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Implementing Revenue Recognition for Health Care Organizations
M ARCH 18 , 2018
Background & Key Principles
ASU 2014-09 REVENUE FROM CONTRACTS WITH CUSTOMERS
• Effective for Public Business Entities (& not-for-profit
entities that are conduit debt obligors) in fiscal years &
interim periods beginning after December 15, 2017
• Effective for all other entities in fiscal years beginning
after December 15, 2018
• Principles-based approach instead of a rules-based
approach
OBJECTIVES OF THE NEW REVENUE STANDARD
*IASB: International Accounting Standards Board/FASB: Financial Accounting Standards Board
FASB/IASB*
converged
standard
Remove inconsistencies
& weaknesses in existing
requirements to improve
comparability
Provide more useful
information through
improved disclosure
requirements
Provide a more robust
framework for addressing
revenue issues
Simplify the preparation
of financial statements by
reducing the number of
requirements by having
one revenue framework
ASU 2014-09 REVENUE FROM CONTRACTS WITH CUSTOMERSThis ASU superseded health care industry-specific guidance & substantially all existing revenue
recognition guidance & added significant interim & annual disclosures
recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services
PROMISED GOODS OR SERVICES TO CUSTOMERS
CONSIDERATION TO WHICH THE ENTITY EXPECTS TO BE ENTITLED
CORE PRINCIPLE
NEW REVENUE RECOGNITION PROCESS
Identify contract with a customer
Identify performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when/as a performance obligation is satisfied
7
EXCEPTIONS
• Lease contracts
• Insurance contracts
• Financial instruments
• Guarantees
• Nonmonetary exchanges in the same line of
business to facilitate sales to customers
EXCLUSIONS
• Contributions
• Collaborative agreements
ASU 2014-09
REVENUE FROM CONTRACTS WITH CUSTOMERS
SCOPE OF NEW STANDARD
All entities that enter into contracts with customers
• Public, private, not-for-profit
• Regardless of industry
8
Insurance Contract Exception
• Entities that fall under ASC 944: Financial Services – Insurance Entities are
excluded
However …
• Entities that fall under ASC 954: Health Care Entities are in scope & so their
insurance-related revenues need to be considered
• Arrangements seen within health care entities that are in-scope include the
following examples
• Claims handling/ASO arrangements
• Capitation & prepaid arrangements
ASU 2014-09
REVENUE FROM CONTRACTS WITH CUSTOMERS
9
Contributions & Grants Exclusion
• While excluded from ASU 2014-09, new guidance was
issued recently
On June 21, 2018, the FASB Issued ASU 2018-08,
Clarifying the Scope & the Accounting Guidance for
Contributions Received & Contributions Made
ASU 2014-09
REVENUE FROM CONTRACTS WITH CUSTOMERS
Transition Methods & Guidance
11
TRANSITION APPROACHES*assumes a public entity with a December 31 year-end
Transition
Approach2017 2018
Date of Cumulative
Effect Adjustment*
Full RetrospectiveRestate for all
contractsApply to all contracts January 1, 2017
Full Retrospective
Using One or More
Practical Expedients
Restate for all
contracts except
contracts covered by
practical expedients
Apply to all contracts January 1, 2017
Modified
Retrospective
No contracts restated;
reported based on
legacy guidance
Apply to all contracts January 1, 2018
12
TRANSITION ELECTIONS – PUBLIC COMPANIES
TRANSITION HELP
TRG
• Advises the Boards
• Does not have
standard-setting authority
AICPA Financial
Reporting Executive
Committee (FinREC)
FASB/IASB AICPA SEC
Focus on consistent
application
AICPA Revenue
Recognition Working
Group
AICPA 16 Industry Task
Forces (RRTF)
Focus on accounting
questions that may
require standard setting
Focus on internal
controls, systems &
processes
AICPA REVENUE RECOGNITION TASK FORCES
Aerospace & Defense Hospitality
Airlines Insurance
Asset Management Not-for-profit
Broker-Dealers Oil & Gas
Construction Contractors Power & Utility
Depository Institutions Software
Gaming Telecommunications
Health Care Timeshare
AICPA REVENUE RECOGNITION TASK FORCES
• Develop a new Accounting Guide on Revenue Recognition
• Guide to provide helpful hints & illustrative examples on how to apply the standard
• Guidance will not be prescriptive but instead is intended to be a resource
• Full implementation issues are posted for comment after review from the overall Revenue Recognition Working Group & FinREC
• List of issues for the health care industry is posted on the AICPA website
https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition/rrtf-healthcare.html
HEALTH CARE ISSUES IDENTIFIED BY THE AICPA REVENUE RECOGNITION TASK FORCE
Issues identified & finalized
• Revenue recognition for self-pay patients
• Application of Steps 1 & 3
• Application of the portfolio approach
• Disclosure requirements
• Performance obligations (other than CCRCs)
• Third-party estimates
• Contract acquisition costs
• Risk sharing arrangements
• Identifying the performance obligation & recognition of refundable & nonrefundable entrance fees for CCRCs, including significant financing component considerations & future service obligations
HEALTH CARE ISSUES BEING CONSIDERED BY HFMA PRINCIPLES & PRACTICES BOARD
Capitation
revenue
Medicaid
supplemental
payment
programs
