The Financial Accounting Standards Board (FASB) issued ASC 606, Revenues from Contracts with Customers, which replaced all previously-existing guidance and created a new model for recognizing revenues from transactions with customers (or patients).
Healthcare providers are unique in the accounting world in many ways, most notably for the complexities surrounding the revenue cycle (billing and collecting for services provided). The proper application of ASC 606 will be difficult for healthcare providers, due in large part to these complexities.
To address this, the AICPA created a special task force to study various challenges facing healthcare entities related to ASC 606, and the task force’s recommendations were integrated into the AICPA’s revenue recognition manual in 2018.
While ASC 606 adoption will require significant time, resources and assistance, once completed, it will make a healthcare provider’s financial statements more comparable to other industries and (at least in theory) more valuable to the capital markets.
What does ASC 606 say?
The core principle of the new revenue recognition standard is that “an entity should recognize 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.”
Translation? Revenues should only be recognized in amounts that are ultimately expected to be collected in cash (and no more). Gone are the days where healthcare providers charge standard rates, recognize revenue at full charges at date of service, and then reduce to expected collectible amounts via reserves or subsequent contractual adjustments after collection is received, or insurance status is verified.
What does ASC 606 mean for the Healthcare Industry?
ASC 606 will require healthcare entities to carefully evaluate how, when, and in what amount they recognize revenue, specifically in regards to contracts with third-party payers and self-pay revenue (and resulting bad debts).
What changes should healthcare finance professionals be making now?
- Consider these questions (among others) and action items and discuss with your CRI healthcare team member:
- What contracts currently exist in your organization?
- Consider uninsured patients – do you have a valid contract? Do you have a valid transaction price? Note that these healthcare-specific considerations are complicated and we encourage you to reach out to us to discuss.
- Identify the promised goods and healthcare services provided to existing patients.
- Study how, when, and how much patients (and payers) pay for healthcare services on a detailed level. Anticipate that extensive analyses will be required to identify and substantiate the actual realizable cash amount on various payer types, patient types, service lines, etc. These analyses will be needed in order to determine the amount of revenue that can be recorded, and when, going forward.
- Determine any remaining performance obligations past time of service.
- Allocate the transaction price to the performance obligations in the contract.
- Proactively provide training to your entire accounting, bookkeeping, and administrative team on the new changes. Also, consider the need to educate your leadership team and board or ownership group. Note that the amount of revenues on your financial statements may change, and your leadership team may be caught by surprise!
- Contact CRI’s healthcare team