Implementing Revenue Recognition for Health Care …...• Capitation & prepaid arrangements ASU...

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ASU 2014-09 REVENUE FROM CONTRACTS WITH CUSTOMERSThis ASU superseded health care industry-specific guidance & substantially all existing revenue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


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


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


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


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.



• 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


• 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.



• 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



• 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.



• 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.



• 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.

• .



• 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.

.



• 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.

.



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


• 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.



• 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.



• 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


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 %



• 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).



• 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.



• 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.



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


• 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


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.



• 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.



• 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.



• 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.



• 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.



• 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.



• 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)


• 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


• 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]

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