Health Care and Revenue Recognition in the Spotlight

By Aarthi Rayapura February 12, 2015

Health Care Has Everyone’s Attention, Including Those Who Monitor Revenue

The year 2014 was historic for the health care industry’s far-reaching implementation of the Affordable Care Act and the watershed announcement of a converged revenue accounting model. Now, consider this: the increasingly valuable implications of revenue recognition rest squarely at the axis of those two hot topics.

Not only did the landmark health care legislation kick off widespread industry alterations, but coupled with the sector’s increased reliance on technology, the need for new revenue models has never been more relevant.

Enter last May’s announcement of ASC 606, “Revenue from Contracts with Customers,” the newly converged revenue guidance by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), to heighten the attention this and other markets now give to revenue management.

Health care revenue cycles must shift gears from the current fee-for-service environment to something more closely managed and accountable, according to PricewaterhouseCoopers (PwC).

“We deal with third-party payers, are concerned about the patient experience, and are constantly looking for ways to automate through new systems. That world is changing, driven by increasing costs, the desire to be more outcomes-driven, and the need to manage care across the continuum of providers. We need to evolve from a culture of generating revenues to one that effectively manages expenses.”                           — PwC on health care changes

In the recently published report, “Stay Informed – 2014 SEC Comment Letter Trends for Healthcare Providers,” PwC  included revenue recognition among the half-dozen key areas in which registrants in the health care provider industry received the highest number of comments from the U.S. Securities and Exchange Commission (SEC) over the past two years.

As the report notes, revenue recognition remains a magnet for comment letters by SEC staff across all industries, but the enactment of federal and state laws as well as the transition to electronic health records (EHR) has the commission giving health care special attention.

Among the items SEC staff weigh in on include accounting policies, classification of income recognized for Medicaid and Medicare EHR incentives and timing of revenue recognition relating to supplemental reimbursement programs.

Of course, all is in a current state of upheaval – and not just in health care – as on the effective date of ASC 606 virtually all the revenue recognition-related guidance previously applied by health care organizations will be superseded. The only health care specific revenue-related guidance in legacy GAAP (Generally Accepted Accounting Principles) is associated with loss contracts for continuing care retirement communities and prepaid health care, charity care and fundraising contributions.

As the service group, McGladrey, pointed out in their drill down report on the new guidance impact on health care, released last year, “Applying the new guidance to health care organizations could significantly affect the timing and amount of revenue recognized.”

The key areas McGladrey suggested may require special attention include variable consideration for third-party payors and self-pay patients, retirement community care fees, shared savings arrangements and bundled payment arrangements.

Yes, historic years in health care and revenue recognition were just had. As the spotlights shine, let the analysis continue.