Update of
HFMA
Statement 15
on Bad Debt
& Charity
Care
The effect of
revenue
recognition
on Medicare
cost
reporting
Common Industry Implementation
Challenges
1
STEP 1 –IDENTIFY CONTRACT(S) WITH A CUSTOMER
A legally enforceable contract can be
written, oral or implied
by an entity’s customary business practices, &
needs to meet all of the following requirements
It has
commercial
substance
The entity
can identify
each party’s
rights
regarding
goods or
services
The parties
have
approved the
contract & are
committed to
their
obligations
The entity
can identify
the payment
terms for the
goods or
services
It is probable
the entity will
collect the
amount of
consideration
to which it will
be entitled
Before applying the model in the standard to a contract, it must be probable that the entity will collect substantially all of the consideration to which it is entitled in exchange for the goods & services that will be transferred to the customer
COLLECTIBILITY CONSIDERATIONS
A health care entity may make
this determination based on past
experience with that patient or
class of similar patients
If this collectability threshold is
not met, a contract with a patient
does not exist within the scope
of the standard
Assessment is based on both
the customer’s ability & intent to
pay as amounts become due
May be difficult for entities to
assessNo such thing as cash basis
• Do I have a contract and collectability threshold• Insurance supports probability of collection• Patient portion varies which impacts collectability• Patients often present without insurance (EMTALA)• Medicaid pending • Insurance coverage identified later in process• Changes in responsible party (MVA, TPL)
• System operational differences• EMTALA vs. Other revenue streams (clinics, urgent-care, retail, home care)• New patients vs. recurring patients• Is a credit risk assessment performed
PROVIDER CONSIDERATIONS
3
STEP 3 –IDENTIFYING THE TRANSACTION PRICE
Transaction price is the amount of consideration an
entity expects to be entitled to
Variable
consideration
Consideration
payable to a
customer
Significant
financing
component
Explicit &
implicit price
concessions
Constraint of
revenue
IMPLICIT PRICE CONCESSION CONSIDERATIONS
Continues to provide services to a patient (or patient class) even when historical experience indicates that it is not probable that the entity will collect substantially all of the discounted charges (gross or standard charges less any contractual adjustments or discounts) in the contract
Customary business practice of not performing a credit assessment prior to providing services
What should we consider?
FinREC believes that the health care entity has
implicitly provided a price concession to the patient
(or patients in the patient class), even if it will
continue to attempt to collect the full amount of
discounted charges
If one is present …
BAD DEBT EXPENSE
When a health care entity performs a credit assessment prior to providing services to a patient & expects to collect substantially all of the discounted charges
So when would there be bad debt expense?
What’s the impact?
For example, an elective procedure in
which historical experience supports
collection of substantially all of the discounted charges
Many health care providers expect a
significant decrease in the provision for bad
debts for services provided to uninsured &
insured patients with co-payments &
deductibles, in comparison to what is currently
recorded under U.S. GAAP
What’s the expected effect?
PORTFOLIO APPROACH
Entities can apply the standard to a portfolio of contracts or performance obligations with similar characteristics
Entities must reasonably expect that the financial statement effect of using the portfolio approach will not differ materially from applying the standard on a contract-by-contract basis
Key considerations
How to establish
portfolios
How to apply a portfolio
approach
How to determine effect
would not differ
materially
PORTFOLIO APPROACH
More on key considerations
• Portfolio approach may be applied to all aspects of the model or only to certain steps
• If establishing portfolios, an entity will need to use judgment to determine the size, composition & number of portfolios
• Health care entities may consider segregating by payor class, type of service & other categories
• An entity also will need to consider materiality & documentation requirements How to establish
portfolios
PORTFOLIO APPROACH
• Considerations for a health care entity to determine in grouping contracts with similar characteristics for inclusion in a portfolio
• Type of service, e.g., inpatient, outpatient, skilled nursing, home health
• Type of payors, e.g., insurance, governmental program, self-pay
• Whether contracts are entered into at or near the same time
• A health care entity may include some or a combination of the above considerations in its determination of a portfolio
• A health care entity may reclassify the remaining self pay balance (co-pay or deductibles) into a separate portfolio after insurance company has paid
How to
establish
portfolios
How to determine
effect would not
differ materially
PORTFOLIO APPROACH – PROVIDER CONSIDERATIONS
COMMON QUESTIONS IN ADOPTION
Do we need any new systems? Will our general ledger change?
