Healthcare Perspectives


Preparing for the Revenue Recognition Standard - Health Care Part III

Apr 03, 2017
By: Joshua J. Boyle

In Part One of the article series, we covered a high level overview of the revenue recognition standard found in Accounting Standards Codification (ASC) Topic 606, implementation issues specific to the health industry, and the high level changes hospitals and clinics will experience from the revenue recognition standard.  In Part Two, we covered in more detail, using examples, the five-step process for recognizing revenue, changes to bad debt expense, and the use of portfolios to estimate the transaction price for a group of patients.

What are the next steps hospitals and clinics need to consider as they prepare to implement the revenue recognition standard in the future?

The first step organizations might consider is to create an action plan by completing a readiness assessment to make the transition to the new standard as smooth as possible.  Here are some broad goals a hospital and clinic might consider as part of its action plan:

  1. Review the organization’s service offerings to determine when a contract exists with a patient.  The following questions may help jumpstart your organization’s action planning process:
    1. Has the organization evaluated its service offerings to determine when it has an oral, written, or an implied contract?
    2. Are there any specific services the organization provides for which management does not believe a contract exists at the time services are provided?
  2. Review the organization’s current process to estimate the transaction price (recording net patient service revenue) and consider what changes will be needed to record net patient service revenue in the future.  The following questions may help evaluate what changes are needed in your current process:
    1. What information does your organization currently utilize to estimate contractual adjustments and the provision for bad debts? 
    2. Is your organization using a portfolio approach already by grouping similar types of payors and types of service to estimate contractual adjustments and provision for bad debts?
    3. How does management currently evaluate the reasonableness of its contractual adjustments and provision for bad debt estimates?  Does your organization complete a hindsight analysis to see how recorded estimates compared to actual amounts collected?
    4. How does your organization currently evaluate self-pay account balances? It’s expected that self-pay accounts will be broken down into multiple portfolios in the future (i.e., uninsured self pay, pending Medicaid, self-pay coinsurance and deductibles, etc.)
    5. Does your organization have data to support historical collections from patients with coinsurance and deductible balances compared to patients that have no insurance?
    6. Does your organization have data to support its historical success rate for qualifying patients into the State Medicaid Program?
    7. Does your organization have data to support its historical rate of patients who qualify for the organization’s financial assistance policy?
  3. Develop a comprehensive policy to document the organization’s process for determining when a contract exists, its process to estimate the transaction price, and its process to evaluate the reasonableness of its estimates.  Under the revenue recognition standard, organizations are required to disclose information about the methods, inputs, and assumptions used to record net patient service revenue (i.e., transaction price).  As a result, the policy should incorporate the following items:
    1. The organization’s assessment and evaluation process to determine when the hospital or clinic has a contract with a patient.  It may have some services where a contract is not written or oral but based on the organization’s customary business practice, they may determine that an implied contract exists.
    2. The organization’s process to record net patient service revenue (i.e., estimating the transaction price for services provided).  Management can use the following questions to help document its process:
      1. How does the organization assess the collectability of a patient or a portfolio of patients with no insurance at the time the services are provided?
      2. How does the organization estimate the transaction price? 
      3. What information does management utilize to estimate implicit price concessions and how does management monitor the reasonableness of its estimate?
      4. How does management assess the likelihood and give consideration to potential significant reversals of revenue?  This consideration should include management assessment of historical collections, third-party payor settlements (i.e., cost reports), and risk-based payment arrangements.
      5. How does the organization define its various portfolios that are utilized to estimate the transaction price?  What types of patients and types of services have been grouped together?
      6. What is management’s process for evaluating write-offs and what is the organization’s policy for classifying accounts as bad debt expense? 

In order to complete the organization’s action plan and make the transition to the new revenue recognition standard, an organization needs to evaluate its current process not only within finance but also within the revenue cycle and information technology departments.   Hospitals and clinics may need to evaluate the following:

  1. Processes to identify patient accounts that meet the organization’s policy to be reflected as bad debt expense.  
  2. How patients with no insurance are tracked within the electronic health record system.  An organization will need to develop history on the likelihood patients with no insurance qualify for the organization’s financial assistance policy or the State Medicaid Program. 
  3. The potential impacts to the information technology department to create more detailed reports or different reports to further analyze the organization’s collection history for various portfolios to estimate net patient service revenue.

How will organizations be required to adopt the revenue recognition standard?

Organizations have the option to adopt the standard retrospectively, which includes optional practical expedients, or using the cumulative effect application method.  Each application method has required disclosures, some of which include disclosing the nature of and reason for the change, and the method elected to apply the revenue recognition standard. 

We expect many organizations will apply the revenue recognition standard retrospectively.  Retrospective application will present all periods reported under the new revenue standards comparatively.  Organizations that adopt using the retrospective application can work on adoption now outside peak financial periods to determine the impact of the new standard.  Organizations that adopt using the cumulative effect application must wait until after the year implemented to determine the cumulative impact to the prior periods presented.

Who can help hospitals and clinics prepare for the revenue recognition standard?

The new revenue recognition accounting standard, ASC 606, has been described as one of the largest changes to GAAP in the past decade.  With effective dates starting calendar year end 2018 (fiscal year 2019) for public companies and nonprofit entities that have conduit bond obligations, there isn’t much time left to prepare for the revenue recognition standard.

With expertise in accounting and financial reporting, tax compliance, processes and systems, Wipfli’s Revenue Recognition Accounting and Consulting Services team is ready to help you further understand and prepare for the impacts of ASC 606.  We are your revenue recognition solution. 

Our Revenue Recognition Services are designed to provide you with a solution that is tailored to your organization’s individual needs based on where you are in the planning and implementation process.

We use a multidisciplinary integrated approach to revenue recognition, utilizing our industry and partner experts, which include Mind the GAAP, to identify, analyze, develop, and implement an efficient and effective project plan.

If you are interested in learning more about our Revenue Recognition Accounting and Consulting Services team please, reach out to your Wipfli relationship executive or contact me at 715.843.8374.


Joshua J. Boyle, CPA
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