New Accounting Standard Presents Unique Challenges for PAC Providers

April 2017

by Steven Shill

By 2018, publicly traded companies will be required to comply with a new way of reporting revenues, with all other companies following suit in 2019. Healthcare companies, particularly post-acute care providers, may feel the pain more than others, and they—along with their investors—should prepare sooner rather than later.

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 based on five steps: identifying the contract; identifying separate performance obligations; determining the transaction price; allocating the transaction price to separate performance obligations; and recognizing revenue when the entity fulfills performance obligations.

The main goal of the standard “is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those 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. The idea is to eliminate industry-specific revenue recognition accounting to give investors a more streamlined picture of revenues—and one that’s comparable across countries.

This is where we run into challenges for the healthcare industry.

Under the existing U.S. GAAP reporting requirements, the industry has already struggled to use comparable revenue measures because of the diversity of its constituents. For investors to compare the revenues of a hospital versus those of a skilled nursing facility would be like comparing apples to oranges. And if one healthcare company’s structure includes a variety of provider types—hospitals, accountable care networks, post-acute care and pharmacies, for example—bundling such a diverse group of revenue streams within the same financial report could provide some difficulties. It could even be misleading without significant supplemental disclosures and discussions.

But healthcare has yet another unique variable: the recently implemented value-based reimbursement demonstration initiatives under Medicare. These models (having bipartisan support and hence potential political staying power irrespective 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 already struggling to accurately report revenues. Furthermore, commercial payers too have jumped on the bandwagon and are following suit with their own form of bundled reimbursement.  

One of the first mandatory bundled payment initiatives, the Comprehensive Care for Joint Replacement rolled out in 67 Metropolitan Services Areas (MSAs) in April 2016. CJR holds participant hospitals financially responsible for the quality and cost of treatment during a 90-day episode of care after a hip or knee replacement, incentivizing the coordination of care between hospitals, doctors and post-acute care providers. CJR financially incentivizes providers to administer the best quality of care the first time around and to partner with providers, especially in post-acute care, who have proven to do the same. The model, which Medicare has now expanded to certain cardiac cases in 98 MSAs and will expand to hip and femur fractures in July 2017, creates multiple partner contracts and multiple payer arrangements. Whereas under the old paradigm each provider (hospitals through post-acute) operated and billed independently of one another, now the value-based “supply chain,” is held responsible for the convalescing patient over a 90-day period.   

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

Healthcare revenues under value-based arrangements are considered a variable consideration because these reimbursements may be subject to retroactive adjustment after the fact. Under current GAAP, allowances against revenue are generally recorded based on payments or settlements due to or from the payer using the “best estimate” basis. Under ASC 606, revenue to be recognized is limited to the amount of variable consideration where it is probable that a significant adjustment will not occur when the uncertainties are resolved (i.e. revenue not reverse out).

This step is likely to be difficult in the value-based reimbursement world, 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 would not stop there.

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

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

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

Secondly, providers should carefully choose an appropriate estimation methodology as required under ASC 606. Their choices will be either the Expected Value Method, which is based on a probability weighted range of possible outcomes suited for multiple contracts, or the Most Likely Amount Method, which is based on the single most likely amount from a range of possible outcomes.

Thirdly, it will be imperative for providers to open channels of communications between their business partners in their supply chains and establish the ability to share data. This process may be new and daunting for many post-acute providers and could create legal, regulatory and technological challenges.

Finally, providers are highly recommended to either individually, or jointly with their network partners, identify vendors that can provide reliable regional or MSA data not only for critical operational and clinical decisions, but also to support estimation methodologies under the new Rev Rec standard.

For some, implementing a robust contract management system to help evaluate, negotiate and efficiently manage payer contracts, may also be a good first step in boosting cost savings and safeguarding revenues.

These are just some of the variables healthcare entities should consider when deciding how to best prepare for the Rev Rec standard.

Regardless of the specific steps companies take to prepare, one thing is for certain: they should outline their path to compliance well ahead of the 2018 implementation date.

This column was originally published in the Jan. 27 edition of McKnight’s.

Steven Shill is an Assurance partner and national co-leader of The BDO Center for Healthcare Excellence & Innovation. He can be reached at

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