Revenue Recognition: Self-pay Inpatient Scenario 3

Revenue recognition guidance under FASB is effective for public businesses and nonprofits that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market for fiscal years beginning after Dec. 15, 2017 (that’s now!). This means Jan. 1, 2018, for organizations with a Dec. 31 year-end and July 1, 2018, for organizations with a June 30 year-end. For all other entities, the guidance is effective for fiscal years beginning after Dec. 15, 2018.

If you find yourself in the first wave of implementors, you’ve likely read the standard and the published implementation guidance. If you haven’t, you can start with four key matters considered to have the greatest potential impact.

As you move from the theoretical world of accounting standards to your financial reporting system, we’ve created four scenarios to illustrate common applications of a few healthcare-specific nuances of the standard and implementation guidance.

• The portfolio approach
• Third-party settlements
• A self-pay patient with revenue recognition over a period of time
• Revenue recognition when a patient’s ability and intent to pay is assessed in advance of care

Springfield Regional Hospital (Hospital) provides surgical care to John Cull, which requires 3 days of inpatient care. The standard rate for the goods and services provided is $50,000, based on the Hospital’s chargemaster. John received numerous goods and services throughout the duration of his care, including a private room, meals, 24/7 nursing, physician services, diagnostics, therapy, pharmaceuticals, and medical supplies. John is a self-pay patient and qualifies for the Hospital’s charity care program, which provides a 75% discount on standard charges (explicit price concession) based on John’s income level and requires pre-payment of $7,000. The Hospital historically collects 60% of remaining charges from self-pay surgery patients.

The Hospital considered the care provided to John to be a bundle of goods and services under one contract for the surgical procedure. While John may have benefited from some of the individual components provided incrementally, the Hospital provided a significant service to integrate all the components and determine the varying levels of each needed by John. The goods and services were considered highly dependent and interrelated (John doesn’t have an a la cart option for majority of the services and goods without significantly altering the ultimate treatment) with each other in the performance of the contract.

The Hospital has determined that the related revenue should be recorded over a period – the 3 days care was provided as the performance obligation was being met. To do so, the Hospital measured the progress toward satisfaction of the overall obligation using gross charges for all the goods and services provided relative to the total anticipated gross charges. This is simply to determine the proportion of care completed, not to determine the transaction price.

• Step 1: The contract with John is explicit, as documented by a signed treatment consent form.
• Step 2: The performance obligation is the bundle of goods and services provided over the 3-day stay.
• Step 3: The Hospital estimates the transaction price (and net patient service revenue) for its contract with John in this situation as follows:
  • $12,500 ($50,000 standard charge less charity care policy discount of $37,500) Less implicit price concession of $2,200 = total revenue to be recognized of $10,300
• Step 4: The Hospital considers the performance obligation to be a bundle of goods and services provided for the surgery, as noted in Step 2. Accordingly, the transaction price is allocated ratably (based on the underling standard charges of the goods and services provided relative to the total anticipated standard charges for the entire bundle of goods and services) over the duration of the 3-day stay.
• Step 5: The performance obligation is considered satisfied ratably (based on the underling standard charges of the goods and services provided relative to the total anticipated standard charges for the entire bundle of goods and services) over the duration of the 3-day stay.

Resolution Scenario A: John ends up paying 100% of net billed charges ($12,500). The additional revenue of $2,200 is recorded when received by the Hospital and recorded as a reduction in the implicit price concession adjustment.

Resolution Scenario B: John declares bankruptcy and does not pay the remaining portion of net billed charges. This situation is considered a change in John’s financial status and ability to pay, which is a credit loss. The hospital records bad debt expense for the remaining portion of net billed charges ($3,300).

Note: In many cases, the Hospital calculates the adjustment amounts during the month-end allowance process. Let’s assume the Hospital recorded the $37,500 of charity adjustments and the $7,000 prepayment, resulting in an AR balance of $5,500 on the books at the time of bankruptcy. To record the bankruptcy and write off the account, the Hospital will generally credit AR for $5,500 and debit bankruptcy write off for $5,500. The previously recorded implicit price concession of $2,200 will get reversed at the end of the month during the allowance process as AR will have been reduced due to the write off. Therefore, the Hospital will have a bad debt expense of $5,500 even though they only expected to collect $3,300. If the charity adjustment of $37,500 was not directly recorded and rather estimated as part of the month end allowance process, the bad debt expense account would show $43,000. The actual bad debt expense in both cases should have been $3,300. The Hospital will need to establish a process to appropriately reflect the true bad debt expense amount. This is only a financial reporting risk when adjustments are changing reporting categories (i.e. from net revenue adjustment to bad debt expense).

Cut-off Consideration
The Hospital’s fiscal year end is June 30. John’s surgery was on June 29 and he was discharged on July 1. Good and services provided through midnight on June 30 totaled $40,500, based on the Hospital’s standard charges. At fiscal year-end, the Hospital will record revenue of $40,500, charity care policy discounts of $30,375, and an implicit price concession of $1,250. Since John prepaid $7,000, the receivable balance at June 30 totaled $1,875.