Executive Briefing | by Ken Carr | October 12, 2017
Come this December, publicly traded companies and organizations with publicly traded debt will have to comply with new revenue recognition rules adopted by the U.S. Financial Accounting Standards Board and the International Accounting Standards Board—known as ASC 606. The purpose of the rules, according to the coverage in The Wall Street Journal in Revenue-Recognition Rules Pose Fraud Challenges for Health Care Cos., is to create more transparency for investors to compare year-over-year financial results.
While the rules sound straightforward in their initial presentation, the application of these new rules by health and human service organizations as they are entering into more value-based and performance-based reimbursement arrangements presents some unique challenges. These challenges are outlined in an interview with CPA Steve Shill in New Accounting Standard Presents Unique Challenges For PAC Providers.
From my perspective, I think the big issue is identifying how outcomes will be aligned with revenue (and revenue estimates when contracts span more than one accounting period), and demonstrating that policies, procedures, and systems are in place so that those estimates are reliable. Auditors will be digging deep into these processes when performing annual audits.
While changes in revenue recognition sounds like the type of topic we would prefer to leave to financial advisers and auditors to figure out, I think that it has practical implications that we need to begin to consider as we move into value-based contracts. There’s a great deal of complexity with this topic, which prompts to me ask certain questions.
Does this apply to me, and if so when? Accounting Standards Codification (ASC) 606 applies to all organizations that follow generally accepted accounting principles (GAAP), however when it applies, varies with the type of organization. Publicly traded organizations, and non-profit organizations that are a conduit for bonds for publicly traded securities are required to implement this change for the fiscal year beginning after December 15, 2017. All other organizations need to implement the change for fiscal years beginning after December 15, 2019.
Why is this change important? The new rule creates requirements for both the amount of revenue that can be recognized with a contract, and the timing of when that revenue can be recognized. The process is clearer in a fee-for-service (FFS) contract – we can identify when services are provided, and have quantifiable data to substantiate those services. However, in a value-based contract, we need to demonstrate that we achieved specified quality outcomes and that will often be done over a period of time instead of a point in time. Our ability to clearly define outcomes, achieve them, and document them with the payer are critical factors in determining how much revenue we can book, and when revenue is verified and confirmed.
Why is there a concern about fraud? There is concern that organizations might overestimate the outcomes tied to their revenue, especially when booking revenue for contracts that are in process between fiscal years. While some organizations may do this, the bigger issue is that auditors will be looking very closely at the process used to estimate and book value-based contract revenue. Also, regulators will be monitoring those processes to ensure that there is not fraud. Organizations need to consider carefully how they measure the outcomes of the value-based contracts, and the process for linking those outcomes to their financial management and accounting system.
What do I need to do to prepare for this change? We know that value-based purchasing agreements are the business model of the future in health care. As organizations begin now to assess their readiness for delivering services in this model, they need consider how the demonstration of outcomes will be linked to the revenue on their financial statements. Specifically:
For another perspective, I reached out to James Stewart, President & CEO, Grafton Integrated Health Network , who notes:
Obviously, this is targeted more at entities who have issues (read some flexibility) in deciding when they can or should recognize revenue. Particularly subscription is my guess. But health care is getting caught in the net because of our difficulty in both identifying the cost of service and when the service is completed. (If I am paid for a stay, but the patient readmits in a penalty time frame so I have a payback, what is my real income?)
I am seeing this more as a recognition of problems in our industry with pricing and costing than I am as a new recognition problem. We simply do not cost well due to allocation issues (which many times have been created to increase a reimbursement in a high profit service line such as cardiac). And that allocation and cost report incentive is different for every hospital.
So, conservatism in my mind would say to book revenue and expense like we do bad debt. Create an estimate to account for expected readmit and quality withholds. The real issue being voices is the “play” in interpretation of quality goals. Can those be manipulated? Maybe, and even probably. As all good accountants will tell you, what do you want the number to be? Especially in an M&A situation it could be that quality data is manipulated to make an entity look more attractive to be acquired. But what if it really is a situation where one entity counts something another entity does not count the same way?
For more, join Misty Tu, Medical Director of Psychiatry and Behavioral Health, Blue Cross Blue Shield of Minnesota on February 16, 2018 at The 2017 OPEN MINDS Performance Management Institute for her session, “Building Successful Value-Based Partnerships: How To Align Financial & Clinical Performance Goals.”