Who should be involved in the implementation process?
Will we have any bad debt expense?
What about patients “in-house” at period end?
How does this standard change the IRS Form 990, community benefit reporting & the cost report requirements?
1
2
3
4
5
COMMON INDUSTRY IMPLEMENTATION CHALLENGES
Contracts• Identify contract(s) with a
patient
Transaction
Price• Portfolio approach • Special considerations for self
pay & Medicaid-pending • Changes to estimation
methodologies • Analysis of service lines for
any true credit risk assessments at or prior to service
Disclosures• Updating systems & processes to
accumulate data • Implicit price concessions
Other
Reimbursement• Third-party settlements• Bundled payment
arrangements• Risk-sharing arrangements
• Implementation approach• Planning• Portfolio approach• Practical expedients selected• Financial impact of adoption• Changes to internal processes• Internal control documentation• Data for disclosures
• Revenue Recognition Issues• Medicaid pending patients• Self pay• Bundled payments• State Medicaid programs• Third party settlements
PROVIDER CONSIDERATIONS
• Medicaid pending• May not have historical information to see how patients are resolved• May need to look at a conversion rate based on materiality
• Self-pay revenue• May have multiple self-pay portfolios• Geographically• Co-insurance and deductibles, high deductible plans, true self pay, etc• Use judgment on when credit risk is performed
• Bundled payments• Determine if additional care coordination after discharge is a separate
performance obligation• Reconciliation process – estimate true up
Lessons Learned
• Control changes• Monthly control to calculate variable consideration• Annual control to review portfolio approach• Analyze new programs/agreements under ASC 606
• Change Allowance Methodology• Run dual methodology until comfortable with changes• Average daily method to be used• May still consider aging as a secondary look but this could mean
variable consideration was not accurate
• Create an implementation group• Involve IT early for data mining• Need a project manager• Engage auditors during implementation process• Understand disclosures and data needed to be gathered• Determine impact on internal operations
Lessons Learned
• Educate stakeholders• Management• Board of Directors• Debt holders• Contributors• May include adoption of ASU 2016-14 on the NFP reporting model
changes
Lessons Learned
Disclosure Considerations
38
DISCLOSURE REQUIREMENTS
Understand nature, amount, timing &
uncertainty of revenue & cash
flows
Disaggregation
of revenue
Contract
balances
Performance
obligations
Significant
judgments
Costs to obtain
or fulfill a
contract
both qualitative & quantitative information
DISAGGREGATION OF REVENUE FOR HEALTH CARE
Example
categories
Type of customer,
e.g., Medicare,
Medicaid, Self-Pay
Timing of transfer of
goods or service
Type of service, e.g.,
independent living,
assisted living,
nursing home
Geographical
location
Type of contract, e.g.,
type A, B, C
DISCLOSURE REQUIREMENTS
Disaggregation of revenue considerations
• What is presented in annual reports, investor presentations, EMMA filings?
• What information is regularly reviewed by the chief decision makers for evaluating financial performance of operating segments?
• What other information would users of the financial statements find helpful in evaluating financial performance?
