7.2.01 The core revenue recognition principle in FASB ASC 606 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. The second step in FASB ASC 606 in achieving the core revenue recognition principle is to identify the separate performance obligations in the contract¹ with a customer. It is necessary for health care entities to first determine, at contract inception, which promised goods or services are included in a contract with the patient. It is then necessary for health care entities to determine which goods or services (if any) represent separate performance obligations in order to identify the unit(s) of account to determine when to recognize revenue in step 5 of FASB ASC 606-10-25-1, with the amount of revenue to be recognized determined in accordance with FASB ASC 606-10-32-1.

7.2.02 In accordance with FASB ASC 606-10-25-14, promised goods or services in a contract are identified as performance obligations if each promise to the customer is either (a) a good or service (or a bundle of goods or services) that is distinct or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. In accordance with FASB ASC 606-10-25-22, if a promised good or service is not distinct, a health care entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct, which may result in accounting for all the goods or services promised in a contract as a single performance obligation.

7.2.03 In accordance with FASB ASC 606-10-25-19, a promised good or service is distinct if the patient can benefit from the good or service either on its own or together with other resources that are readily available to the patient (that is, the good or service is capable of being distinct), and the health care entity’s promise to transfer the good or service to the patient is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract).

7.2.04 FASB ASC 606-10-25-15 indicates that a series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:

a.     Each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in paragraph 606-10-25-27 to be a performance obligation satisfied over time.

b.     In accordance with paragraphs 606-10-25-31 through 25-32, the same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.

7.2.05 FASB ASC 606-10-25-21 states the following:

In assessing whether an entity’s promise to transfer goods or services are separately identifiable in accordance with paragraph 606-10-25-19(b), the objective is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs. Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following:

a.     The entity provides a significant service of integrating goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs as specified by the customer. A combined output or outputs might include more than one phase, element, or unit.

b.     One or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract.

c.     The goods or services are highly interdependent, or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfill its promise by transferring each of the goods or services independently.

Consideration of Contract Terms

7.2.06 A health care organization should consider the terms of the contract with a patient to determine the performance obligation(s). FASB ASC 606-10-25-3 states the following:

Some contracts with customers may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a periodic basis that is specified in the contract. An entity shall apply the guidance in this Topic to the duration of the contract (that is, the contractual period) in which the parties to the contract have present enforceable rights and obligations.

7.2.07 FASB ASC 606-10-25-4 states, "For the purpose of applying the guidance in this Topic, a contract does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties)."

7.2.08 At the October 31, 2014, TRG meeting, the TRG addressed the issue of termination (or cancellation) clauses in a contract by either of the parties and stated in paragraph 11 of its TRG Agenda Ref. No. 10, Contract Enforceability and Termination Clauses:

If a contract can be terminated by each party at any time without compensating the other party for the termination (that is, other than paying amounts due as a result of goods or services transferred up to the termination date), the duration of the contract does not extend beyond the goods or services already transferred. This is the case whether or not the contract has a specified contract period.

7.2.09 At the November 2015 TRG meeting, the TRG addressed the issue of contract termination (or cancellation) when only one party has the right to terminate the contract and stated in paragraph 10 of its TRG Agenda Paper 49, November 2015 Meeting — Summary of Issues Discussed and Next Steps

...TRG members supported the view that the legally enforceable contract period should be considered the contract period. Since that meeting, stakeholders have raised further questions (Issue 2) about evaluating a contract when only one party has the right to terminate the contract. TRG members agreed with the staff analysis that the views expressed at the October 2014 TRG meeting would be consistent regardless of whether both parties can terminate, or whether only one party can terminate. TRG members highlighted that when performing an evaluation of the contract term and the effect of termination penalties, an entity should consider whether those penalties are substantive.

7.5.01 In accordance with FASB ASC 606-10-25-23, health care entities are required to recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. In accordance with FASB ASC 606-10-25-24, each performance obligation should be evaluated at contract inception to determine if it is satisfied over time or at a point in time.

7.5.02 The notion of control is easier to apply when considering a good as opposed to a service. However, FASB ASC 606 points out that the rights to the results of services are assets, even if they are often consumed immediately upon receipt. By considering when the customer gains control over the results of a service, the notion of control can also be applied to services. Often, the evidence that a customer has gained control of a service will be that it has realized or consumed the benefits of that service, as described in FASB ASC 606-10-25-25.

7.5.03 As stated in FASB ASC 606-10-25-27:

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

a.     The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs 606-10-55-5 through 55-6).

b.     The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7).

c.     The entity’s performance does not create an asset with an alternative use to the entity (see paragraph 606-10-25-28), and the entity has an enforceable right to payment for performance completed to date (see paragraph 606-10-25-29).

7.5.04 As noted in FASB ASC 606-10-25-30, "[if] a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27 through 25-9, an entity satisfies the performance obligation at a point in time."

Measuring Progress Toward Complete Satisfaction of a Performance Obligation

7.5.05 FASB ASC 606-10-25-31 notes as follows:

For each performance obligation satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity should recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (that is, the satisfaction of an entity’s performance obligation).

7.5.06 FASB ASC 606-10-25-32 indicates the following:

An entity should apply a single method of measuring progress for each performance obligation satisfied over time, and the entity should apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity should remeasure its progress toward complete satisfaction of a performance obligation satisfied over time.

7.5.07 FASB ASC 606-10-25-33 states the following:

Appropriate methods of measuring progress include output methods and input methods. Paragraphs 606-10-55-16 through 55-21 provide guidance for using output methods and input methods to measure an entity’s progress toward complete satisfaction of a performance obligation. In determining the appropriate method for measuring progress, an entity should consider the nature of the good or service that the entity promised to transfer to the customer.

7.5.08 The following examples related to various health care services are meant to be illustrative, and the actual identification of performance obligations should be based on the facts and circumstances of an entity’s specific situation.

Example 7-5-1 — Performance Obligations — Inpatient Health Care Services

Acute Care Hospital (ACH) provided an inpatient surgical procedure to a patient who required four days of care in the hospital. This procedure required ACH to provide and coordinate numerous goods or services to the patient (including a patient room, meals, nursing care, physician services, therapy services, drugs, supplies, and so forth) within the four days of care. In this example, ACH is acting as the principal for the inpatient services provided.

ACH considered if the room provided to the patient includes a lease component. If a lease component is identified, that component would be accounted for in accordance with FASB ASC 840 or 842, Leases, and any non-lease components would be accounted for in accordance with FASB ASC 606.

This example presumes that ACH concluded there is not a lease of the patient room to the patient. In this example, ACH concluded that the bundle of goods and services provided during this inpatient stay should be accounted for as a single performance obligation. In reaching this conclusion, ACH considered the following factors:

a.     Although the patient could have benefitted from some of the individual goods or services (for example, room, meals, drugs) provided as part of the inpatient care and surgery (that is, some of the individual goods or services are capable of being distinct), the nature of ACH’s promise to the patient was to transfer a combined service (the inpatient surgical procedure and related goods and services). Additionally, the patient’s expectation is that he or she will receive the full scale of the combined care during the inpatient stay.

b.     The overall provision of care may include identifying goods or services to be provided, including how much nursing care and physician services are necessary, which drugs to administer, and how long the patient will need to stay in the facility and be provided a room, meals, and supplies. In coordinating the patient’s care during the inpatient stay, ACH provided a significant service of integrating the goods or services promised in the contract into a bundle of goods and services that represents the combined service for which the patient has contracted.

c.     Substantially all of the goods or services provided during the inpatient stay are highly dependent on, or highly interrelated with, other goods or services promised in the contract. For example, a patient is not in a position to decide whether or not to purchase an imaging procedure that is required to determine a course of treatment or to guide a surgical procedure, without significantly affecting that course of treatment or surgical procedure. Similarly, a patient is not in a position to decide whether or not to purchase a general anesthetic when general anesthesia is required for a surgical procedure.

d.     In this example, the individual promised goods or services are not substantially the same and do not represent a series of distinct goods and services. In this case, the goods and services are not substantially the same during the inpatient stay because different and additional goods and services were provided in connection with the surgical procedure at the beginning of the stay, but fewer and different goods and services were provided post-surgery as the patient recovered. The goods and services provided on Day 1 are substantially different from the goods and services provided on Day 4 in terms of the actual services provided, the level of direct physician activity, and the amount of drugs or other supplies. Because the goods and services provided on Day 1 were substantially different than the goods and services provided on Day 4 and were not provided in the same pattern, ACH determined that the goods and services provided during the other three days of the stay do not constitute a series of distinct goods and services.

In accordance with FASB ASC 606-10-25-27, ACH determined that the inpatient procedure should be accounted for over time (versus point in time) because the patient simultaneously received and consumed the benefits provided by ACH as ACH performed.

In this example, the patient is covered by insurance and the payment for the inpatient services is based on diagnostic-related group codes. ACH is entitled to a payment from the insurer, and a related deductible or coinsurance payment from the patient, for all goods and services related to the inpatient stay that is calculated without regard to the amount of resources that ACH provides to the patient. ACH considered all of the factors in step 3 of FASB ASC 606 and determined that these payments represent the transaction price.

The revenue recognized at the reporting date by ACH is determined by multiplying the transaction price by a measure of the progress toward the complete satisfaction of the performance obligation to be incurred over the complete inpatient stay.

To measure the progress in satisfying the performance obligation at the reporting date, ACH considered various input and output methods and determined its undiscounted charges represented the best proxy of its progress on satisfying the performance obligation. ACH reached this conclusion because it establishes its charges to reflect the level of effort it incurs to provide goods or services to its patients. As a result, in this case, ACH measured progress toward complete satisfaction of the performance obligation by using undiscounted charges incurred as of the reporting date relative to the total expected undiscounted charges to be incurred over the inpatient stay.

Example 7-5-2A — Performance Obligations — Outpatient Health Care Services — Discrete Visit

Physician A provides goods and services to a patient during an annual physical exam that included performing inquiry with the patient, obtaining certain vital statistics, performing certain lab tests, and providing any additional goods and services as necessary depending on the information obtained during the annual physical exam. In this scenario, the patient’s insurance company pays a specified amount per outpatient visit based on ambulatory payment classification codes.

Physician A concluded that the goods (for example, supplies) and services provided during this exam represent a single performance obligation even though the underlying tasks performed in each patient’s annual physical exam will vary by patient. Because the patient simultaneously received and consumed the benefits of the services provided in the physical exam in accordance with FASB ASC 606-10-25-27a, Physician A concluded that the revenue should be recognized over time; however, in this case, because all of the goods and services were provided when the exam was performed (including the lab services), the revenue recognition would be the same as point in time because all of the goods and services were provided the same day. Physician A based these conclusions using similar criteria as ACH in example 7-5-1.

During the previously discussed physical exam, because it was the beginning of flu season, Physician A inquired if the patient had obtained a flu shot. Because a flu shot is not part of the standard protocol for the annual physical exam (that is, if the annual physical exam occurred in April, the patient would likely not need to obtain a flu shot at that particular time), and the patient could obtain a flu shot from Physician A or the patient could obtain the flu shot from a different source entirely unrelated to Physician A, the flu shot was viewed as a separate performance obligation by Physician A. Because the patient simultaneously received and consumed the benefits of the services provided by the flu shot in accordance with FASB ASC 606-10-25-27a, the revenue from the flu shot should be recognized over time. However, the recognition would be the same as point in time for this particular service because the length of the service was only a few minutes. In some instances, communication of lab results or other visit-related follow-up services may be provided on a separate day from the actual visit. Physician A should consider if these services are administrative in nature or if these services are part of the performance obligation or represent a separate performance obligation. If the services do not provide additional goods or services to the patient and are considered administrative in nature, the transaction price would not be allocated to these services. However, if these services represent the transfer of additional goods or services that are part of the performance obligation or create a separate performance obligation, a portion of the transaction price should be allocated to these goods or services.

