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Revenue Recognition for Healthcare Organizations

For healthcare entities, the new revenue recognition standard, Revenue from Contracts with Customers, or ASC 606, requires unique considerations for mitigating risk. Outside forces, like the move to value-based care and developments in technology, are charging healthcare organizations to break down silos across—and beyond—the traditional continuum to drive more precise, improved patient outcomes and shared value. We compiled 6 key considerations for Healthcare Organizations:

Consistency

In many instances, different facilities—even those that offer the same services—may use slightly different contract models or may have adjusted contracts over time to better serve patients. When this happens, it’s important to ensure the organization conducts a rigorous assessment of each contract type to ensure services are accounted for and reported properly under ASC 606 guidance. In some instances, different contracts for the same service may have created different revenue recognition and reporting requirements.

Care Type

Under ASC 606, care management or coordination services are accounted in different ways. If the coordination is, itself, a significant service in the determination of the nature and extent of each of the individual services provided to the patient, and each of the services are highly dependent upon and integrated with the other services, then the patient is not in a position to decide whether to purchase individual distinct services.

Value-Based Contracting

Under value-based contracting paradigms, healthcare revenue is a variable consideration, since many contracts allow payment amounts to be adjusted retroactively, based upon outcomes. This uncertainty in final contract value is an added complexity under ASC 606. Under the new revenue recognition provisions, revenue is recognized only where it is probable that there will not be a significant adjustment (reversal) once the uncertainty is resolved. Many healthcare organizations—and integrated health systems in particular—will need to establish clear visibility into clinical and operational metrics throughout the system to accurately estimate outcomes and report on revenue under ASC 606.

Clinical Care or Leasing?

Under ASC 606, leasing contracts are excluded from consideration. Many long-term care contracts contain both clinical care and leasing provisions, and therefore need to be accounted for under two different sets of revenue recognition guidance—ASC 606 for non-lease provisions and GAAP guidance (ASC 842) for lease provisions. Being able to clearly delineate between the two is important in ensuring revenue recognition in financial reports conforms to the new guidelines.

Portfolio Consolidation

ASC 606 allows for a portfolio approach as a practical expedient to account for patient contracts as a collective group rather than individually. To take advantage of this provision, contracts must share similar characteristics such as the type of service, type of payer, size of payments or timing of contracts. To fully capitalize on their data, healthcare organizations will also want to ensure there is sufficient homogeneity of data and contract structure, and to consider whether it makes sense to apply a portfolio approach system-wide or on a facility-by-facility basis.

Revenue Over Time

For long-term care providers, revenue from certain services can be recognized immediately, while other services may be classified such that revenue can only be recognized over time. Ancillary services—barber or beauty care—are considered point-in-time services from a revenue recognition standpoint. Conversely, the delivery of inpatient care services is often treated as delivered over time, meaning revenue must be recognized over the full period of time for which care is delivered.

For more information on revenue recognition and specific considerations for your healthcare business, please connect with us.

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