New accounting standard presents unique challenges for AAS providers

By 2018, publicly traded companies will be required to comply with a new method of reporting income, and all other companies will follow in 2019. Healthcare companies, especially post-acute care providers, may feel the pain more than others, and they and their investors – should prepare as soon as possible.

Under this new standard, ASC Topic 606 Revenue from Contracts with Customers, the timing and pattern of revenue recognition will likely change for many entities. In short, the standard will require companies to determine revenue recognition in five steps: identify the contract; identify separate performance obligations; determine the price of the transaction; allocate the transaction price to separate performance obligations; and revenue recognition when the entity fulfills its performance obligations.

The primary objective of the standard “is for enterprises to recognize revenue to represent the transfer of goods or services to customers in amounts that reflect the consideration (i.e. payment) to which the enterprise s expect to be entitled in exchange for such goods or services,” wrote the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) when they announced the changes in 2014. he idea is to eliminate industry-specific revenue recognition to give investors a simpler picture of revenue – and comparable across countries.

This is where we encounter challenges for the healthcare industry.

Under current US GAAP reporting requirements, the industry has previously struggled to use comparable revenue measures due to the diversity of its constituents. For investors, comparing the earnings of a hospital to those of a skilled nursing facility would be like comparing apples to oranges. And if the structure of a healthcare business includes a variety of provider types – hospitals, responsible care networks, post-acute care, and pharmacies, for example – grouping such a diverse group of revenue streams into the same financial report could present certain difficulties. It might even be misleading without significant additional disclosures and discussions.

But healthcare has yet another unique variable: the value-based reimbursement demonstration initiatives recently implemented under Medicare. These models (enjoying bipartisan support and therefore enduring political power regardless of what happens to the Affordable Care Act under the Trump administration), potentially make the new Rev Rec standard even more challenging for an industry that already struggles to accurately report income. Additionally, commercial payers have also jumped on the bandwagon and are following suit with their own form of bundled reimbursement.

One of the first mandatory bundled payment initiatives, comprehensive care for joint replacements rolled out to 67 metropolitan service areas (MSAs) in April 2016. CJR holds participating hospitals financially responsible for the quality and cost of treatment during an episode 90-day care after hip or knee replacement surgery, encouraging coordination of care between hospitals, physicians and aftercare providers. The CJR financially incentivizes providers to administer the highest quality of care the first time and to partner with providers, especially in post-acute care, who have been proven to do the same. The model, which Medicare has now extended to some cardiac cases in 98 MSAs and will extend to hip and femur fractures in July 2017, creates multi-partner contracts and multi-payer arrangements. Whereas under the old paradigm, each provider (hospitals through post-acute care) operated and billed independently of each other, the value-based “supply chain” is now held accountable to the patient in recovery over a period of 90 days.

In this environment, the third step of the Rev Rec standard – determining the transaction price – presents significant challenges.

Health care revenues under value-based arrangements are considered variable consideration, as these reimbursements may be subject to retroactive adjustment after the fact. Under current GAAP, revenue provisions are generally accounted for based on payments or settlements due to or from the payor using the “best estimate”. Under ASC 606, revenue to be recognized is limited to the amount of variable consideration when it is probable that a significant adjustment will not occur when the uncertainties are resolved (i.e. revenue will not reverse).

This step is likely to be difficult in the world of value-based reimbursement, as it would require providers to have visibility into the costs and quality of other providers within their own supply chain to make a reasonable assessment. .

But it wouldn’t stop there.

The reimbursement model would likely also require suppliers to have visibility into the costs and quality of other competing supply chains within their MSA against their own metrics. These data are unlikely to be readily available in a timely manner. Each new reporting year will present a new set of challenges in determining where suppliers and their supply chains stand relative to the arithmetic mean of the bundled costs established by payers.

Additionally, gain and loss sharing agreements within the value-based supply chain are likely to further complicate matters. They will need an assessment of the impact of settlements and even the financial viability of other participants to settle their end of the bargain when the piper comes.

When preparing for the new Rev Rec standard, healthcare organizations should first perform a comprehensive inventory of their contracts, reviewing their revenue cycle management in the process. During this process, they must develop a good understanding of their exposure to value-based retroactive reimbursement.

Second, vendors must carefully choose an appropriate estimation methodology, as required by ASC 606. Their choices will be either the expected value method, which is based on a weighted range of probability of possible outcomes suitable for multiple contracts, or the most likely amount method, which is based on the most likely single amount from a range of possible outcomes.

Third, it will be imperative for suppliers to open communication channels between their trading partners in their supply chains and establish the ability to share data. This process can be new and daunting for many post-acute care providers and could create legal, regulatory and technological challenges.

Finally, vendors are strongly recommended to identify, individually or jointly with their channel partners, vendors who can provide reliable regional or MSA data not only for critical operational and clinical decisions, but also to support methodologies. estimate under the new standard Rev Rec.

For some, implementing a robust contract management system to help effectively assess, negotiate, and manage payer contracts can also be a good first step to increasing cost savings and preserving revenue.

These are just a few of the variables healthcare entities must consider when deciding how best to prepare for Rev Rec.

Whatever specific steps companies take to prepare, one thing is certain: they must outline their path to compliance well in advance of the 2018 implementation date.

Steven Shill, CPA, is an insurance partner and national co-lead of the BDO Center for Healthcare Excellence & Innovation.

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