• Industry comparisons
Revenue Disaggregation by Payor
The composition of patient care service revenue by primary payor for the years ended December 31 is as follows:
20x2 20x1
Medicare $ 16,000 $ 15,000
Medicaid 6,000 5,000
Managed care 11,000 10,500
Commercial insurers 4,000 3,500
Uninsured 1,800 1,900
Other 1,000 1,000
$ 39,800 $ 36,900
DISAGGREGATION OF REVENUE FOR HEALTH CARE
Revenue Disaggregation by
Region, Service Line, Reimbursement & Timing
20x2
Northeast Central Southeast Total
Services lines:
Hospital-inpatient
Hospital-outpatient
$ 3,500
4,500
$ 1,000
2,000
$ 3,000
2,000
$ 7,500
8,500
Physician services 3,000 3,000 5,000 11,000
Home health & hospice
Retail sales
Other
1,000
2,000
400
800
2,000
200
2,000
4,000
400
3,800
8,000
1,000
$ 14,400 $ 9,000 $ 16,400 $ 39,800
Method of reimbursement:
Fee for service
Capitation & risk sharing
Other
$ 8,900
3,100
2,400
$ 14,400
$ 5,300
1,500
2,200
$ 9,000
$ 6,000
6,000
4,400
$ 16,400
$ 20,200
10,600
9,000
$ 39,800
Timing of revenue & recognition:
Health care services transferred over time $ 12,400 $ 7,000 $ 12,400 $ 31,800
Retail pharmacy & equipment sales at point in time 2,000 2,000 4,000 8,000
$ 14,400 $ 9,000 $ 16,400 $ 39,800
DISAGGREGATION OF REVENUE FOR HEALTH CARE
DISCLOSURE REQUIREMENTS Quantitative & qualitative disclosures
• Contracts with customers
• Significant judgements
• Assets recognized
Level of detail
• Need enough to explain, not so much it confuses
Performance obligations
• Over time or a point in time
Transaction price
• Allocation & subsequent changes
• Optional disclosures
• Implicit price concessions
Public Company Disclosure
Excerpts from Second Quarter
2018 10Q’s
AICPA Health Care Industry Conference #AICPAhealth
Tenet Healthcare Corporation 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• ASU 2014-09 was issued to clarify the principles for recognizing revenue, to remove inconsistencies and weaknesses in revenue recognition requirements, and to provide a more robust framework for addressing revenue issues. Our adoption of ASU 2014-09 was accomplished using a modified retrospective method of application, and our accounting policies related to revenues were revised accordingly effective January 1, 2018, as discussed below.
Tenet Healthcare Corporation 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Net Patient Service Revenues — We report net patient service revenues at the amounts that reflect the consideration to which we expect to be entitled in
exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs)
and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations.
Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as
performance obligations are satisfied.
• We determine performance obligations based on the nature of the services we provide. We recognize revenues for performance obligations satisfied
over time based on actual charges incurred in relation to total expected charges. We believe that this method provides a faithful depiction of the transfer
of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied
over time relate to patients in our hospitals receiving inpatient acute care services. We measure performance obligations from admission to the point
when there are no further services required for the patient, which is generally the time of discharge.
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Because our patient service performance obligations relate to contracts with a duration of less than one year, we have elected to apply the optional
exemption provided in FASB Accounting Standards Codification (“ASC”) 606-10-50-14(a) and, therefore, we are not required to disclose the aggregate
amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The
unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the
reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within
days or weeks of the end of the reporting period.
• We determine the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to third-party payers,
discounts provided to uninsured patients in accordance with our Compact , and implicit price concessions provided primarily to uninsured patients. We
determine our estimates of contractual adjustments and discounts based on contractual agreements, our discount policies and historical experience. We
determine our estimate of implicit price concessions based on our historical collection experience with these classes of patients using a portfolio
approach as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using
this practical expedient are not materially different from an individual contract approach.
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• We have a system and estimation process for recording Medicare net patient revenue and estimated cost report settlements. As a result, we record accruals
to reflect the expected final settlements on our cost reports. For filed cost reports, we record the accrual based on those cost reports and subsequent
activity, and record a valuation allowance against those cost reports based on historical settlement trends. The accrual for periods for which a cost report is
yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports, and a corresponding valuation allowance is recorded as
previously described. Cost reports generally must be filed within five months after the end of the annual cost reporting period. After the cost report is filed,
the accrual and corresponding valuation allowance may need to be adjusted.
• Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration
and are included in the determination of the estimated transaction price for providing patient care using the most likely outcome method. These
settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and our historical settlement
activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments
become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigations
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-
service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take
several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is
subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each
particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the
end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable
contract terms. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as
payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised.
We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporate-wide basis, we
do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of
contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends
for these payers and other factors that affect the estimation process.
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Generally, patients who are covered by third-party payers are responsible for related co-pays, co-insurance and deductibles, which vary in amount. We also provide services
to uninsured patients and offer uninsured patients a discount from standard charges. We estimate the transaction price for patients with co-pays, co-insurance and
deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured discount
programs, the discount offered to certain uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay
accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value at the time they are
recorded through implicit price concessions based on historical collection trends for self-pay accounts and other factors that affect the estimation process. There are
various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and
underinsured patients, the volume of patients through our emergency departments, the increased burden of co-pays, co-insurance amounts and deductibles to be made by
patients with insurance, and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our
estimation process. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient revenues in the period of the
change.