Example 7-5-2B — Performance Obligations — Outpatient Health Care Services — Physical Therapy

ABC Physical Therapy (ABC PT) provides Patient A physical therapy services three times per week in 30 minute increments to strengthen Patient A’s back. Patient A’s physician orders a total of 12 visits. In this scenario, Patient A’s insurance company will only pay for the actual number of visits the patient attends (not to exceed the prescribed 12 visits) at a fixed amount per visit. ABC PT concluded that, in this case, each visit would be a separate performance obligation. ABC PT reached this conclusion because the patient has the unilateral right to terminate the contract after each visit with no penalty or compensation due. If a contract can be terminated by either party at any time without compensating the other party for the termination (that is, other than paying amounts due as a result of goods or services transferred up to the termination date), the duration of the contract does not extend beyond the goods or services already transferred. That is the case whether or not the contract has a specified contract period (in this example, the 12 visits). Because the patient simultaneously received and consumed the benefits of the physical therapy services in accordance with FASB ASC 606-10-25-27a as each visit occurs ABC PT concluded that the revenue would be recognized over time.

ABC PT determined that each subsequent visit is an option for which there is not a material right as the price of each visit is a standard price consistent with the price for the initial visit (that is, there is no discount for each subsequent visit). As a result, ABC PT should recognize revenue for each subsequent visit as it occurs.

Example 7-5-3 — Performance Obligations — Skilled Nursing Facility Services

Traditional Skilled Nursing Facility (TSNF) provides nursing home care to Resident A. As part of Resident A’s care, TSNF provides on a daily basis, room and board, administration of medications, program activities, and, on certain days, in-house physical therapy services. The length of Resident A’s stay at TSNF is not determinable because the date of discharge is based on patient progress; however, the contract with the patient is for a 30-day period, with automatic renewal unless one of the parties provides notice of termination. Although the contract is for 30 days, Resident A may terminate the contract on a daily basis with no penalty for termination. The amount billed for the services described are based on a daily rate to be paid by Resident A, or its third-party payor based on the actual days for which care is provided.

TSNF considered if the room provided to the resident includes a lease component. If a lease component is identified, that component would be accounted for in accordance with FASB ASC 840 or 842, and any non-lease components would be accounted for in accordance with FASB ASC 606.

This example presumes that TSNF concluded there is not a lease of the patient room to the patient.

Although Resident A could benefit from some of the individual goods or services (for example, room, meals, drugs) provided as part of the individual plan of care (that is, some of the individual goods or services are capable of being distinct), the nature of TSNF’s promise to Resident A is to transfer a combined item (skilled nursing facility services) to which the promised goods or services noted previously are inputs.

TSNF is responsible for the overall provision of care, which includes identifying goods or services to be provided, including how much skilled nursing care is necessary, which drugs to administer, and how long Resident A will need to stay in the facility and require a room, meals, and supplies.

TSNF concludes that each day that Resident A receives services represents a separate contract and performance obligation based on the fact that Resident A has the unilateral right to terminate the contract after each day with no penalty or compensation due. If a contract can be terminated by either party at any time without compensating the other party for the termination (that is, other than paying amounts due as a result of goods or services transferred up to the termination date), the duration of the contract does not extend beyond the goods or services already transferred. That is the case whether or not the contract has a specified contract period.

TSNF determined that the daily renewal is an option in which there is not a material right as the price of the renewal is a price consistent with the price for the initial day (that is, there is no discount for the renewal). As a result, TSNF would account for the renewal (that is, each day) when exercised by Resident A.

While at TSNF, Resident A requested that TSNF provide her transportation services to her physician’s office. Transportation for this type of request is not covered by TSNF in its normal routine of care and is a service the facility provides to its residents requiring an additional fee based on miles driven and the type of vehicle required for the transport.

This transportation service for Resident A is capable of being distinct from the standard goods and services provided in the contract and is not a service that is provided in similar increments on a regular basis as part of the care contract with Resident A. Resident A could also purchase this service from other service providers and TSNF does not provide a discount on the transportation services. TSNF concluded that the transportation service provided by TSNF is a separate performance obligation that should be recognized as revenue as the service is provided.

Because the patient simultaneously received and consumed the benefits of the services provided by TSNF in accordance with FASB ASC 606-10-25-27a, TSNF concluded that the revenue should be recognized over time.

7.6.01 Certain health care entities are required by law or regulation to treat emergency conditions (for example, through a hospital’s emergency department) and often provide services to uninsured or underinsured patients regardless of the patient’s ability to pay. More specifically, in 1986, Congress enacted the Emergency Medical Treatment & Labor Act to ensure public access to emergency services regardless of ability to pay. Additionally, Section 1867 of the Social Security Act imposes specific obligations on Medicare-participating hospitals that offer emergency services to provide a medical screening examination when a request is made for treatment of an emergency medical condition regardless of an individual's ability to pay.

7.6.02 In addition, some not-for-profit health care entities are tax-exempt under IRC Section 501(c)(3) as charitable organizations and, therefore, have certain requirements to maintain their tax-exempt status. IRC Section 501(r) imposes certain requirements on organizations that operate one or more hospital facilities, including establishing written financial assistance and emergency medical care policies, limiting amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy, and making reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions against the individual.

7.6.03 Further, some not-for-profit health care entities provide services to patients regardless of their ability to pay because of their charitable mission or to support their tax-exempt status, or both. There are other types of health care entities that do not provide emergency services or may not have a stated mission to provide medically necessary services but that also provide services to patients before determining their intent or ability to pay.

7.6.04 FASB ASC 606-10-25-2 discusses that enforceability of the rights and obligations in a contract is a matter of law. Therefore, a health care entity may consider involvement of internal or external legal counsel, or both, in making the overall determination of when a legally enforceable contract with its patients is in place.

7.6.05 FASB ASC 606-10-25-1 explains that an entity should account for a contract with a customer when all five criteria of FASB ASC 606-10-25-1 are met. FASB ASC 606-10-25-1a states that one requirement is that the “parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.” In accordance with FASB ASC 606-10-25-1a, a health care entity may consider if it has a written contract with the patient by considering whether the patient signed any forms, such as a patient responsibility form, which would be considered a written contract. If the health care entity determines it does not have a written contract (for example, the patient refuses to sign a patient responsibility form), it may consider if it has an oral or implied contract based on the entity’s customary business practices. If the patient schedules health care services in advance (for example, elective surgery), the health care entity may consider if it has an oral or implied contract. If the patient does not schedule the services in advance (for example, a patient that was admitted through the emergency room while unconscious or against their will), the health care entity may perform an analysis of the specific facts and circumstances to assess enforceability, including looking at customary business practices.

7.6.06 Example 3, “Implicit Price Concession,” in paragraphs 102–105 of FASB ASC 606-10-55 illustrates that the health care entity may be unable to evaluate an uninsured patient’s commitment to perform his or her obligations (for example, pay for services rendered) or determine if it is probable that it will collect the consideration to which it is entitled until it obtains certain information about the patient. Until that determination is made, a contract with the customer cannot be presumed to exist in the revenue model. In the example, the health care entity is not able to determine whether the patient is committed to perform his or her obligations or that it is probable that it will collect the consideration to which it is entitled until after the health care entity has provided services.

7.6.07 In accordance with FASB ASC 606-10-25-1, if the health care entity determines that the patient or other payor is not committed to perform his or her obligation(s) or that it is not probable that the entity will collect the consideration to which it is entitled, the criteria in FASB ASC 606-10-25-1 have not been met and a contract with a customer does not exist. A health care entity may make this determination based on past history with that patient or because the patient qualifies for the health care entity’s charity care policy. Example 3 in FASB ASC 606-10-55 indicates that the patient did not qualify for charity care or government subsidies (for example, Medicaid) and, therefore, does not illustrate how to apply the guidance in FASB ASC 606 in situations in which the entity obtains some information about the patient, but additional time is needed to determine if, and how much, insurance coverage exists.

7.6.08 For example, a patient may be admitted to the emergency room of a health care entity and be unresponsive. The health care entity is obligated to provide services to the patient as required by law. If the health care entity subsequently determines that the patient is uninsured, it may try to qualify the patient for Medicaid coverage. Depending on the state, the Medicaid qualification process can take from several weeks to over a year. The health care entity may consider the information in the following paragraphs to determine if a contract, as defined in FASB ASC 606, exists for a patient whose insurance coverage has not yet been determined (such as “pending Medicaid”).

7.6.09 Although the party responsible for payment has not yet been determined, the health care entity may have historical information for pending Medicaid patients to determine the transaction price based on the percentage of those contracts it estimates will

a.     qualify for Medicaid,

b.     qualify for the health care entity’s charity care policy (therefore, those contracts are not within the scope of the revenue model), and

c.     become uninsured self-pay.

7.6.10 This approach of using historical information for pending Medicaid patients may provide a health care entity a basis to conclude that a patient in “pending Medicaid” status meets the requirements in FASB ASC 606-10-25-1. FinREC believes that this approach may be applied to an individual contract or a portfolio of similar contracts as described in FASB ASC 606-10-10-4, although in practice, will generally be applied to a portfolio of similar contracts. In accordance with discussion at the July 2015 TRG meeting and FASB ASC 606-10-32-9, a health care entity should consider all information that is reasonably available to the entity to estimate variable consideration, whether the guidance in FASB ASC 606 is applied on a portfolio or contract-by-contract basis. Refer to the “Application of the Portfolio Approach” section in paragraphs 7.7.01–7.7.15 for discussion on application of the portfolio approach for contracts with patients.

7.6.11 A health care entity may estimate the transaction price for an individual contract considering the likelihood of each outcome for the contract (for example, Medicaid, self-pay, and charity care) and the expected reimbursement rate for each. A health care entity may also apply the guidance to a portfolio of contracts if it reasonably expects that the effects on the financial statements would not differ materially from applying to an individual contract. For the percentage of contracts expected to qualify for Medicaid, a health care entity may consider applying the guidance in FASB ASC 606 in a similar manner as other Medicaid patients. For the percentage of contracts expected to qualify for charity care, the health care entity would not recognize revenue in accordance with FASB ASC 954-605-25-10 (which was not amended by FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606)). For the percentage of contracts expected to become uninsured self-pay, a health care entity may follow example 3 in paragraphs 102–105 of FASB ASC 606-10-55.

7.6.12 This approach is consistent with example 22, “Right of Return,” in paragraphs 202–207 of FASB ASC 606-10-55, whereby the entity applies historical experience to a portfolio of contracts to estimate products that will be returned and, therefore, does not recognize revenue for those products. This is also similar to a health care entity that estimates the number of patients who will qualify for charity care and, therefore, does not recognize revenue for those patients.

7.6.13 If a health care entity does not have historical experience to estimate the outcome for a pending Medicaid account prior to receiving the Medicaid qualification determination (for example, the account is an outlier), it may determine that a contract does not exist because it has not met the requirements in FASB ASC 606-10-25-1. That is, the health care entity has not yet determined that the patient or other payor is committed to perform his or her obligation(s) (that is, pay for services rendered) based on its past history, including whether the patient qualifies for charity care, or if it is probable that it will collect the consideration to which it is entitled.

7.6.14 If at a later date the health care entity determines it has sufficient historical evidence to estimate the outcome for a pending Medicaid account or the Medicaid program subsequently approves the patient for coverage, the health care entity would reassess the criteria in FASB ASC 606-10-25-1 to determine if a contract exists in accordance with FASB ASC 606-10-25-6.

7.6.15 If the Medicaid program subsequently denies coverage, the health care entity may attempt to qualify the patient for its charity care policy. If the patient qualifies for charity care, a contract does not exist for purposes of applying FASB ASC 606, in accordance with FASB ASC 954-605-25-10. If the patient does not qualify under the health care entity’s charity care policy, the fact pattern may be similar to the one provided in example 3 in paragraphs 102–105 of FASB ASC 606-10-55.

7.6.16 There are other FASB ASC 606-10-25-1 considerations for a health care entity even when the payor has been determined. Example 3 in paragraphs 102–105 of FASB ASC 606-10-55 illustrates that for an uninsured emergency room patient for which the health care entity had not previously provided medical services (that is, the health care entity had no history with that specific patient), the health care entity may designate the patient to a customer or payor class based on its review of the patient’s information. The review of the patient’s information may include determining if the patient has insurance coverage, a co-payment, or a deductible. If a patient has no insurance or if a portion of the balance is due from the patient (for example, a deductible), the health care entity evaluates the patient's ability and intention to pay in accordance with FASB ASC 606-10-25-1e, which may include consideration of whether any negative evidence exists with respect to the health care entity’s history with that particular patient.

