Update for Health Care Providers on Revenue Recognition Standard

November 29, 2017
FLORIDA HOSPITAL ASSOCIATION WEBINAR SERIES
Update for Health Care Providers
on Revenue Recognition Standard

Prepared for Florida Hospital Association Webinar Series Page 1
Revenue Recognition
 To replace old guidance where revenue recognition was
defined in many different ways
 Previous guidance was more industry specific
 Effective date for new standard
 Public companies and certain not-for-profits annual periods
beginning after December 15, 2017
 Nonpublic companies annual periods beginning after December
15, 2018

Revenue Recognition
 Step 1 Determine whether you have a contract with a
customer
 A contract is approved and the parties are committed (written or
oral)
 A contract identifies the rights of the parties (it is evident what
each party is giving and/or receiving)
 A contract has payment terms (how much or what is being
exchanged for the goods or services being provided – an
estimate is acceptable)
 A contract has commercial substance – the exchange is actually
worth something (intended to prevent companies from loaning
money to customers to buy goods or services to inflate prices
 Under a contract collectability is probable – are you going to get
your money?

Revenue Recognition
 Step 2 Identify the performance obligations (i.e. who’s
doing what?)
 Must specify each performance obligation into distinct pieces or
bundles
 If a customer can use or benefit from a specific good or service on
its own, or with other readily available resources, that is
considered distinct
 However, if a good or service is dependent upon other items that
are part of the contract that item is not considered distinct.
Therefore, there are situations where a bundle of goods or
services could make up one distinct performance obligation

Revenue Recognition
 Common Payment Methodologies
 Fee-for-service
 Per diem
 Per case
 Episodic
 Capitation
4

Revenue Recognition
 Step 3 Determine the transaction price (what you expect
to be paid)
 Variable consideration – will any factors alter the amount you will
ultimately collect
 Constraining estimates of variable consideration – are there
events that will significantly reduce the amount of consideration
you will receive – even things outside of the entity’s controls
 Significant financing component – is the customer paying after
you deliver
 Noncash consideration – if no cash payment, goods or services
should be measured at fair value of what is being exchanged for
goods and services
 Consideration payable to a customer – do you owe anything to
the customer other than the good or service

Revenue Recognition
 Step 4 Allocate the transaction price
 Based on separate performance obligations
 Think about if you were to sell each of the performance
obligations to separate customers what would be the standalone
price per performance obligation
 Must think about whether a discount relates to a specific
performance obligation or a general discount that applies
proportionately to all performance obligations

Revenue Recognition
 Step 5 Recognize revenue when (or as) performance
obligations are satisfied
 When transfer of control occurs you can recognize the revenue
 If control is transferred over time the revenue is recognized over
time

Revenue Recognition
 AICPA has established Health Care Entities Revenue
Recognition Task Force
 Charged with developing revenue recognition implementation
issues that will provide helpful hints and illustrative examples for
how to apply the new revenue recognition standard
 Thus far, the Task Force has listed 10 implementation issues on
the AICPA website

Revenue Recognition
 Task Force Implementation Issue 1
 Consideration of the following regarding self-pay balances:
 Application of Step 1 (determine if there is a contract) and Step
3 (determine the transaction price) for health care services
provided to self-pay patients, including uninsured patient
balances and self-pay balances arising from co-payments and
deductibles.
 This implementation issue will discuss evaluating whether
a contract exists and what (including consideration of
implicit price concessions) the transaction price is to
arrangements for health care services provided to self-pay
patients and balances arising from co-payments and
deductibles. This implementation has been finalized and
included in AICPA Guide Revenue Recognition.

Revenue Recognition
 Task Force Implementation Issue 1a
 This implementation issue, being submitted to the FASB, provides
two views over the initial accounting for implicit price concessions
for services provided to uninsured patients and two views for the
subsequent accounting for these types of contracts and whether
changes in the estimates of variable consideration represent
changes in price concessions or impairments. This
implementation has been submitted to FASB.

Revenue Recognition
 Application of the portfolio approach to contracts with patient
 This implementation issue will discuss how to apply the
portfolio approach to revenue from self-pay patients and third
party payors. This implementation has been finalized and
included in the AICPA Guide Revenue Recognition.

Revenue Recognition
 CCRC: Identifying and satisfying the performance obligation(s)
and recognizing the monthly/periodic fees and nonrefundable
entrance fees under Type A or “life care” contracts for continuing
care retirement communities.
 This implementation issue will discuss the performance
obligations under a typical Type A (life care) continuing care
retirement community (CCRC) resident agreement and, given
these performance obligations, how a Type A CCRC will
estimate a transaction price and recognize nonrefundable
entrance fees and monthly/periodic fees received from
residents under the new model. This implementation was
resubmitted to AICPA RRWG.