Tenet Healthcare Corporation 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• We have provided implicit price concessions, primarily to uninsured patients and patients with co-pays, co-insurance and deductibles. The implicit price
concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts we expect to
collect based on our collection history with similar patients. Although outcomes vary, our policy is to attempt to collect amounts due from patients,
including co-pays, co-insurance and deductibles due from patients with insurance, at the time of service while complying with all federal and state statutes
and regulations, including, but not limited to, the Emergency Medical Treatment and Active Labor Act (“EMTALA”). Generally, as required by EMTALA,
patients may not be denied emergency treatment due to inability to pay. Therefore, services, including the legally required medical screening examination
and stabilization of the patient, are performed without delaying to obtain insurance information. In non-emergency circumstances or for elective procedures
and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur. Such exceptions can
include, for example, instances where (1) we are unable to obtain verification because the patient’s insurance company was unable to be reached or
contacted, (2) a determination is made that a patient may be eligible for benefits under various government programs, such as Medicaid or Victims of
Crime, and it takes several days or weeks before qualification for such benefits is confirmed or denied, and (3) under physician orders we provide services to
patients that require immediate treatment.
• .
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• We also provide charity care to patients who are financially unable to pay for the healthcare
services they receive. Most patients who qualify for charity care are charged a per-diem amount
for services received, subject to a cap. Except for the per-diem amounts, our policy is not to
pursue collection of amounts determined to qualify as charity care; therefore, we do not report
these amounts in net operating revenues. Patient advocates from Conifer’s Medical Eligibility
Program screen patients in the hospital to determine whether those patients meet eligibility
requirements for financial assistance programs. They also expedite the process of applying for
these government programs.
.
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Net operating revenues for our Hospital Operations and other and Ambulatory Care segments
primarily consist of net patient service revenues, principally for patients covered by Medicare,
Medicaid, managed care and other health plans, as well as certain uninsured patients under our
Compact and other uninsured discount and charity programs. Net operating revenues for our
Conifer segment primarily consist of revenues from providing revenue cycle management
services to healthcare systems, as well as individual hospitals, physician practices, self-insured
organizations, health plans and other entities.
.
Tenet Healthcare Corporation10Q – Second Quarter 2018
AICPA Health Care Industry Conference
The table below shows our sources of net operating revenues from continuing operations:
Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Hospital Operations and other:
Net patient service revenues less provision for doubtful accounts
from hospitals and related outpatient facilities
Medicare $ 701
$ 820
$ 1,483
$ 1,682
Medicaid 314
279
635
554
Managed care 2,273
2,451
4,641
4,884
Self-pay 8
18
45
31
Indemnity and other 147
151
282
296
Total 3,443
3,719
7,086
7,447
Physician practices revenues less provision for doubtful accounts 270
271
545
540
Health plans —
25
6
90
Revenue from other sources 20
70
43
123
Hospital Operations and other total prior to inter-segment
eliminations 3,733
4,085
7,680
8,200
Ambulatory Care 531
472
1,029
927
Conifer 386
400
790
802
Inter-segment eliminations (144 ) (155 ) (294 ) (314 )
Net operating revenues $ 4,506
$ 4,802
$ 9,205
$ 9,615
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard
related to revenue recognition. We adopted the new standard effective January 1, 2018,
using the full retrospective method. The adoption of the new standard did not have an
impact on our recognition of net revenues for any periods prior to adoption. The most
significant impact of adopting the new standard is to the presentation of our
consolidated income statements, where we no longer present the “Provision for doubtful
accounts” as a separate line item and our “Revenues” are presented net of estimated
implicit price concession revenue deductions. We also have eliminated the related
presentation of “allowances for doubtful accounts” on our consolidated balance sheets as
a result of the adoption of the new standard.
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Our revenues generally relate to contracts with patients in which our performance obligations are to provide health
care services to the patients. Revenues are recorded during the period our obligations to provide health care services
are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average
approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges.
Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The
contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed
care health plans and commercial insurance companies, including plans offered through the health insurance
exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare
and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party
payers.
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Our revenues are based upon the estimated amounts we expect to be entitled to receive
from patients and third-party payers. Estimates of contractual allowances under managed
care and commercial insurance plans are based upon the payment terms specified in the
related contractual agreements. Revenues related to uninsured patients and uninsured
copayment and deductible amounts for patients who have health care coverage may have
discounts applied (uninsured discounts and contractual discounts). We also record
estimated implicit price concessions (based primarily on historical collection experience)
related to uninsured accounts to record self-pay revenues at the estimated amounts we
expect to collect.