7.6.17 A situation in which services were previously provided to the patient and no consideration was collected may provide strong evidence that the patient does not have the intent or ability to pay. However, if no such evidence exists, the health care entity may be able to conclude that its expectation related to collectibility for that patient is no different than for any other patient in the customer class.

7.6.18 A health care entity should consider the guidance pertaining to the portfolio approach (as described in FASB ASC 606-10-10-4) to determine if that practical expedient can be applied and, if so, at what level. For example, a health care entity may evaluate whether to establish separate portfolios for uninsured self-pay patients, insured patients with co-payments, insured patients with deductibles, emergency room uninsured self-pay, elective surgery that is not medically necessary or covered by insurance, and so on. Refer to the “Application of the Portfolio Approach” section in paragraphs 7.7.01–7.7.15 for discussion on application of the portfolio approach for contracts with patients.

7.6.19 To determine if it is probable that the health care entity will collect substantially all of the consideration to which it will be entitled as required in FASB ASC 606-10-25-1e, a health care entity will need to determine the transaction price as described in FASB ASC 606-10-32-2. If the transaction price includes an estimate of variable consideration (for example, a price concession), the transaction price may be less than the stated price in the contract. FASB ASC 606-10-32-8 discusses two methods for estimating variable consideration (the expected value method and the most likely amount), the selection of which is dependent on which method an entity expects to better predict the amount of consideration to which the entity will be entitled. In accordance with FASB ASC 606-10-32-11, some or all of an amount of estimated variable consideration should be considered in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

7.6.20 FASB ASC 606-10-32-9 indicates that to estimate the transaction price, a health care entity should consider all information that is reasonably available, including historical, current, and forecasted information. As such, the health care entity should consider the historical cash collections from a customer class identified (for example, self-pay) to estimate the transaction price for a patient (that is, how much the health care entity expects to be entitled for the services provided). In accordance with the discussion at the July 2015 TRG meeting on the portfolio practical expedient and FASB ASC 606-10-32-9, a health care entity is required to consider all information that is reasonably available to the entity to estimate variable consideration whether the guidance in FASB ASC 606 is applied on a portfolio or contract-by-contract basis (refer to the “Use of Historical Experience to Estimate Contractual Adjustments From Third-Party Payors, Governmental Programs, Self-Pay Discounts, and Implicit Price Concessions” section in paragraphs 7.7.13–7.7.15 for further discussion).

7.6.21 Variable consideration can result from discounts, price concessions, or other similar items. FASB ASC 606-10-32-7 indicates that variable consideration may be explicitly stated in the contract. In determining whether a health care entity has provided an implicit price concession to a patient with a self-pay balance, a health care entity needs to determine, in accordance with paragraphs 7a–7b of FASB ASC 606-10-32, whether “the customer has a valid expectation arising from an entity’s customary business practices, published policies, or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expected that the entity will offer a price concession,” or “facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer.”

7.6.22 As noted in paragraph BC194 of ASU No. 2014-09, the boards decided not to develop detailed guidance for differentiating between a price concession and impairment losses. Therefore, a health care entity should use judgment and consider all relevant facts and circumstances to determine if it has implicitly offered a price concession or has accepted the risk of default by the patient of the contractually agreed-upon consideration (that is, customer credit risk). It is important to note that an implicit price concession does not have to be specifically communicated or offered to the patient by the entity.

7.6.23 Under FASB ASC 606-10-32-7b, to determine whether a health care entity has provided an implicit price concession to a patient with a self-pay balance, a health care entity should determine whether facts and circumstances indicate an intention to provide a price concession. Example 3 in paragraphs 102–105 of FASB ASC 606-10-55 provides a specific set of facts and circumstances related to a hospital that provides medical services to an uninsured patient in the emergency room. FASB ASC 606-10-55-104 indicates that if a health care entity “expects to accept a lower amount of consideration,” it may conclude that “the promised consideration is variable” (that is, the health care entity is providing an implicit price concession).

7.6.24 A health care entity may consider the following factors to determine whether it intends to provide an implicit price concession:

a.     The health care entity has a customary business practice of not performing a credit assessment prior to providing services (for example, because it is required by law or regulation, or has a mission to provide medically necessary or emergency services prior to assessing a patient’s ability or intent to pay).

b.     The health care entity 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. In evaluating the probability that the entity will collect substantially all of the discounted charges, the entity should evaluate the entire amount of discounted charges for the contract and not just the patient responsibility portion.

7.6.25 If one of those factors is present, 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.

7.6.26 When a health care entity determines the consideration is variable, the entity would only include in the transaction price an estimate of the variable consideration that meets the constraint under paragraphs 11–12 of FASB ASC 606-10-32. Therefore, the entity’s calculation of the implicit price concession should incorporate the entity’s expectations of cash collections at a level at which it is probable that the cumulative amount of revenue recognized would not result in a significant revenue reversal. Consistent with paragraph BC215 of ASU No. 2014-09, there may be circumstances in which the calculation of variable consideration already incorporates the principles on which the guidance for constraining estimates of variable consideration is based.

7.6.27 To assist with the determination of whether it is probable that there will not be a significant revenue reversal when the cash is collected, FASB ASC 606-10-32-12 provides factors for an entity to consider. The following are factors for health care entities to consider when evaluating if it is probable there will not be a significant revenue reversal when the cash is collected in contracts with patients with self-pay balances:

a.     Whether the amount of consideration from patients with self-pay balances is highly susceptible to factors outside the entity’s influence (for example, a health care entity may consider the current economic conditions in the market it serves)

b.     The entity’s experience with similar types of contracts (for example, a health care entity may consider the extent of its experience with similar patients or portfolios of similar patients)

c.     How long the period is until the uncertainty is resolved (for example, a health care entity may consider how long it generally takes to collect the consideration from similar patients)

d.     Its practice of offering price concessions or changing payment terms (for example, a health care entity may adjust the standard charges based on its uninsured discount or prompt-pay discount policy)

e.     The number of possible consideration amounts (for example, a health care entity may consider the historical range of collection history with similar patients and whether the range is broad (significant differences from reporting period to reporting period) or narrow (insignificant differences from reporting period to reporting period)

7.6.28 In a contract with a patient with a self-pay balance for an “elective” procedure that is scheduled in advance and does not involve a medical emergency, the health care entity may be able to assess the patient’s intent and ability to pay prior to or at the time of service, and determine that it is probable that it will collect substantially all of the consideration to which it is entitled. In that situation, the health care entity may determine that it has not provided an implicit price concession.

7.6.29 If the health care entity determines that it has not provided an implicit price concession because the factors in paragraph 7.6.24 are not present, it is still required to determine whether it is probable that it will collect substantially all of the consideration to which it is entitled in order to determine whether it has a contract under FASB ASC 606-10-25-1e. If a health care entity determines it does not meet the requirements of FASB ASC 606-10-25-1, it would not recognize revenue until one of the criteria in FASB ASC 606-10-25-7 is met. Refer to the “Other Considerations” section in paragraphs 7.6.37–7.6.43 for further discussion.

7.6.30 If the entity concludes that it has provided an implicit price concession for the amount it doesn’t expect to collect (that is, the consideration is variable), the entity must also consider how to account for subsequent changes in the estimate of the transaction price relating to the amount expected to be received. FASB ASC 606-10-32-14 requires an entity to update the estimated transaction price, including updating the assessment of whether an estimate of variable consideration is constrained, at the end of each reporting period. This requirement to update the estimated transaction price applies regardless of whether the entity determines the transaction price based on an individual contract (individual patient basis) or a portfolio of similar contracts (patient class).

7.6.31 Factors that may result in a change in the estimate of the transaction price (that is, when the entity expects to be entitled to more or less than it originally estimated) prior to receiving payment include whether the health care entity obtained additional information about an insured patient’s deductible, co-payment or co-insurance coverage, or other information about the patient’s personal financial situation. For example, the health care entity may subsequently learn that an uninsured patient qualifies for Medicaid or that an uninsured patient qualifies for charity care.

7.6.32 Health care entities that apply the portfolio approach to a patient class will need to consider additional information they may obtain about patients in the patient class that may result in a change in the estimate of the transaction price in order to update the estimate of the transaction price each reporting period.

7.6.33 When a health care entity determines it has provided an implicit price concession based on the factors discussed in paragraph 7.6.24 or other factors, FinREC believes that subsequent changes to the estimate of variable consideration should generally be accounted for as increases or decreases in the implicit price concession (adjustments to patient service revenue). Because the assessment of the implicit price concession inherently considers the amount the entity expects to collect from the patient (or patient class), FinREC believes that changes in the entity’s expectation of the amount it will receive from the patient (or patient class) will be recorded in revenue unless there is a patient-specific event that is known to the entity that suggests that the patient no longer has the ability and intent to pay the amount due and, therefore, the changes in its estimate of variable consideration better represent an impairment (bad debt). FASB ASC 606-10-32-43 states that “amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.” Therefore, if the change in the transaction price occurs after the service has been provided to the patient, the changes in the estimate of the variable consideration would be recognized as additional revenue, or a reduction to revenue, in the period in which the estimate of the transaction price changes.

7.6.34 If an entity experiences frequent subsequent adjustments that result in decreases to patient revenue, the entity should re-assess whether its estimation process, including the constraint, is appropriate. In addition, when an entity subsequently collects significantly less than its original estimate of variable consideration, there may be facts and circumstances that indicate there has been an adverse change in the patient’s credit worthiness (for example, the patient filed for bankruptcy or lost their job), and the difference may be better classified as an impairment loss (bad debt) rather than a change in the transaction price. However, as discussed in paragraph 7.6.30, an entity is required to update its estimate of the transaction price at the end of each reporting period and should not wait for subsequent cash collections to do so.

7.6.35 In estimating the transaction price, a health care entity may determine that it has not provided an implicit price concession (because the factors in paragraph 7.6.24 are not present) but, rather, that it has chosen to accept the risk of default by the patient, and that uncollectible amounts better represent impairment losses or bad debts. For example, a health care entity that (i) provides elective surgeries, (ii) does not meet the factors in paragraph 7.6.24, and (iii) determines that it is probable that it will collect substantially all of the consideration to which it is entitled based on its initial assessment of the patient’s creditworthiness, may determine that any amount it does not expect to collect represents an impairment loss or bad debt.

7.6.36 In determining what constitutes an impairment loss, a health care entity considers the effects of customer credit risk after the determination that the arrangement meets the criteria for a contract under FASB ASC 606-10-25-1, and revenue and a receivable are recognized for the services provided. For example, a health care entity may have collection experience with a customer class that indicates it collects substantially all (for example, 98 percent) of the amount it bills to that customer class. The contracts with those patients would meet FASB ASC 606-10-25-1, and the health care entity would recognize revenue and receivables for the amount it bills (100 percent) along with a provision for bad debts (2 percent) based on valuation of the receivables. An example of where an impairment loss may be recorded after contract inception for a self-pay patient balance may be the subsequent inability of a patient to pay his or her portion of a bill for an elective procedure as a result of his or her loss of employment or filing for bankruptcy and for which the health care entity had assessed the patient’s ability to pay prior to providing the service and expected to collect substantially all of the discounted charges.

7.6.37 In accordance with paragraphs 1a–1e of FASB ASC 606-10-25, a contract with a customer exists only when all of the criteria are met. In addition to the criteria in items a and e of FASB ASC 606-10-25-1 discussed in previous paragraphs, a health care entity should also consider the criteria for a contract in paragraphs 1b–1d of FASB ASC 606-10-25 to determine that a contract with a patient exists within the scope of the model. This includes identifying each party’s rights regarding the goods or services transferred (a health care entity has a right to payment for services provided to a patient), identifying payment terms (generally, gross charges less any contractual adjustments or self-pay discounts), and that the contract has commercial substance (entity expects its cash flows to change as a result of the services provided).

7.6.38 For arrangements with patients that do not meet one or more of the criteria in FASB ASC 606-10-25-1, the health care entity should continually reassess the arrangement as facts and circumstances change, in accordance with FASB ASC 606-10-25-6. If partial payment is received, the health care entity should reassess whether the criteria in FASB ASC 606-10-25-1 are met and a contract with a customer exists, including whether it has provided an implicit price concession. If consideration is received from the patient and the criteria in FASB ASC 606-10-25-1 are still not met, the health care entity would apply the guidance in paragraphs 7–8 of FASB ASC 606-10-25 to determine when to recognize the consideration received as revenue.