Revenue Recognition
 CCRC: Identifying the performance obligations(s) and
recognizing the performance obligation (s) to provide future
services and use of facilities.
 This implementation issue will describe the changes to a
continuing care retirement community’s calculation of the
obligation to provide future services and use of facilities as a
result of the new model. This implementation was re-
submitted to AICPA RRWG.

Revenue Recognition
 Significant financing component – CCRC contracts, and patient
and third-party payor amounts in arrears
 This implementation issue will discuss how CCRCs assess
whether a significant financing component exists in
determining the transaction price for its resident contracts, as
well as how CCRCs and other health care entities will assess
whether a significant financing component is applicable to
patient and third-party payor amounts in arrears. This
implementation was re-submitted to AICPA RRWG.

Revenue Recognition
 Disclosure requirements of ASU No. 2014-09
 This implementation issue will discuss judgements related to
disclosure requirements under ASC 606 for health care
entities. This implementation was out for exposure until
August 1, 2017.

Revenue Recognition
 Accounting for contract costs
 This implementation issue will discuss how health care
organizations will account for certain costs of acquiring and
fulfilling contracts under the new model. This implementation
was submitted to FinREC-September 2015.

Revenue Recognition
 Consideration of FASB ASC 606, Revenue from Contracts with
Customers, for third party settlement estimates
organizations will account for revenue earned under
arrangements with government programs (for example,
Medicare or Medicaid), which typically contain a variable
element that requires providers to estimate the cash flows
ultimately expected to be received for services provided. This
implementation was out for exposure until September 1, 2017.

Revenue Recognition
 Risk Sharing Arrangements
 This implementation issue will discuss the interplay between
health care organizations and health care providers that
receive fee for service payments from the Centers for
Medicare and Medicaid Services for services provided to
Medicare patients. This implementation is out for exposure
until December 1, 2017.

Revenue Recognition
 Performance Obligations
organizations (other than CCRCs) need to identify the
promised goods and services in a contract with a patient and
determine which of them represent separate performance
obligations in order to apply the revenue recognition guidance.
This implementation was submitted to the AICPA RRWG.

Revenue Recognition
 Revenue Recognition Audit and Accounting Guide –
Chapter 7 Health Care Entities
 Paragraphs 1 – 5 are being held for future additions related to
Steps 1 – 5
 Paragraph 6 – Revenue Streams Related to Arrangements for
Health Care Services Provided to Uninsured and Insured Patients
with Self-Pay Balances, Including Co-Payments and Deductibles

Revenue Recognition
 Paragraph 6 Takeaways
 A health care entity may consider if it has a written contract with
the patient by considering whether the patient signed any forms,
such as a patient responsibility form, which would be considered
a written contract.

Revenue Recognition
 If health care entity determines it does not have a written contract
(for example, the patient refuses to sign a patient responsibility
form), it may consider if it has an oral or implied contract based on
the entity’s customary business practices.

Revenue Recognition
 If the patient schedules health care services in advance (for
example, elective surgery), the health care entity may consider if
it has an oral or implied contract.

Revenue Recognition
 New guidance uses a different model than historic assumption
that transaction price is amount billed to patient. Under new
guidance, transaction price is amount the provider expects to be
entitled to. Where services are provided to uninsured patients,
the transaction price for revenue is likely to be much less. The
new standard permits the transaction price to be estimated using
a portfolio of contracts.
24

Revenue Recognition
 Example from Standard
 The hospital’s average collection rate from uninsured patients is
ten cents on the dollar. Although the patient’s gross charges for
services were $10,000, the example indicates that the transaction
price the provider can expect to be entitled to is $1,000 ($10,000
X 10%).
25

Revenue Recognition
 Example from Standard
 This example uses a portfolio approach in making that evaluation.
The fact pattern indicates that the hospital does not have any
prior experience with this patient, therefore it is implied that the
hospital is as likely to collect from this patient as from other
patients in this payer classification (or portfolio).
26

Revenue Recognition
 In a situation where a patient was admitted through the
emergency room while unconscious or against their will, the
health care entity may perform an analysis of the specific facts
and circumstances to assess enforceability, including looking at
customary business practices.

Revenue Recognition
 In certain situations, a health care entity may be unable to
evaluate an uninsured patient’s commitment to perform his or her
obligations (for example, pay for services rendered) or determine
if is probable that it will collect the consideration to which it is
entitled until it obtains certain information about the patient. Until
that determination is made, a contract with the customer cannot
be presumed to exist in the revenue model.

Revenue Recognition
 A health care entity may make the determination of whether it is
probable it will collect the consideration to which it is entitled
based on past history with that patient or by determining that the
patient qualifies for the health care entity’s charity care policy.