HCA Healthcare Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
Our revenues from third-party payers and others (including uninsured patients) for the quarters and six months ended June 30, 2018 and 2017 are summarized in the following table (dollars in millions):
Quarter
2018 Ratio 2017 Ratio
Medicare $ 2,425 21.0 % $ 2,272 21.2 %
Managed Medicare 1,345 11.7 1,158 10.8
Medicaid 357 3.1 376 3.5
Managed Medicaid 586 5.1 527 4.9
Managed care and insurers 5,993 51.9 5,729 53.4
International (managed care and insurers) 295 2.6 269 2.5
Other 528 4.6 402 3.7
Revenues $ 11,529 100.0 % $ 10,733 100.0 %
Six Months
2018 Ratio 2017 Ratio
Medicare $ 4,949 21.6 % $ 4,633 21.7 %
Managed Medicare 2,744 12.0 2,341 11.0
Medicaid 638 2.8 670 3.1
Managed Medicaid 1,147 5.0 1,116 5.2
Managed care and insurers 12,055 52.5 11,352 53.2
International (managed care and insurers) 600 2.6 538 2.5
Other 819 3.5 706 3.3
Revenues $ 22,952 100.0 % $ 21,356 100.0 %
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• Laws and regulations governing the Medicare and Medicaid programs are complex and
subject to interpretation. As a result, there is at least a reasonable possibility recorded
estimates will change by a material amount. Estimated reimbursement amounts are
adjusted in subsequent periods as cost reports are prepared and filed and as final
settlements are determined (in relation to certain government programs, primarily
Medicare, this is generally referred to as the “cost report” filing and settlement process).
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party
payers and patients is our primary source of cash and is critical to our operating performance. The
primary collection risks relate to uninsured patient accounts, including patient accounts for which the
primary insurance carrier has paid the amounts covered by the applicable agreement, but patient
responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions
relate primarily to amounts due directly from patients. Estimated implicit price concessions are
recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off
when all reasonable internal and external collection efforts have been performed.
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net
collections, business and economic conditions, trends in federal, state and private employer health care coverage and other
collection indicators. Management relies on the results of detailed reviews of historical writeoffs and collections at facilities that
represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in
estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months
accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated implicit price concession
amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable.
These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable
or period-to-period comparisons of our results of operations. At June 30, 2018 and December 31, 2017, estimated implicit price
concessions of $5.736 billion and $5.488 billion, respectively, had been recorded as reductions to our accounts receivable balances
to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.
HCA Healthcare Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
To quantify the total impact of the trends related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of
charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the quarters and six months ended
June 30, 2018 and 2017 follows (dollars in millions):
Quarter Six Months
2018 2017 2018 2017
Patient care costs (salaries and benefits, supplies, other operating expenses
and depreciation and amortization) $ 9,871 $ 9,177 $ 19,738 $ 18,326
Cost-to-charges ratio (patient care costs as percentage of gross patient charges) 12.6 % 13.0 % 12.5 % 12.9 %
Total uncompensated care $ 6,486 $ 5,721 $ 12,738 $ 11,048
Multiply by the cost-to-charges ratio 12.6 % 13.0 % 12.5 % 12.9 %
Estimated cost of total uncompensated care $ 817 $ 743 $ 1,592 $ 1,425
Genesis Healthcare, Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and all related amendments (ASC 606),
which serves to supersede most existing revenue recognition guidance, including guidance specific to the healthcare industry. ASC
606 provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and
requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 effective January 1, 2018 using the
modified retrospective transition method. There was no cumulative effect on the opening balance of accumulated deficit as a result
of adopting the standard as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under
ASC 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect
for those periods. See Note 4 – “Net Revenues and Accounts Receivable.”
Genesis Healthcare, Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
Three months ended June 30, Six months ended June 30,
2018 2017 2018 2017
Medicare 22 % 23 % 22 % 23 %
Medicaid 57 % 55 % 56 % 55 %
Insurance 12 % 12 % 13 % 12 %
Private 8 % 9 % 8 % 9 %
Other 1 % 1 % 1 % 1 %
Total 100 % 100 % 100 % 100 %
• The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-
term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services segment derives
approximately 78% of its revenue from Medicare and various state Medicaid programs. The following table depicts the Company’s
inpatient services segment revenue by source for the three and six months ended June 30, 2018 and 2017.
Genesis Healthcare, Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The sources and amounts of the Company’s revenues are determined by a number of
factors, including licensed bed capacity and occupancy rates of inpatient facilities, the mix
of patients and the rates of reimbursement among payors. Likewise, payment for ancillary
medical services, including services provided by the Company’s rehabilitation therapy
services business, varies based upon the type of payor and payment
methodologies. Changes in the case mix of the patients as well as payor mix among
Medicare, Medicaid and private pay can significantly affect the Company’s profitability.