7.6.39 FASB ASC 606-10-25-7 indicates that when a contract with a customer does not meet the criteria in FASB ASC 606-10-25-1 and an entity receives consideration from the customer, the entity should recognize the consideration received as revenue only when one or more of the following events has occurred:

a.     The entity has no remaining obligations to transfer goods or services to the customer, and all, or substantially all, of the consideration promised by the customer has been received by the entity and is nonrefundable.

b.     The contract has been terminated, and the consideration received from the customer is nonrefundable.

c.     The entity has transferred control of the goods or services to which the consideration that has been received relates, the entity has stopped transferring goods and services to the customer (if applicable) and has no obligation under the contract to transfer additional goods or services, and the consideration received from the customer is nonrefundable.

7.6.40 In accordance with FASB ASC 606-10-25-7, a health care entity would have to determine that the consideration received from the patient is nonrefundable. If the consideration received is nonrefundable, the service has already been performed for the patient, and all, or substantially all, of the consideration promised by the patient has been received, revenue may be recognized under FASB ASC 606-10-25-7a. If the consideration received is nonrefundable and the contract is considered terminated, revenue may be recognized under FASB ASC 606-10-25-7b. A health care entity would have to assess when the contract is terminated. Contract termination is a legal matter and may require involvement of legal counsel. If the consideration received is nonrefundable and the health care entity has stopped performing services to the patient and has no obligation to perform additional services under the contract, revenue may be recognized under FASB ASC 606-10-25-7c.

7.6.41 In accordance with FASB ASC 606-10-25-8, if a health care entity does not meet the guidance in FASB ASC 606-10-25-7 to recognize revenue, it would recognize the consideration received from the patient as a liability until one of the events in FASB ASC 606-10-25-7 occurs or until the criteria in FASB ASC 606-10-25-1 are subsequently met (see FASB ASC 606-10-25-6).

7.6.42 When determining the transaction price, the health care entity should also consider whether a significant financing component exists, as required in paragraphs 15–20 of FASB ASC 606-10-32.

7.6.43 The following examples are meant to be illustrative, and the determination of the application of the guidance in FASB ASC 606 should be based on the individual facts and circumstances. The illustrative examples based on a single contract are intended to expand on example 3 in paragraphs 102–105 of FASB ASC 606-10-55. However, many health care entities may elect to use the portfolio approach (as described in FASB ASC 606-10-10-4) for recognizing revenue from self-pay patients. Refer to the “Application of the Portfolio Approach” section in paragraphs 7.7.01–7.7.15 for discussion on application of the portfolio approach for contracts with patients.

Example 7-6-1 — Implicit Price Concession Based on Single Contract — Uninsured Self-Pay Patient With No Uninsured Discount

A hospital treats a patient with an emergency condition and does not assess the patient’s ability to pay at the time of service. Upon discharge, the hospital determines that the patient does not have insurance coverage, does not qualify for financial assistance (that is, the hospital’s charity care policy, hospital uninsured discount policy, or government entitlement program) and, therefore, is considered an uninsured self-pay patient. The standard charges for services provided to the patient are $10,000, and a bill is sent to the patient for this amount.

The hospital intends to pursue collection of the entire amount and may engage the use of external collection agencies to do so. That is, the hospital does not intend to give up collecting the standard charges. However, the hospital has a long history of providing services to uninsured self-pay patients and collecting amounts that are substantially less than its standard charges because it is required to provide emergency services regardless of the patient’s ability to pay under the Social Security Act. Based on its experience with similar uninsured self-pay patients, the hospital only expects to collect $1,000 from the patient.

The facts and circumstances indicate that the entity’s intention when entering into the contract with the customer was to provide an implicit price concession to the customer because (a) the hospital is required to provide emergency services regardless of the patient’s ability to pay under the Social Security Act, and (b) the hospital continues to provide services to uninsured self-pay patients 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). Therefore (after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32), the hospital determines that $1,000 is the transaction price. The hospital concludes that it is probable that it will collect the $1,000 and that the other criteria in FASB ASC 606-10-25-1 are also met and, therefore, records patient revenue and accounts receivable of $1,000.

FASB ASC 606-10-32-14 requires the hospital to update the estimated transaction price, including updating the assessment of whether the estimate of variable consideration is constrained, at the end of each reporting period. If the entity subsequently determines it will collect $1,100, instead of the $1,000 it initially estimated, FinREC believes the entity should generally account for the difference as a reduction to the implicit price concession (that is, an increase to the estimate of the transaction price) in accordance with paragraphs 42–43 of FASB ASC 606-10-32 because the entity has additional information to update its estimate of the transaction price.

If the entity subsequently determines it will only collect $900, instead of the $1,000 it initially estimated, it will need to evaluate whether it has obtained any adverse information regarding the patient’s financial condition to determine if an impairment exists. If no adverse information regarding the patient’s financial condition has been obtained, FinREC believes the entity should generally account for the difference as an increase to the implicit price concession (that is, a reduction to the estimate of the transaction price) because the health care entity determined that it intended to provide an implicit price concession. If an entity experiences frequent subsequent adjustments that result in decreases to patient revenue, the entity should re-assess whether its estimation process, including its application of the constraint, is appropriate.

Example 7-6-2 — Implicit Price Concession Based on Single Contract — Uninsured Self-Pay Patient With Uninsured Discount

A hospital treats a patient with an emergency condition. The hospital is required to provide emergency services regardless of the patient’s ability to pay under the Social Security Act as well as based on its stated mission. In addition, based on the requirements of IRC Section 501(r), the hospital makes reasonable efforts to determine whether patients are eligible for assistance under its financial assistance policy.

During the patient’s hospital stay and before discharge, the hospital determines that the patient qualifies for the hospital’s uninsured discount policy and grants the patient a 75 percent discount (that is, an explicit price concession) similar to a contractual adjustment for local managed care companies. The standard charges for services provided to the patient are $40,000. Upon billing, the hospital discounts the charges by 75 percent, or $30,000, based on its uninsured discount policy.

The discounted charges for services provided to the patient are $10,000, and a bill is sent to the patient for this amount. The hospital intends to pursue collection of the discounted charges and may engage the use of external collection agencies to do so. That is, the hospital does not intend to give up collecting the discounted charges. However, based on its experience with similar patients, the hospital only expects to collect $1,000 from the patient. The hospital has a history of providing services to uninsured patients and collecting amounts that are substantially less than its discounted charges.

The facts and circumstances indicate that the entity’s intention when entering into the contract with the customer was to provide a price concession to the customer because (a) the hospital is required to provide emergency services regardless of the patient’s ability to pay under the Social Security Act; (b) as per its stated mission and in accordance with IRC Section 501(r), the hospital is required to limit amounts charged for emergency services to individuals eligible for assistance under the hospital's financial assistance policy; and (c) the hospital continues to provide services to uninsured self-pay patients even when historical experience indicates that it is not probable that the entity will collect substantially all of the discounted charges. Therefore (after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32), the hospital determines that $1,000 is the transaction price. The hospital concludes that it is probable that it will collect the $1,000 and that the other criteria in FASB ASC 606-10-25-1 are also met and records patient revenue and accounts receivable of $1,000.

Example 7-6-3 — Implicit Price Concession Based on Portfolio Approach — Uninsured Self-Pay Patients

A hospital elects to apply the portfolio approach (as described in FASB ASC 606-10-10-4) for recognizing revenue from uninsured self-pay patients. The hospital identifies the uninsured self-pay customer class as a portfolio of contracts based on qualitative and quantitative factors, including an analysis that shows that the uninsured self-pay customer class shares similar collection patterns based on historical information (that is, variances from reporting period to reporting period in the percentage of collections have been insignificant in the aggregate). Therefore, the hospital concludes that the expected outcome from using a portfolio approach is not expected to materially differ from an individual contract approach.

During the reporting period, the uninsured self-pay portfolio has total gross charges of $1,000,000. Based on its historical experience with the uninsured self-pay customer class, the hospital determines that these patients qualify for financial assistance (for example, charity care policy, uninsured discount policy) totaling $750,000, or 75 percent. Therefore, the adjustments of $750,000 represent discounts (explicit price concessions) and are included as a reduction to the transaction price.

The discounted charges for services provided to the patients total $250,000. However, the hospital has a history of providing services to uninsured patients and collecting payments that are substantially less than its discounted charges. Based on its collection history from patients in this customer class, the hospital concludes it is probable it will collect $50,000 of the discounted charges from the uninsured self-pay patients in the portfolio. In addition, based on an assessment of other facts and circumstances, the entity concludes that the other criteria in FASB ASC 606-10-25-1 are met.

Because the facts and circumstances indicate that the entity’s intention, when entering into the contracts with the patients, was to provide an implicit price concession, it may conclude that $50,000 is the transaction price (variable consideration) after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32 and record patient revenue and accounts receivable of $50,000.

FASB ASC 606-10-32-14 requires the hospital to update the estimated transaction price, including updating the assessment of whether the estimate of variable consideration is constrained, at the end of each reporting period. If the hospital subsequently determines it will collect $55,000, instead of the $50,000 it initially estimated, FinREC believes the entity should generally account for the difference as a reduction to the implicit price concession (that is, an increase to the estimate of the transaction price) in accordance with paragraphs 42–43 of FASB ASC 606-10-32 because the entity has additional information to update its estimate of the implicit price concession.

If the entity subsequently determines it will only collect $45,000, instead of $50,000 it initially estimated, it will need to evaluate whether it has obtained any adverse information regarding the financial condition of the patients in the portfolio to determine if an impairment exists. If no adverse information regarding the patients’ financial condition has been obtained, FinREC believes the entity should generally account for the difference as an increase to the implicit price concession (that is, a reduction to the estimate of the transaction price) because the health care entity determined that it intended to provide an implicit price concession. If an entity experiences frequent subsequent adjustments that result in decreases to patient revenue, the entity should re-assess whether its estimation process, including its application of the constraint, is appropriate.

Example 7-6-4 — Implicit Price Concession Based on Single Contract — Insured patient with high deductible plan

An urgent care clinic treats an insured patient with a high deductible plan but, prior to providing service, does not determine whether or not the patient has a patient responsibility (for example, whether or not the patient has met his or her deductible for the period) and, if so, whether the patient has the ability to pay it. The standard charges for the services provided to the patient are $5,000. After services are provided, the patient presents proof of coverage with a commercial insurance company. Based on its contract with the commercial payor, the clinic determines there is a contractual adjustment of $3,000 (that is, an explicit price concession) Therefore, the discounted charges for services provided to the patient are $2,000.

The clinic has a history of providing services to insured patients with high deductible plans and collecting amounts that are substantially less than its discounted charges. The clinic considered that the services were provided early in the calendar year and, therefore, patients with high deductible plans may not have met their deductible. Based on its historical experience with patients with high deductible plans during similar time periods in prior years, the clinic estimates that it only expects to collect $200 for the contract. The clinic intends to pursue collection of the $2,000 and may engage the use of external collection agencies to do so. That is, the clinic does not intend to give up collecting the discounted charges.

Because the facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, was to provide an implicit price concession, it concludes that $200 is the transaction price (variable consideration) after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32. The clinic concludes that it is probable that it will collect the $200 and that the other criteria in FASB ASC 606-10-25-1 are also met and records patient service revenue and accounts receivable of $200.

Example 7-6-5 — Implicit Price Concession Based on Portfolio Approach — Insured patients with high deductible plans

An urgent care clinic elects to apply the portfolio approach (as described in FASB ASC 606-10-10-4) for recognizing revenue from patients. The urgent care clinic identifies a portfolio of contracts for patients with high deductible plans provided by insurance carrier A based on qualitative and quantitative factors, including an analysis that shows that the customer class shares similar collection patterns based on historical information (that is, variances from reporting period to reporting period in the percentage of collections from period to period have been insignificant in the aggregate). Therefore, the urgent care clinic concludes that the expected outcome from applying a portfolio approach is not expected to materially differ from an individual contract approach.

