More Revenue Recognition, More Problems

March 2017 | Posted in Audit, Healthcare
Audit, Healthcare
Healthcare Benefits

The Financial Accounting Standards Board’s impending revenue recognition standard and Medicare’s new value-based reimbursement program are forcing health care providers to cope with two changing sets of methodologies at the same time. This concoction is causing headaches for Medicare providers who have to adapt to two shifting models. Historically, the health care industry had a very unique model in that Medicare reimbursement was not focused on efficiency or effectiveness.  For instance, a patient is admitted to a hospital, treated and discharged only to become ill again/never fully recover, and the patient is readmitted to the hospital.  The hospital and providers would be allowed to bill for a second time for the same medical issues and Medicare would be on the hook once again.

The new value-based program focuses on efficiency and cost effectiveness. Initially there was a normal service approach; the hospital charged what they expected to receive, and the rest of the supply chain followed suit. Under the new reimbursement program, Medicare has set a target cost that makes hospitals responsible for the over and undercharges. Those charges include claw backs when there are overages in the supply chain.  These claw backs paired with the new revenue recognition standard can cause significant accounting problems.

By now, we have all heard about the new revenue recognition standard and the associated five-step process, but let’s remind ourselves of those steps:

  1. Identify whether there is a contract
  2. Identify the separate performance obligations
  3. Determine a transaction price
  4. Allocate the transaction price to the performance obligation
  5. Recognize revenue when the performance obligation has been satisfied.
  6. Seems simple and straight forward, right?  Maybe not for steps 1 and 3.

Steps 1 and 3 seem to be the most problematic. Step 1 requires the patient to have a contract with the provider. Hospitals are finding this to be quite challenging when ER patients are unconscious or unable to respond. Step 3 states there needs to be a 70% probability that revenue won’t get clawed back, and with the new program allowing for claw backs on overages, the estimates will be very hit or miss. The average costs that Medicare has implemented are a continually moving target that make estimating even more difficult.

In an order to alleviate some of these risks, an expert panel has been set up by the American Institute of Certified Public Accountants (AICPA) to address the aforementioned problems. Even with the help of the AICPA, appropriate revenue recognition under the new value-based reimbursement program will cause many problems and require a significant amount of analytics and judgment.  Despite the inevitable repeal and replace of the Affordable Care Act, many believe the value-based reimbursement is not going anywhere.  This new model is really only a year old and has been narrowly focused on hip and joint replacements.  The results have been impressive thus far and the scope is already being expanded to other diagnosis that have traditionally been a drag on Medicare.

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