Genesis Healthcare, Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The Company generates revenues, primarily by providing healthcare services to its customers. Revenues are recognized when
control of the promised good or service is transferred to our customers, in an amount that reflects the consideration the Company
expects to be entitled from patients, third-party payers (including government programs and insurers) and others, in exchange for
those goods and services.
• Performance obligations are determined based on the nature of the services provided. The majority of the Company’s healthcare
services represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance
obligation satisfied over time as services are rendered. The Company also provides certain ancillary services which are not
included in the bundle of services, and as such, are treated as separate performance obligations satisfied at a point in time, if and
when, those services are rendered.
Genesis Healthcare, Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as
implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to
arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. Variable consideration also
exists in the form of settlements with Medicare and Medicaid as a result of retroactive adjustments due to audits and reviews. The Company applies constraint
to the transaction price, such that net revenues are recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative
revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company
adjusts these estimates, which would affect net revenues in the period such variances become known. Adjustments arising from a change in the transaction
price were not significant for the three and six months ended June 30, 2018.
• The Company has elected a practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component due to its
expectation that the period between the time the service is provided and the time payment is received will be one year or less.
Genesis Healthcare, Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price
concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectable are generally considered implicit price
concessions that are a direct reduction to net revenues. Prior to adoption of ASC 606, such amounts were classified as provision for losses on accounts
receivable. For the three and six months ended June 30, 2018, the Company recorded approximately $22.0 million and $46.8 million, respectively, of implicit
price concessions as a direct reduction of net revenues that would have been recorded as operating expenses prior to the adoption of ASC 606. The adoption of
ASC 606 is not expected to have a material impact on net income on an ongoing basis. To the extent there are material subsequent events that affect the payor's
ability to pay, such amounts are recorded within operating expenses.
• At June 30, 2018, the remaining balance of allowance for doubtful accounts previously disclosed on the consolidated balance sheets relating to accounts
receivable with December 31, 2017 and prior service dates is $277.4 million.
Genesis Healthcare, Inc.10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The Company has reclassified the provision for losses on accounts receivable of $24.0 million and $47.5 million for the three and six months ended June 30, 2017,
respectively, to other operating expenses in the consolidated statements of operations. These reclassifications had no effect on the reported results of operations.
• Under ASC 606, the Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services
have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract
assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
• Under ASC 606, payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily
relate to private pay patients, which are billed monthly in advance. The Company had no material contract liabilities or activity as of and for the three and six
months ended June 30, 2018.
Genesis Healthcare, Inc. 10Q – Second Quarter 2018
AICPA Health Care Industry Conference
• The Company disaggregates revenue from contracts with customers by reportable
operating segments and payor type. The Company notes that disaggregation of revenue
into these categories achieves the disclosure objectives to depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors. The
payment terms and conditions within the Company's revenue-generating contracts vary by
contract type and payor source. Payments are generally received within 30 to 60 days after
billed. See Note 6 – “Segment Information.”
Other Considerations
THIRD-PARTY SETTLEMENTS
•Determination of the transaction price for third-party settlements
• Medicare/Medicaid cost report settlements
• RAC accruals
• Risk adjustments for prepaid health plans
• Other
•Use method which entity expects to better predict the amount of consideration to which it will be entitled
• Use of Expected Value (probability-weighted amount)
• Use of Most Likely Amount (single most likely amount in a range of possible considerations)
THIRD-PARTY SETTLEMENTS
• Required to evaluate whether to “constrain” amounts of variable consideration included in transaction price
• Objective of the constraint – include variable consideration in the transaction price only to the extent it is “probable” that a significant revenue reversal will not occur
• Estimates must be updated each reporting period
EXPECTED VALUE MOST LIKELY AMOUNT• Sum of the probability-weighted amounts in a
range of possible outcomes
• Most predictive when the transaction has a
large number of possible outcomes
• The single most likely amount in a range of
possible outcomes
• Most predictive when the transaction has two
possible outcomes
THIRD-PARTY SETTLEMENTS
• Transition guidance for modified retrospective approach
• Evaluate contracts to determine if substantially all of the revenue was recognized under legacy GAAP (before the date of initial application)
• If all or substantially all of the revenue has not been recognized, the contracts with patients subject to retroactive settlement by that payor for the open cost report year would be considered open contracts & FASB ASC 606 will need to be applied to those contracts for purposes of determining the cumulative effect adjustment at the date of initial application
BUNDLED PAYMENT ARRANGEMENTS
Step 1 | Identification of the contract
FinREC believes the contract is with the patient not the third-party payor
Step 2 | Performance obligation
Care Coordination is not necessarily a performance obligation. Need to assess each contract & in addition consider implied promises & if so are they a distinct performance obligation
Step 3 | Transaction price considerations
• Variable consideration
• Constraint of revenue
• Use of portfolios
• Significant financing component
• Do you have historical information to estimate the variable consideration
• Exposed an example for CJR
CCRC SPECIFIC CONSIDERATIONS
• Accounting for monthly/periodic fees
• Accounting for nonrefundable entrance fees under the different contract types (focus has been primarily on Type A Contracts)
• Significant financing component considerations for refundable & nonrefundable entrance fees
• Obligation to provide future services & use of facilities
• Contract acquisition costs
Want more in depth training on CCRC-specific implications? Visit bkd.com/TheLink to access our on-demand presentation.