During the reporting period, the portfolio of insured patients with high deductible plans provided by insurance carrier A has total gross charges of $500,000. Based on its agreement with this insurance carrier, the urgent care clinic recognizes a contractual adjustment of 60 percent, or $300,000, of gross charges. Therefore, the adjustments of $300,000 represent explicit price concessions and reduce the transaction price. The discounted charges for services provided to the patients total $200,000.

The urgent care clinic has a practice of providing services to patients with high deductible plans even though it historically collects amounts that are substantially less than its discounted charges from patients in this customer class. The clinic considered that the services were provided early in the calendar year and, therefore, patients with high deductible plans may not have met their deductible. Based on the collection history from this customer class during similar time periods in prior years, the urgent care clinic concludes it is probable it will collect $80,000 of the discounted charges from the customers in the portfolio. The $80,000 was determined based on amounts expected to be received from patients and amounts expected to be received from insurance carrier A for patients who have met all or a portion of their deductible. In addition, based on an assessment of other facts and circumstances, the entity concludes that the other criteria in FASB ASC 606-10-25-1 are met.

Because the facts and circumstances indicate that the entity’s intention, when entering into the contracts with these customers, was to provide implicit price concessions to the customers, it may conclude that $80,000 is the transaction price (variable consideration) after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32 and records patient service revenue and accounts receivable of $80,000.

Example 7-6-6 — No Implicit Price Concession Based on Single Contract — Uninsured Self-Pay Patient

An uninsured self-pay patient schedules an elective cosmetic surgery at an outpatient surgery center that has a policy of performing a credit assessment prior to providing elective surgery to its patients. The gross charges for the procedure are $4,000. Prior to surgery, the outpatient surgery center assesses the patient’s ability to pay and grants the patient special pricing of $3,000 (that is, an explicit price concession or discount of $1,000), which is similar to what it would charge an insured patient. The outpatient surgery center collects $1,500 upfront and agrees to bill the patient the remaining $1,500 after the surgery. Based on its credit assessment, the outpatient surgery center determines that it is probable that it will collect the remaining $1,500 due from the patient and does not intend to provide a further price concession or discount. The outpatient surgery center records patient service revenue of $3,000, accounts receivable of $1,500, and cash of $1,500.

Based on a subsequent change in facts and circumstances, the surgery center determines that it only expects to collect $500 of the $1,500 billed to the patient. Therefore, the remaining $1,000 that it does not expect to collect represents an impairment loss (bad debt expense).

Example 7-6-7 — Implicit Price Concession Based on Portfolio Approach — Insured patients with co-payment

A health care entity provides services to patients during a reporting period and determines that they are covered by insurance carrier B and that each patient has a patient responsibility (co-payment). Because of its not-for-profit mission, the health care entity does not have a policy of assessing patients’ intent and ability to pay their patient responsibility portion prior to providing service.

Because of the similar characteristics of the patients (that is, each patient is covered by insurance carrier B and has a similar co-payment), the health care entity applies a portfolio approach. This portfolio of contracts is identified based on qualitative and quantitative factors, and the entity concludes that the expected outcome from using a portfolio approach is not expected to materially differ from an individual contract approach.

Its insurance carrier B portfolio includes both the insurance and co-payment amounts. The standard charges for services provided to patients in this portfolio total $1,000,000 for the reporting period. Based on its contractual agreement with insurance carrier B, the health care entity applies contractual adjustments of 50 percent, or $500,000, and nets these adjustments against the standard charges. The contractual adjustments represent explicit price concessions. The contractual adjustments are recognized as a reduction to the transaction price. The remaining charges of $500,000 include $475,000 in amounts due from insurance carrier B and $25,000 in co-payment amounts due from the patients.

Based on its historical experience, the health care entity expects to collect all of the amounts due from insurance carrier B ($475,000) but only expects to collect 40 percent or $10,000 of the co-payment amounts due from the patients. In total, the health care entity expects to collect $485,000. Because the health care entity has a business practice of providing services to patients regardless of their ability to pay, it determines that the $15,000 it does not expect to collect of patient co-payments represents an implicit price concession. Therefore, the health care entity determines that the transaction price, after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32, is $485,000 (gross charges of $1,000,000, less contractual adjustments of $500,000, less the implicit price concessions of $15,000) and that collection of substantially all of the transaction price is probable.

The health care entity determines that the other criteria in paragraphs 1a–1e of FASB ASC 606-10-25 are met because it has legally enforceable contracts with the patients, the contracts have commercial substance, the services provided and payment terms can be identified, and the parties have approved the contracts.

The health care entity would only include the estimate of variable consideration ($485,000) in the transaction price after consideration of the constraint in paragraphs 11–12 of FASB ASC 606-10-32. The health care entity considers the likelihood of a revenue reversal and the potential magnitude of a reversal considering its level of experience with similar types of contracts, the range of possible outcomes, the amount of time before payment is expected, and the susceptibility to external factors.

Based on its expectation of payment from insurance carrier B, the health care entity concludes that it is probable that a significant revenue reversal in the cumulative amount of revenue recognized ($485,000) will not occur as the uncertainty is resolved (that is, as payments are received).

The health care entity recognizes patient revenue and accounts receivable of $485,000. If the entity subsequently determines it will collect more or less than the amount initially estimated, the entity should account for the difference similar to preceding example 7-6-3.

7.6.44 In the health care industry, the amount of revenue earned under arrangements with government programs (for example, Medicare or Medicaid) is determined under complex rules and regulations that subject the health care entity to the potential for retrospective adjustments in future years. Several years may elapse before all potential adjustments related to a particular fiscal year are known and before the amount of revenue to which the health care entity is entitled is known with certainty. As a result, revenue from contracts with patients that are paid by a government payor typically contain a variable element that requires health care providers to estimate the cash flows ultimately expected to be received for services provided.

7.6.45 Under a retrospective rate-setting system, a health care entity may be entitled to receive additional payments or be required to refund amounts received in excess of interim payment rate amounts under the system. For example, some third-party payors retrospectively determine final amounts that are reimbursable for services rendered to their beneficiaries based on allowable costs. These payors reimburse the health care entity on the basis of interim payment rates until the retrospective determination of allowable costs can be made. In most instances, the accumulation and allocation of allowable costs results in final settlements that are different from the interim payment rates. Final settlements are determined after the close of the fiscal periods to which they apply.

7.6.46 A unique aspect of health care is the involvement of multiple parties in health care service transactions. In addition to the patient and the health care provider, often a third party (an insurer, managed care company, or government program) will pay for some or all of the services on the patient’s behalf. For the purposes of FASB ASC 606, FinREC believes that the "contract with the customer" refers to the arrangement between the health care provider and the patient. However, separate contractual arrangements often exist between health care providers and third-party payors which establish amounts the third-party payor will pay on behalf of a patient for covered services rendered. Although those separate contractual agreements are not themselves considered "contracts with customers" under FASB ASC 606, those agreements should be considered in determining the transaction price for services provided to a patient covered by that third-party payor.

7.6.47 When the third-party payor is a government program (for example, Medicare or Medicaid), the contractual arrangement between the health care provider and the government program is commonly referred to as an entity’s "provider agreement." The provider agreement specifies the terms of the provider agreement, the grounds for terminating a provider agreement, the circumstances under which payment for new admissions may be denied, and the circumstances under which payment may be withheld for failure to complete timely utilization review. The term of the provider agreement is generally one year, and it automatically renews unless the health care provider withdraws or is debarred from the government program. Payments under provider agreements are made subject to complex laws and regulations which include an ability for the government payor to retrospectively adjust the rates it pays based upon the filing of the cost report and subsequent program audits. Therefore, the payments received under a provider agreement for a cost report year (that is, the aggregate transaction price associated with Medicare or Medicaid patient contracts entered into during the cost report year) is subject to retrospective adjustment. These are referred to as third-party settlement adjustments.

7.6.48 Several years may elapse before all potential adjustments related to a particular cost report year are resolved such that the transaction price associated with Medicare or Medicaid patient contracts for that year is known with certainty. Examples of these potential adjustments include the disproportionate share hospital program and the intern and resident program. As a result, revenue arising from services that will be paid for by government payors typically contains a variable element that requires health care providers to estimate the cash flows ultimately expected to be received for services provided during each reporting period.

7.6.49 FASB ASC 606-10-32-2 states the following:

An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

Variable Consideration

7.6.50 In accordance with FASB ASC 606-10-32-8

[a]n entity shall estimate an amount of variable consideration by using either of the following methods [the expected value method and the most likely amount method], depending on which method the entity expects to better predict the amount of consideration to which it will be entitled... (emphasis added)

Entities should determine which method is a better predictor of the amount of consideration to which the health care entity will be entitled. In addition, example 22, "Right of Return," and example 23, "Price Concessions," in paragraphs 204 and 211 of FASB ASC 606-10-55, respectively, state “...To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 606-10-32-8a) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.” (emphasis added). As such, a health care entity can use either the expected value method or the most likely amount method in determining the amount of consideration to which it will be entitled. In accordance with FASB ASC 606-10-32-8, the health care entity should use the method to estimate the amount of variable consideration that it believes will better predict the amount of consideration to which it will be entitled. That is, the selection of an estimation method is not intended to be a "free choice" and the method selected must be applied consistently for similar types of contracts.

7.6.51 In accordance with FASB ASC 606-10-32-8b, "The most likely amount – The most likely amount is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not)." (emphasis added)

7.6.52 FASB ASC 606-10-32-8b does not indicate that the most likely amount can only be used or must be used if the contract has only two possible outcomes. FinREC believes that health care entities may apply the most likely amount method to estimate third-party settlements even if the outcome is not binary as long as that entity believes it will better predict the amount of consideration to which it will be entitled.

7.6.53 Whichever method (the expected value or the most likely amount) a health care entity uses to determine the amount of variable consideration, certain factors may be considered including the following:

a.     Historical and current reimbursement information including third-party settlements

b.     Historical and current experience with the fiscal intermediary

c.     Current charges, allowable costs, and relevant patient statistics

7.6.54 Many health care entities have significant historical experience related to third-party settlements. FASB ASC 606-10-32-9 states, "An entity shall apply one method consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration to which the entity will be entitled. In addition, an entity shall consider all the information (historical, current, and forecasted) that is reasonably available to the entity and shall identify a reasonable number of possible consideration amounts." In accordance with paragraph BC 195 of FASB ASU No. 2014-09, the method selected should be applied consistently to contracts with similar characteristics and in similar circumstances. As such, a health care entity should apply one method (the expected value or the most likely amount) when estimating third-party settlements for a cost report year with similar characteristics and in similar circumstances as described in FASB ASC 606-10-32-9.

7.6.55 A contract with a patient may have more than one uncertainty related to variable consideration and depending on the method the entity expects to better predict the amount of consideration to which it is entitled, as discussed in paragraph BC 202 of ASU No. 2014-09, the entity may use different methods for different uncertainties. In estimating the amount of variable consideration under either of the methods, and as discussed in FASB ASC 606-10-32-9 and paragraph BC 201 of ASU No. 2014-09, an entity can use a reasonable basis for estimation and is not required to consider all possible outcomes using unnecessarily complex methods or techniques.

Constraining Estimates of Variable Consideration

7.6.56 FASB ASC 606-10-32-11 requires a health care entity to include in the transaction price some or all of an amount of variable consideration estimated in accordance with FASB ASC 606-10-32-8 only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This means that, in estimating variable consideration, it is necessary that a health care entity determine that it is probable there will not be a significant revenue reversal when the cash is collected or paid based on final settlement with the government payor. Each health care entity will need to evaluate their facts and circumstances to determine the likelihood and magnitude of the potential reversal in revenue. To assist with that determination, FASB ASC 606-10-32-12 provides factors for an entity to consider. The following are some factors to consider with examples of how a health care entity may apply them to arrangements with third-party payors:

d.     Whether the amount of the third-party settlement is highly susceptible to factors outside the entity’s influence — For example, a health care entity may consider the fact that a third party (that is, Medicare or Medicaid) determines the amount of the third-party settlement based on specific rules and regulations. Further, Medicare or Medicaid has control over the review and final settlement of the cost report.

e.     The entity’s experience with third-party payor settlements for similar types of contracts — In many cases, health care providers’ experience in estimating third-party settlements associated with Medicare and Medicaid programs will extend back many years. A health care entity should consider its history with the Medicare or Medicaid programs in determining each component of variable consideration related to third-party settlements.

f.     How long the period is until the uncertainty is resolved — Several years may elapse before all potential adjustments for third-party settlements related to a particular cost report year are known and before the amount of revenue to which the health care entity is entitled is known with certainty.

g.     Its practice of offering price concessions or changing payment terms — As it relates to third-party settlements, health care entities generally do not change the payment terms with Medicare or Medicaid because these governmental payors determine the prices and terms for all services and communicate the prices they will pay to health care entities. There is generally no negotiation between Medicare or Medicaid and a health care entity as it relates to price or contract terms.

h.     The number of possible consideration amounts — For example, a health care entity may consider the historical range of third-party settlements and whether the range is broad (significant differences from reporting period to reporting period) or narrow (insignificant differences from reporting period to reporting period).

