Revenue Recognition

Rev Rec Poses Health-Care Pricing Problems

As the industry consolidates, health-care CFOs will encounter a plethora of revenue streams that need to be accounted for.
David KatzAugust 30, 2017

At the core of the Financial Accounting Standards Board’s new revenue recognition standard is a five-step process companies will have to follow once the standard starts taking effect for financial periods starting at the end of this year.

First, the company must identify the contract it has with the customer. Second, it has to identify the promises it’s made in the contract with the customer. Third, the company must figure out the transaction price. Fourth, the company’s required to allot the right transaction price to the promises made in the contract. Finally, once the company’s made good on its promises, it can recognize revenue.

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revrec hcDepending on the conditions a company — or an entire industry — is operating under, it might have trouble complying with one or more of those steps. The nation’s health-care organizations might be as good an example as you’ll find of an industry facing massive challenges in getting past the third step.

When the revenue recognition rule takes effect for public companies after December 15, 2017 (after December 15, 2018 for nonpublic outfits), the industry will have to cope with a confluence of difficulties in figuring out how much revenue to recognize for its services, experts say. Among them are consolidation of the industry, which is resulting in the integration of different types of provider organizations and confusion among their various payment systems. Also challenging: the addition of new “variable” payment arrangements on top of longstanding fee-for-service systems.

“There’s an especially wide diversity of provider types within the health-care system, including hospitals, health plans, physician practices, nursing facilities, and retirement communities. They all have specific nuances to them, and one size does not fit all” in terms of how they recognize revenue, says Venson Wallin, a managing director at BDO.

But in addition to the various provider groups, the industry’s consolidation is also producing ever larger integrated health systems that are gobbling up those groups. “When you have an integrated health system, you are facing a myriad of decisions and implementation issues associated with revenue recognition because of the diversity of providers and their contracts,” Wallin says.

While integrated health-care organizations are already struggling to make the revenue metrics of these different provider groups comparable, they will soon face the added burden of trying to recognize them on their financials. “When trying to represent such diverse revenue streams in financial statements, health-care organizations will need to be careful to include appropriate supplemental disclosures and discussions to avoid inadvertently presenting misleading information,” according to a BDO alert on the subject.

Another big challenge for health-care CFOs is that the revenue recognition compliance deadlines are coming on the heels of the implementation by many hospitals of a new Medicare “value-based” payment system for hospitals. Set up in 2010 under the Affordable Care Act, the Hospital Value-Based Purchasing Program has been empowered to pay incentives to qualifying hospitals since 2013.

A U.S. Medicare and Medicaid services initiative, the program rewards acute-care hospitals with incentive payments for the quality of care they provide to Medicare beneficiaries.

Under the program, some hospitals are no longer being paid based solely on the basis of the quantity of services they supply, as many still are based on the existing Medicare fee-for-service system. Instead, hospitals who take part in the value-based program will receive rewards based on the quality of care they provide, how closely best clinical practices are followed, and  how well they improve patients’ experiences of care.

The program presents health-care CFOs with the added difficulty of tracking a whole new set of quality metrics on top of the straight payment metrics of the existing fee-for-service, according to Wallin. What’s more, the quality metrics are likely to be different for the physician and nursing groups within an integrated health-care organization, he says.

The change that many hospitals are making from a fee-for-service billing system to a value-based system will add a considerable layer of complexity, according to Steven Shill, who leads BDO’s Center for Healthcare Excellence and Innovation. Unlike the traditional fee-for-service model, in which health-care services are broken out and paid for separately, value-based reimbursement is based on an “episode of care” in which services provided for a medical problem during a set time period are bundled together for billing purposes.

“The shift of reimbursement from a fee-for-service basis, which is the most simple and the easiest to address when it comes to revenue recognition, to the value-based, bundled type reimbursement,” says Shill, is “what really makes the estimation of the transaction price difficult.”