WHAT TO DO NOW?
Read the standard & related resources
Engage reimbursement, IT & finance staff (& third party, if deemed necessary)
Identify a champion or task force to study the new standard
Determine if resource bandwidth & competencies exist within the organization or if outside assistance is needed
Identify revenue streams & the related portfolios
1
2
3
4
5
6
7
Concentrate on disclosures & if any changes are needed to gather the information
Educate audit committees, boards & other stakeholders
Accounting Guidance for Contributions Received & Contributions Made
79
Contributions & Grants
• One June 21, 2018, the FASB Issued ASU 2018-08, Clarifying the Scope &
the Accounting Guidance for Contributions Received & Contributions Made
• The ASU clarifies
• Whether an asset transfer is a contribution or an exchange
transaction
• The criteria for determining whether contributions are unconditional
(& recognized immediately into income) or conditional (& deferred)
ASU 2018-08
CLARIFYING THE SCOPE & ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED & CONTRIBUTIONS MADE
Background
Issued as a result of seeing diversity in practice among NFP entities, even after
considering the issuance of ASC 606
Scope
Guidance applies to all NFPs & business entities. The rules do not apply to
transfers of assets from the government to a business entity
ASU 2018-08
CLARIFYING THE SCOPE & ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED & CONTRIBUTIONS MADE
ASU 2018-08, CLARIFYING THE SCOPE & THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED & CONTRIBUTIONS MADE
Effective Date & Transition
The final standard should be applied on a modified prospective basis following the effective date
to agreements that are either (a) incomplete as of the effective date or (b) entered into after the
effective date. Retrospective application is permitted
Resource providers have an additional year to implement the provisions on the standard
1 – Public entities include NFPs with conduit debt obligations
CONTRIBUTIONS VERSUS EXCHANGE TRANSACTIONS
Exchange Transaction
If commensurate value is received by the resource provider, the transaction should be accounted for as an exchange transaction by applying ASC 606 or other topics
Contribution Transaction
If commensurate value is not received by the resource provider, i.e., the transaction is nonexchange, the recipient organization would record the transaction as a contribution under ASC 958 & determine whether the contribution is conditional or unconditional
FASB expects the new
guidance could result in
more grants & contracts
being accounted for as
contributions (often
conditional contributions)
than under current
practice. Because of this,
it believes the clarifying
guidance about whether a
contribution is conditional
or unconditional, which
affects the timing of
revenue recognition, is
important
CONTRIBUTIONS:CONDITIONAL OR UNCONDITIONAL?
Organizations would evaluate whether contributions (“nonexchange” transactions) are conditional or unconditional by determining whether there is a barrier or hurdle that must be overcome & whether the agreement or other referenced document includes either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets
To determine if there is a barrier, an NFP will consider indicators, which include, but are not limited to
• The inclusion of a measurable performance-related barrier or other measurable barrier
• The extent to which a stipulation limits discretion by the recipients on the conduct of an activity
• The extent to which a stipulation is related to the purpose of the agreement
ASU 2018-08CLARIFYING THE SCOPE & THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED & CONTRIBUTIONS MADE
Simultaneous Release Option
The ASU modifies the current simultaneous release option, which allows an NFP to
recognize a restricted contribution directly in unrestricted net assets/net assets without donor
restrictions if the restriction is met in the same period that the revenue is recognized
This election may now be made for all restricted contributions that were initially classified as
conditional without having to elect it for all other restricted contributions & investment returns
Thank You!Kimberly McKay | [email protected]