7.6.57 Many health care entities have been in operation for many years and have sufficient history related to estimated third-party settlements such that a health care entity can assess whether it is probable that there will not be significant reversals of revenue in future periods. In some cases, the constraint may already be incorporated into the entity’s estimation process and would not require a separate evaluation. As noted in paragraph BC 215 of ASU No. 2014-09, "Although some respondents explained that they reasoned that this guidance would inappropriately require a two-step process, the Boards observed that an entity would not be required to strictly follow those two steps if the entity’s process for estimating variable consideration already incorporates the principles on which the guidance for constraining estimates of variable consideration is based. For example, an entity might estimate revenue from sales of goods with a right of return. In that case, the entity might not practically need to estimate the expected revenue and then apply the constraint guidance to that estimate, if the entity’s calculation of the estimated revenue incorporates the entity’s expectations of returns at a level at which it is probable that the cumulative amount of revenue recognized would not result in a significant revenue reversal." The historical information used by a health care entity to estimate the transaction price related to third-party settlements may include historical cost report settlement activity, as well as denied claims or recoupments of amounts previously received by the health care entity based on a review by a Recovery Audit Contractor (RAC).

7.6.58 As discussed in FASB ASC 606-10-32-12, determining the amount of variable consideration to include in the transaction price should consider both the likelihood and magnitude of a revenue reversal. Given the nature of third-party settlements, these amounts are not always determined for each contract between a health care provider and a patient, but rather are often based on a number of contracts included in the determination of the third-party settlement. FinREC believes that, for third-party settlements, the evaluation to determine if a potential reversal of cumulative revenue recognized is significant, is a comparison between the third-party settlement amount (the reimbursement to or from the third-party payor subject to settlement) and the total consideration for services rendered pursuant to the contracts that are included in the settlement determination (that is, using a portfolio approach). For example, assuming the fiscal year and the cost report year are the same, the third-party settlement amount related to Medicare Part A patients for the fiscal year would be compared to the total consideration from all payors (for example, including co-pays and deductibles) for Medicare Part A patients who received services during the fiscal year. An estimate of variable consideration is not constrained if the potential reversal of cumulative revenue recognized is not significant, or if a potential reversal is significant but probable not to occur. The amount of revenue reversal deemed significant will vary across entities depending on the facts and circumstances. If the entity determines that it is probable that the inclusion of its estimate will not result in a significant revenue reversal, that amount is included in the transaction price.

7.6.59 When a health care entity does not have significant historical experience or that experience has limited predictive value, the health care entity may constrain its estimate of variable consideration as noted in paragraphs 11–13 of FASB ASC 606-10-32 and would, therefore, be precluded from recognizing revenue for the constrained amount until such time as it has better historical experience or the uncertainty associated with the additional payments or refunds (that is, the third-party settlement) is subsequently resolved. In other words, the health care entity would only recognize revenue up to the amount of variable consideration that is not subject to a significant reversal until such time as additional information is obtained or the uncertainty associated with the additional payments or refunds is subsequently resolved. This could result in the health care entity constraining some or all of the revenue of an individual component of a third-party settlement (for example, disproportionate share reimbursement) for which the entity does not have sufficient historical experience.

7.6.60 When a health care entity has sufficient historical experience, the health care entity may not have to constrain its estimates of variable consideration as noted in paragraphs 11–13 of FASB ASC 606-10-32 and would therefore not be precluded from recognizing the entity’s estimate of the third-party settlement adjustment. A health care entity would need to consider how to determine the amount of variable consideration to recognize based on the method the entity expects to better predict the amount of consideration to which it will be entitled.

7.6.61 Historically, health care entities may have used a variety of methods to evaluate third-party settlements. For instance, some health care entities may evaluate settlements with government payors on an individual facility and individual cost report year basis and some may aggregate historical information to evaluate third-party settlements. For example, many health care entities evaluate each cost report by facility and by year, individually. However, some third-party settlement issues may apply to multiple cost reports and health care entities should use all available information regarding the cost report settlement process to evaluate similar third-party settlement issues. The determination of the method to use to estimate the amount of variable consideration the entity expects to better predict the amount of consideration to which it will be entitled (that is, the expected value method or the most likely amount method) is not dependent upon whether the health care entity uses a portfolio approach or an individual contract approach to evaluate arrangements with third-party payors. The portfolio approach is described in FASB ASC 606-10-10-4. Refer to the "Application of the Portfolio Approach to Contracts With Patients" section in paragraphs 7.7.01–7.7.15 for discussion on application of the portfolio approach.

Reassessment of Variable Consideration

7.6.62 Differences between original estimates and subsequent revisions, including final settlements, represent changes in the estimate of variable consideration and should be included in the period in which the revisions are made in accordance with FASB ASC 606-10-32-14. These differences should be disclosed in the financial statements. See section "Presentation and Disclosure" in paragraphs 7.7.16–7.7.60 for further information on disclosures. These differences are not treated as restatements of prior periods unless they meet the definition of an error in previously issued financial statements, as defined in FASB ASC 250, Accounting Changes and Error Corrections.

Existence of a Significant Financing Component in the Contract

7.6.63 FASB ASC 606-10-32-15 states, "In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer."

7.6.64 A health care entity should evaluate all of the facts and circumstances including payment terms and the reasons for any difference between the time period for settlement and the difference in the amount received as consideration from the government payor to determine if a significant financing component exists.

7.6.65 If a health care entity receives advances, the health care entity should consider the reasons for the advance and evaluate if a significant financing component exists.

7.6.66 To assist in determining if a significant financing component exists, FASB ASC 606-10-32-17 indicates that a contract with a customer would not have a significant financing component if certain factors exist. The following are the factors to consider with examples of how a health care entity may apply them to third-party settlements:

a.     The customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer — Consideration from a third-party payor on a patient’s behalf is generally not paid in advance of a health care entity providing services to patient.

b.     A substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity (for example, if the consideration is a sales-based royalty) — Contracts with patients generally include a substantial amount of variable consideration because third-party payors do not pay standard provider charges. In addition, the amount and timing of the consideration related to third-party settlements may vary on the basis of the occurrence or nonoccurrence of a future event that is not substantially with the control of the health care entity or the patient. For example, with respect to the timing of cost report settlements, neither the health care entity nor the patient has control over when a cost report is reviewed and settled because that is determined by the third-party payor (for example, Medicare or Medicaid).

c.     The difference between the promised consideration and the cash selling price of the good or service (as described in paragraph 606-10-32-16) arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference (For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.) — For health care providers, the amount of the third-party adjustment arises due to the normal course of cost report settlements and is not a result of the provision of a financing arrangement with the government payor. The information the government payor uses to determine a final settlement for a given cost report year is generally submitted by the health care provider in a cost report several months after the end of the reporting period. The government payor reviews or audits the information provided in the cost report and determines a final settlement amount. The final settlement could either be additional consideration owed to the health care provider or a return of consideration back to the government payor.

7.6.67 Although the timing between the service to the Medicare or Medicaid beneficiary and final settlement or payment is often more than one year, FinREC believes that a significant financing component likely does not exist for third-party settlements because the timing of the payment is at the discretion of the third-party payor and does not involve the patient (that is, the customer).

7.6.68 Under the full retrospective transition method (retrospective application to each prior period presented) described in FASB ASC 606-10-65-1, health care entities are required to apply the standard to all contracts presented in the financial statements (subject to certain practical expedients). Under the modified retrospective transition method (cumulative effect recognized on the date of initial application), health care entities may apply the standard to either all contracts or only to contracts that are not completed as of the adoption date.

7.6.69 A health care entity that elects to apply the modified retrospective transition method only to contracts that are not completed as of the date of initial application should evaluate its contracts to determine if all or substantially all of the revenue was recognized under legacy GAAP (that is, they are completed contracts) before the date of initial application. For example, for contracts with patients where a third-party settlement has not been finalized for a specific cost report year as of the date of initial application, the health care entity should compare the estimated settlement amount for that payor to the amount of revenue recognized under legacy GAAP for patients subject to retroactive settlement by that payor to determine if all or substantially all of the revenue has been recognized. 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 and 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.

7.6.70 The following example is intended to be illustrative, and the actual determination of the amount of a third-party settlement may differ based on the facts and circumstances of a health care entity’s specific situation.

Federal and state governments fund a significant portion of health care services in the United States through their role as third-party payors in programs such as Medicare and Medicaid. Under those programs, payments for services provided to program beneficiaries are determined under complex government rules and regulations. The programs may subject the health care entity to potential retrospective adjustments; therefore, the actual amount of consideration from the third-party may not be known with certainty for several years. As a result of the uncertainty, consideration from providing services to government program beneficiaries generally represents variable consideration under FASB ASC 606.

Example 7-6-8 — Illustrative Use of the Expected Value Method — Medicare Program

Hospital X participates in the Medicare program and accepts Medicare’s rates as payment in full for services rendered to Medicare beneficiaries during a cost report year. During a cost report year, Medicare makes payments to Hospital X for patients eligible under the program based on various interim payment methodologies. It may take two or more years from the year that services are rendered by Hospital X for Medicare to validate the claims and issue a Notice of Final Program Reimbursement to close out a cost report year. Each reporting period, management estimates the potential program adjustments and accrues a third-party settlement asset or liability for Hospital X to adjust the estimated revenue (variable consideration) for that cost report year. The Medicare transaction price before adjustment is $50 million based on contracts included in the determination of the third-party settlement.

Management determines that the expected value method (a probability-weighted approach) would be the best predictor of the variable consideration for patient services provided to Medicare beneficiaries during the cost report year and identifies four possible outcomes for the potential program adjustments (cost report settlements) that would reduce the amount of variable consideration. The probability of each possible outcome is as follows:

The amounts associated with each outcome are aggregated to arrive at the estimated adjustment amount of $1.5 million which decreases the transaction price estimate from $50 million to $48.5 million. In accordance with paragraphs 11–12 of FASB ASC 606-10-32, management also evaluates whether it is probable that a significant reversal in the amount of cumulative revenue recognized will occur (that is, whether a constraint on recognition is required). In assessing whether the amount of revenue to be recognized should be constrained, management considered if a subsequent settlement would result in a significant reversal of cumulative revenue once the cost reports are fully settled. Based on the information available, management determined that it is probable that a significant reversal of revenue would not occur. As such, Hospital X would record Medicare revenue for the cost report year of $48.5 million.

7.6.71 The following example is intended to be illustrative, and the actual determination of the amount of a third-party settlement may differ based on the facts and circumstances of a health care entity’s specific situation. An entity will need to use professional judgement to evaluate the claims that could be subject to a RAC program audit. The following example is not intended to be a comprehensive description of the RAC program.

Under the Medicare program, payments to health care entities for services provided to program beneficiaries are determined under complex government rules and regulations. The program may subject the health care entity to potential retroactive adjustments; therefore, the actual amount of consideration from Medicare may not be known with certainty for several years. As a result of the uncertainty, consideration from providing services to Medicare beneficiaries generally represents variable consideration under FASB ASC 606.

The RAC program was created through the Medicare Modernization Act of 2003 to identify and recover improper payments to health care providers under Medicare’s fee-for-service payment methodology. The United States Department of Health and Human Services was required by law to make the RAC program permanent for all states by January 1, 2010.