Revenue Recognition
 A situation could occur where a patient is admitted to the
emergency room of a health care entity and is unresponsive. The
health care entity may be obligated to provide services to the
patient as required by law. If the health care entity subsequently
determines that the patient is uninsured, it may try to qualify the
patient for Medicaid coverage. This process could take from
several weeks to over a year. Although the party responsible for
payment has not yet been determined, the health care entity may
have historical information for pending Medicaid patients to
determine the transaction price based on the percentage of those
contracts it estimates will a.) qualify for Medicaid, b) qualify under
the charity care policy, and c) become uninsured self-pay

Revenue Recognition
 Example
 A patient is admitted to the emergency room and is unresponsive.
Provider determines the patient is uninsured, and attempts to
assist the patient in qualifying for Medicaid. If the hospital has
historical information on the ultimate payer class for this individual
– for example, Medicaid or self-pay – the contract is with the
scope of the standard.
If the provider doesn’t have historic information on the ultimate
payer class, the contract only falls within the scope of the
standard once the payer class is confirmed. However, if the
ultimate payer class is determined to be charity care, the
collectability threshold isn’t met, and the contract doesn’t fall
within the scope of the standard.
31

Revenue Recognition
 An approach based on the use of historical information may be
applied to an individual contract or a portfolio of similar contracts.

Revenue Recognition
 A health care entity may apply the guidance to a portfolio of
contracts if it reasonably expects that the effects on the financial
statements would not differ materially from applying to an
individual contract.

Revenue Recognition
 Health care entities will continue to not recognize revenue from
charity care

Revenue Recognition
 A situation may occur where an uninsured emergency room
patient, for which the health care entity has not previously
provided service, is designated to a payor class based on its
review of the patient’s information.

Revenue Recognition
 A health care entity should consider the historical cash collections
from a customer class (for example self-pay) to estimate the
transaction price for a patient.

Revenue Recognition
 In determining whether a health care entity has provided an
implicit price concession to a patient with a self-pay balance, the
entity needs to determine whether the customer has a valid
expectation arising from the entity’s customary business
practices, published policies, or specific statements that the entity
will accept an amount of consideration that is less than the price
stated in the contract. It is important to note than an implicit price
concession does not have to be specifically communicated or
offered to the patient by the entity.

Revenue Recognition
 Example – Explicit Price Concession
 If a patient is determined to be self-paying, and qualifies for the
provider’s uninsured patient discount policy, which is a 50%
discount, this discount is an explicit price concession and reduces
the transaction price from the gross charge of $30,000 to the
$15,000 which is actually billed to the patient.
38

Revenue Recognition
 Example – Implicit Price Concession
 If we continue with the previous example, the gross charges for
services were $30,000 and the amount billed to the patient is
$15,000. However, if the provider has a history of only collecting
17% of the self-pay balance after the explicit price concession,
there is an implicit price concession of an additional $12,500.
Therefore, the provider would expect to collect $2,500. The
provider would record patient revenue and accounts receivable of
$2,500.
39

Revenue Recognition
 Example – Bad Debt
 If we continue with the previous example, we have an explicit
price concession of $15,000 reducing gross charges from
$30,000 to $15,000 under the provider’s uninsured patient
discount policy. We also have an implicit price concession of
$12,500 based upon the providers historical collection percentage
of 17% to record net patient service revenue of $2,500. If upon
collection efforts, the provider is unable to collect the $2,500 from
the patient, the provider will need to record bad debt expense of
$2,500.
40

Revenue Recognition
 In estimating the transaction price, a health care entity may
determine that it has not provided an implicit price concession,
but rather it has chosen to accept the risk of default by the patient,
and that uncollectible amount better represents impairment losses
or bad debts.

Revenue Recognition
 Third-party Settlement Estimates
 Under existing standards, a provider makes its best estimate of
third-party settlement amounts based on its knowledge and
experience about past and current events. Under the new
standard, that process will be modified to estimate consideration
using either the expected value (probability-weighting of
alternative outcomes) or most likely amount, whichever is the best
predictor of the future outcome. The estimate should be
recognized only to the extent is probable that a significant
reversal of cumulative revenue will not occur. The end result may
not change the amount accrued in connection with the estimate,
but it will represent some change in the process to develop and
document the estimate.
42

Revenue Recognition
 Implementation Considerations
 Continue to monitor developments of the AICPA Health Care Task
Force
 Look for updates to Chapter 7 on Health Care Industry in the
AICPA Revenue Recognition Guide
43

Revenue Recognition
 Recap
 Old/current guidance industry specific
 New Guidance from FASB – authoritative – not industry specific
 AICPA created Health Care Industry Task Force
 Chapter 7 of AICPA Revenue Recognition Guide is non-
authoritative but will help us understand how to implement new
standard
 Several implementation issues that have been raised by the
AICPA Health Care Industry Task Force that are still open and in
process of resolution
 Stay tuned but prepare to implement
44

PERSHING YOAKLEY & ASSOCIATES, P.C.
800.270.9629 | www.pyapc.com
For questions or comments, please
contact the PYA representative below:
Mike Shamblin
mshamblin@pyapc.com
800-270-9629

Update for Health Care Providers on Revenue Recognition Standard

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