The RAC’s mission is to identify and correct Medicare improper payments through the efficient detection of overpayments or underpayments made on claims for health care services provided to Medicare beneficiaries, so that the Centers for Medicare & Medicaid Services (CMS) can implement actions that will prevent future improper payments.

Under the program, a RAC generally reviews claims on a post payment basis. These reviews can be automated or they can be complex. For complex reviews, the health care entity is required to submit to the RAC medical record documentation to support the claim.

After a RAC has completed the review, a demand letter is sent to the health care entity notifying them of any changes to payments previously received as a result of the review. If the review resulted in a net overpayment for all of the claims reviewed, the health care entity has four options: (a) pay the amount, (b) allow recoupment from future payments by Medicare, (c) request or apply for an extended payment plan, or (d) appeal the review.

If a health care entity decides to appeal the review, there are five levels in the appeals process. Often, the appeals process takes years to complete given the complex government rules and regulations used to determine payments for health care services to Medicare beneficiaries.

Example 7-6-9 — Illustrative Use of the Expected Value Method — Recovery Audit Contractor Program

Hospital X participates in the Medicare program and receives payments for services provided to Medicare beneficiaries under a fee-for-service payment methodology. During the year, inpatient services are provided to Medicare beneficiaries which results in numerous claims to Medicare.

Hospital X has experience with RAC audits and demand letters that challenge the appropriate classification of certain types of patients as inpatient. Based on its experience in reviewing and appealing similar claims, management determined that the expected value method would be the best predictor of the variable consideration for these patient services provided to Medicare beneficiaries related to claims that may be the subject of a RAC audit, because Hospital X has a large number of contracts with similar characteristics.

Over the past three years, Hospital X has an overall 90 percent success rate with claims having similar classification issues, including RAC audit appeals. That is, for claims with a similar classification issue that were resolved during that period, only 10 percent of the amounts previously billed were ultimately recouped as overpayments. Management’s method of evaluating the success rate over the past three years inherently considers the probability of the expected outcome of each claim and incorporates the constraint. Although the RAC audit and appeals process are outside of its control, Hospital X determines that it has sufficient historical experience to estimate the success rate for similar claims, as noted previously, and therefore concludes that it is probable that a significant reversal in the cumulative revenue recognized will not occur as the uncertainty is resolved. As a result, and based on known or knowable information, management estimates the transaction price by reducing the billed amount by 10 percent at the time revenue is initially recognized for all similar claims based on claims expected to be audited and the historical success rate of 90 percent.

Based on an audit in a subsequent year, the RAC challenges the classification of some of the claims submitted by Hospital X for patients classified as inpatient (that is, the RAC concluded that Hospital X should have billed these claims as outpatient instead of inpatient) and determines that Hospital X was overpaid. The RAC issues a demand letter indicating an overpayment to Hospital X.

Based on a review of the RAC’s findings by Hospital X, management believes the classification of these patients as inpatient is correct and files an appeal. Significant time may pass before the appeal is processed through the five levels of the appeals process. Management previously included an estimate of the amount of overpayments for the claims in the initial transaction price based on its 90 percent historical success rate. Hospital X determined that it does not need to update the estimate of the transaction price as the result of the RAC audit because the RAC audit and demand letter are consistent with its historical experience and would not change its overall success rate.

Hospital X will continue to update its historical success rate in subsequent periods based on actual results of RAC audits, demand letters, appeals experience, and other known or knowable information to determine if the historical success rate remains appropriate to apply. At the end of each reporting period, Hospital X should update the estimated transaction price in accordance with FASB ASC 606-10-32-14 and paragraphs 42–45 of FASB ASC 606-10-32.

7.6.72 The following example is intended to be illustrative, and the actual determination of the amount of a third-party settlement may differ based on the facts and circumstances of a health care entity’s specific situation and the Medicare rules and regulations in effect at the time the calculations are performed.

Under the Medicare program, payments to health care entities for services provided to program beneficiaries are determined under complex government rules and regulations. The program may subject the health care entity to potential retroactive adjustments; therefore, the actual amount of consideration from Medicare may not be known with certainty for several years. As a result of the variability in reimbursement, the amounts a health care entity is entitled to for providing services to Medicare beneficiaries generally include variable consideration under FASB ASC 606.

The Medicare program provides for additional payments to eligible hospitals that provide services to a disproportionately higher share of indigent patients based on formulas defined in the Medicare regulations. These additional payments are commonly referred to as DSH payments. The primary method used to determine whether a hospital qualifies for DSH payments is based on a complex statutory formula that results in a Medicare DSH percentage. The hospital’s Medicare DSH percentage is used to determine whether the hospital qualifies for any additional payments, and if it qualifies, the amount of additional payments.

For illustrative purposes, assume the statutory formula in the Medicare regulations specifies that if the Medicare DSH percentage is less than 15 percent, the hospital will not receive any additional payments. However, a hospital with a DSH percentage in excess of 15 percent qualifies for additional payments, the specific amount of which depends on whether the DSH percentage is in excess of 20.1 percent. That is, the statutory formula calls for additional payments for hospitals with a DSH percentage between 15 percent and 20.1 percent and increased additional payments for hospitals with a DSH percentage of 20.2 percent or higher. The Medicare regulations for determining DSH payments are complex and are subject to ongoing review and change by the government. Therefore, a health care provider should determine the DSH rules and regulations currently in effect at the time the calculations are performed, which may differ from the formula described previously.

Example 7-6-10 — Illustrative Use of the Most Likely Amount Method — Disproportionate Share Hospital Program

Hospital X participates in the Medicare program and accepts payments from Medicare as specified in the Medicare regulations (fee for service payments and retroactive settlements) for services rendered to Medicare beneficiaries during a cost report year (in this case, the hospital’s fiscal year).

Hospital X is an urban hospital with more than 100 beds that provides inpatient services to a large number of indigent patients each year. Over the past several years, Hospital X has received DSH payments based on the statutory formula. Because it has more than 100 beds, Hospital X is not subject to a DSH reimbursement cap. The additional DSH payments have been audited by the Medicare Administrative Contractor in connection with Hospital X’s routine cost report audit process for the past several years and the additional payments have been validated without a significant adjustment (that is, changes over the past several years have not resulted in significant adjustments to the estimated settlement).

Because Hospital X’s cost report is prepared and filed with the Medicare program within five months after its cost report year end, Hospital X performs a calculation of the estimated Medicare DSH percentage during its financial statement close process to determine the estimated amount of additional payments it expects to receive for DSH for the cost report year related to services provided to Medicare beneficiaries during the cost report year.

Management determines that the most likely amount method (derived from the single most likely amount in a range of possible consideration amounts) would be the best predictor of the variable consideration for services provided to Medicare beneficiaries related to the DSH payments because there are only three possible outcomes. Management identifies the following three possible outcomes for the potential additional payments related to DSH.

Hospital X has experience with calculating the Medicare DSH percentage. Each year, upon subsequently filing the Medicare cost report, Hospital X reconciles the estimated amount determined in connection with their financial statement close process to the calculation included in the Medicare cost report. Based on its experience with determining the Medicare DSH percentage, Hospital X determines there have been no significant differences between the calculation included in the cost report and the estimated amount determined during the financial statement close process. In addition, based on their experience, Hospital X has historically exceeded the 20.2 percent DSH percentage threshold. For the current cost report year, management determines its Medicare DSH percentage exceeds the 20.2 percent threshold based on its patient mix. Therefore, management believes the most likely amount of consideration related to DSH is $3 million. Hospital X considered whether the most likely amount should be constrained. However, based on its history of receiving Medicare DSH additional payments and its history of Medicare cost report audits that have validated the Medicare DSH percentage, Hospital X determined that it is probable there will not be a significant reversal in the amount of cumulative revenue recognized when the cost report is audited and the uncertainty is subsequently resolved. Hospital X includes $3 million for the DSH additional payments in the transaction price that is recorded at the end of the reporting period.

7.6.74 The Comprehensive Care for Joint Replacement (CJR) model was effective April 1, 2016, in 67 metropolitan areas for Medicare beneficiaries undergoing the most common orthopedic inpatient surgeries, which are hip and knee replacements (also called lower extremity joint replacements or LEJR). This model holds participant hospitals financially accountable for the quality and cost of episodes of care associated with hip and knee replacements to encourage hospitals, physicians, and post-acute care providers to work together to improve the quality and coordination of care from the initial hospitalization through recovery.

7.6.75 The episode of care evaluated in this model begins with the admission of a patient to a hospital who is ultimately discharged under certain joint replacement diagnostic codes and ends 90 days after discharge of the patient. The episode of care length is intended to cover the expected period of recovery of the patient. Generally, all episodes that end between January 1 and December 31 are included in a performance year. Although the hospital is held financially responsible for the entire episode of care, the episode includes post-acute services (and other services, with certain limitations) that are often rendered by post-acute providers.

7.6.76 Hospitals and post-acute providers bill and are paid under usual payment system rules (referred to as fee-for-service) for all related services rendered to Medicare beneficiaries who have LEJR procedures. Subsequent to the end of a performance year (that is, the calendar year), actual spending (that is, the total amount paid by Medicare for the related services) is compared to the Medicare target price for the respective hospital for the entire episode of care of each beneficiary. Depending on the hospital’s quality and episode spending performance (including spending by Medicare for other providers involved in the episode of care), the hospital may receive an additional payment from Medicare or be required to repay a portion of the fee for service payments. Settlement of these amounts is expected to occur three to six months subsequent to the end of a performance year. The settlement is not specific to any patient but is based on all of the episodes of care for CJR in the performance year.

7.6.77 Under the CJR model, hospitals may also enter into separate agreements with various post-acute providers for the coordination of care of a patient during an episode of care. For example, a hospital provides the initial acute care, a second provider may provide rehabilitation services, and a third provider may provide home care services. Revenue recognition for such agreements is outside the scope of this issue. In addition, the separate agreements a hospital may enter into with various post-acute providers may include a gain or loss sharing component. These gain or loss sharing arrangements are outside the scope of this issue.

7.6.78 A hospital should continually evaluate the CJR model and other similar risk sharing arrangements for changes and updates to these programs to determine the impact, if any, on the accounting treatment for these programs.

7.6.79 A health care provider should first determine that the five criteria in FASB ASC 606-10-25-1 have been met for there to be a contract with a customer within the scope of FASB ASC 606. For the purposes of FASB ASC 606, FinREC believes the "contract with the customer" refers to the arrangement between the health care provider and the patient.

7.6.80 Separate contractual arrangements (also referred to as provider agreements or participation agreements) exist between health care providers and third-party payors (for example, the Centers for Medicare and Medicaid Services or CMS), which establish amounts to be paid on behalf of a patient (who is the third-party’s beneficiary). These separate contractual arrangements between the health care providers and third-party payors are not considered separate "contracts with the customer" under FASB ASC 606. However, these agreements should be considered in determining the transaction price for the goods and/or services rendered to patients.

7.6.81 In accordance with FASB ASC 606-10-25-1ae, a contract with a customer exists only when all of the criteria in that paragraph are met. Hospitals should consider the criteria in FASB ASC 606-10-25-1 to determine that a contract with a patient exists and that the contract is legally enforceable. FinREC believes that a hospital should consider the following items when evaluating if the criteria in FASB ASC 606-10-25-1 are met:

a.     Parties have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations of the contract. A hospital should consider if it has a written contract with the patient by considering whether the patient signed any forms, such as a patient responsibility form, which would be considered a written contract. If the hospital determines it does not have a written contract but the patient schedules the elective surgery in advance, the hospital may consider if it has an oral or implied contract.

b.     Each party’s rights regarding the goods or services to be transferred can be identified. A hospital should consider if it has a right to payment for services provided to a patient based on the contract.

c.     Payment terms can be identified for the goods or services to be transferred. Under the CJR model, hospitals receive Medicare fee-for-service payments for services provided to patients that are subject to adjustment based on the difference between actual Medicare spend and a pre-determined bundle target price. There may also be a co-pay or deductible due from the patient.

d.     The contract has commercial substance. The hospital should consider if it expects its future cash flows to change as a result of the services provided.

e.     It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. A hospital should consider if it is probable that the entity will collect substantially all of the consideration to which it is entitled in exchange for goods or services transferred to Medicare beneficiaries; this includes amounts due from the Medicare program and deductibles and co-pays due from patients. Refer to the "Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles" section in paragraphs 7.6.01–7.6.43. Also refer to the "Third-Party Settlement Estimates" section in paragraphs 7.6.44–7.6.72 for additional information related to factors to consider in determining if it is probable that the entity will collect substantially all of the consideration to which it is entitled in exchange for goods or services transferred to Medicare beneficiaries.

7.6.82 FASB ASC 606-10-25-14 provides that at contract inception, an entity should assess the goods or services promised in a contract with a patient and should identify as a performance obligation each promise to transfer to the patient a good or service (or a bundle of goods or services) that is distinct.

7.6.83 To be distinct, a performance obligation must meet both of the following criteria in FASB ASC 606-10-25-19:

a.     The customer can benefit from the good or service either on its own or together with the other resources that are readily available to the patient (that is, the good or service is capable of being distinct).

b.     The entity’s promise to transfer the good or service to the patient is separately identifiable from other promises in the contract (that is, the good or service is distinct within the context of the contract).

7.6.84 FinREC believes that generally, the goods and services provided by the hospital in a CJR episode will be considered a single combined performance obligation for inpatient health care services. Refer to the section, "Identifying Performance Obligations" in paragraphs 7.2.01–7.2.09 for additional information related to factors to consider in identifying performance obligations.

7.6.85 Although there is no contractual requirement, some hospitals may perform certain additional care coordination activities or case management services. A hospital may choose to perform these activities as it may be in the best interest of the hospital in an effort to control costs. Hospitals should evaluate the nature of the care coordination services or case management services that are provided to the patient. These activities may include, for example, the following:

a.     Providing notification to the patient that the patient is a participant in a bundled payment arrangement

b.     Providing coordination of the post-acute care plan

c.     Calling the patient to ensure he or she is taking prescribed medications

FASB ASC 606-10-25-17 provides that promised goods or services do not include activities that an entity must undertake to fulfill a contract unless those activities transfer a good or service to the customer. FinREC believes that generally, these types of care coordination activities do not transfer an additional good or service to the patient and are administrative in nature and would not be considered separate performance obligations. Hospitals should, however, consider if there are implied promises to the patient to provide post-acute transitional services or coordination of care with other post-acute providers. These implied promises could be considered performance obligations if the promises are considered distinct. Based on each hospital’s facts and circumstances regarding arrangements in place, a hospital should evaluate if care coordination activities should be considered separate performance obligations in its contracts with customers based on the criteria in FASB ASC 606-10-25-19.

7.6.86 The transaction price (the amount of consideration to which the hospital expects to be entitled) will be established by the rules and regulations of the Medicare program.

7.6.87 For reconciliation and settlement purposes, CMS will group a hospital’s CJR episodes by the performance year (that is, the calendar year) in which the episode ends, and accumulate information on all claims filed by all providers relative to those episodes. Approximately three to six months after a performance year ends, CMS performs a reconciliation calculation for each hospital, as described in the "Background" section, and determines an interim settlement for that performance year’s episodes in the aggregate (not on a patient-by-patient basis). The actual spending data used in calculating this settlement will be incomplete because claims associated with episodes in the latter part of the performance year may still be in process (and, therefore, would not have been filed or processed, or both, as of the reconciliation cut-off date). Twelve months later (that is, 15 to 18 months after the end of the performance year), a second reconciliation is performed using complete claims information and the final determination is made as to whether the hospital is entitled to a bonus payment or, instead, has incurred a penalty that is owed back to CMS.

7.6.88 For purposes of applying step 3, hospitals may group individual patient contracts into portfolios that mirror these CMS performance year groupings and establish transaction prices on a portfolio basis.² Refer to section "Application of the Portfolio Approach to Contracts With Patients" in paragraphs 7.7.01–7.7.15.

Variable Consideration

7.6.89 An entity is required to estimate variable consideration using either the expected value method or the most likely amount method (as described in FASB ASC 606-10-32-8) and include some or all of that estimate in the transaction price to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved (as described in FASB ASC 606-10-32-11). This limitation on including variable consideration in the transaction price is referred to as the constraint. An entity should consider the factors in FASB ASC 606-10-32-12 when evaluating the extent to which variable consideration should be constrained.

7.6.90 The hospital’s promised consideration from CMS consists of the normal Medicare Severity-Diagnosis Related Group (MS-DRG) payments for the patient contracts in a portfolio plus or minus a bonus or penalty amount, respectively, determined for the portfolio of the CMS performance year as a whole. The retrospective settlement feature and its linkage to a performance-based bonus or penalty means that as described in FASB ASC 606-10-32-6, the transaction price has a variable component.

7.6.91 The hospital will initially include the MS-DRG revenue in the transaction price. The impact of the potential retrospective adjustment (that is, variable consideration) will need to be considered at each financial reporting date. Therefore, each portfolio of contracts may have an associated adjustment of the transaction price based on the estimate of variable consideration related to the CJR program, along with a corresponding balance sheet account that reflects the estimated amount due to or from CMS for potential CJR program settlements. Amounts due to or from CMS for estimated CJR program settlements are generally included in the balance sheet within the same line item as other settlements with CMS.

7.6.92 Estimating the potential bonus or penalty amount associated with a CMS performance year requires consideration of (a) the overall actual episode spending compared to target episode prices, (b) whether (and, if so, how) the target episode prices used in the calculation will (or are likely to) be adjusted based on the hospital’s quality score, and (c) the extent and financial impact of potential overlaps with other CMS payment models, for which CMS will make adjustments in the final reconciliation.

a.     Actual episode spending. The actual episode spending for a CMS performance year will be determined after all claims attributable to that performance year (both hospital and post-acute care) have been processed by CMS. A hospital’s estimate of this amount will depend on its facts and circumstances, including the extent to which it has visibility into the data associated with the claims that have been filed with CMS by post-acute providers involved in the episode of care, and its historical information regarding variables such as the total number of expected episodes during the performance year, the severity of each episode, and expectations related to complications and readmissions.

b.     Quality score. The hospital will obtain its quality score for the performance year from the first CMS reconciliation report, which will be received approximately three to six months after the end of the performance year.

c.     Potential overlap with other models. For example, Medicare shared savings program participants also participating in a program with a bundled payment.

In this situation, the bonus or penalty is not associated only with the hospital’s own performance; instead, it arises in connection with a risk sharing activity involving other providers.

7.6.93 In accordance with paragraphs 11 and 12 of FASB ASC 606-10-32, a hospital is required to estimate the amount of variable consideration by applying the constraint guidance and cannot default to a conclusion whereby no variable consideration is included in the transaction price. If a hospital determines that it cannot estimate the performance-based bonus or penalty such that it is probable that a significant revenue reversal would not occur upon resolution of the final amounts, the portion of consideration that is variable should be excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized. (Refer to the "Accounting Considerations When the Transaction Price Is Constrained" section in paragraphs 7.6.98–7.6.100.)

7.6.94 However, if the hospital has sufficient data such that it is probable that a significant revenue reversal would not occur upon resolution of the final amount, that amount should be estimated using one of the two methods described in FASB ASC 606-10-32-8 (whichever is the better predictor), and the initial CJR program estimate established to reflect that amount. After the performance year ends, CMS performs the first reconciliation and determines an interim settlement amount. In accordance with FASB ASC 606-10-32-14, a hospital should update the estimated transaction price at each reporting date, including the assessment of whether the estimate of variable consideration is constrained, based on the available information. The hospital should also increase or decrease its estimated amount due to or from CMS to reflect any interim settlements received or paid at the time this becomes known. The hospital should continue to evaluate and update the estimate as necessary based on additional information that becomes known in a period.

7.6.95 Approximately 15 to 18 months after the end of the performance year, CMS performs the second reconciliation and determines whether the hospital has earned a bonus or incurred a penalty. At that time, the estimated amounts are "trued up" to reflect the actual bonus or penalty amount, and the final settlement amount is determined. These adjustments represent changes in the estimate of variable consideration and should be included in revenue in the period (quarter or annual) in which the change in estimate is made in accordance with FASB ASC 606-10-32-14. These differences should be disclosed in the financial statements. See the "Presentation and Disclosure" section in paragraphs 7.7.16–7.7.60 for further information on disclosures. These differences are not treated as restatements of prior periods unless they meet the definition of an error in previously issued financial statements, as defined in FASB ASC 250.

Uncertainties Associated With the Variable Consideration

7.6.96 In accordance with FASB ASC 606-10-32-12, hospitals should evaluate uncertainties associated with the bonus or penalty calculations that could increase the likelihood or the magnitude of a revenue reversal include the following:

a.     Whether a hospital earns a bonus or incurs a penalty will depend on the performance of parties other than the hospital and, thus, is largely outside of the hospital’s influence

b.     The large number and broad range of possible consideration amounts

c.     The extent to which the hospital has access to data involving claims filed by post-acute providers

d.     The CJR program is new with no prior history and available data may have low predictive value

e.     There are contingencies inherent in the bonus or penalty calculation formula. For example:

i.     The hospital’s exposure to loss (or upside potential for a bonus) will be determined based on highly aggregated data for all episodes ending within a performance year, and the quantity and severity of episodes and exposure to losses from occurrence of complications or readmissions will not be known until several months after the performance year ends. Therefore, for example, costly readmissions close to the end of the performance year could affect a portfolio’s overall performance enough to change a hospital from a bonus position to a penalty position.

ii.     The target episode prices used in the reconciliation might increase or decrease as a result of quality scores earned by the hospital during the performance year. The quality score is based on performance with all patients during the performance year and, therefore, is not determined until several months after the end of the performance year. The hospital will be informed of its quality score at the same time it is informed of the results of the first reconciliation (typically, in the second quarter of the calendar year that follows the end of the performance year).

7.6.97 Several of these uncertainties directly relate to the lack of experience or history with the CJR program. As a hospital progresses through the performance years of the program and obtains experience and data that can produce more reliable estimates, uncertainties associated with the likelihood or magnitude of a revenue reversal should diminish. In addition, to the extent that a hospital uses providers within its own health system to provide the post-acute care, the uncertainty associated with performance that is outside of the hospital’s influence may be diminished.

Accounting Considerations When the Transaction Price Is Constrained

7.6.98 Until a hospital concludes it is probable that a significant revenue reversal would not occur upon resolution of the final amount, at each financial reporting date, the reduction of the transaction price (due to the constraint) for the estimate of variable consideration associated with the portfolio for that performance year should reflect the minimum amount of consideration from CMS under the stop-loss limits applicable to that performance year. The reduction of the transaction price (due to the constraint) will reduce the net patient service revenue associated with CJR to reflect the amount that is at risk of being returned to Medicare. Once a hospital concludes it is probable that a significant revenue reversal will not occur upon resolution of the final amount, at each reporting date, a hospital should adjust the transaction price based on its updated estimate of the amount payable to CMS under the stop-loss limits applicable to that performance year.

7.6.99 After the performance year ends, a hospital will obtain additional data that might allow it to update its estimate of the amount of variable consideration that should be included in the transaction price. For example:

a.     If a hospital has robust independent data related to the claims filed across the spectrum of care,³ a hospital can make an estimate of total spending as soon as all claims have been filed or when it is able to calculate the amount of outstanding claims not yet submitted to CMS by the post-acute provider. For those hospitals, the information provided by the CMS reconciliation reports and the CMS data feed will simply serve as a check or confirmation of the hospital’s independent data.

b.     A hospital without robust independent data could use spending information supplied in the first CMS reconciliation report, which will be made available to hospitals in the second quarter following the end of a performance year. However, because the claims information will be incomplete, this would need to be supplemented with updated information from the quarterly CMS data feed or by an estimate of the missing claims from post-acute providers (if predictive historical information is available).

When a hospital possesses the additional data, variable consideration will be estimated in the manner described in FASB ASC 606-10-32-8, and the initial CJR program estimate will be adjusted to reflect the revised estimate.

7.6.100 The hospital should use information from the claims data from the post-acute providers to update the estimated transaction price, including the assessment of whether the estimate of variable consideration is constrained.

Interim Reporting Considerations

7.6.101 When estimates are established related to an estimated bonus or penalty for a performance year, it may be necessary to apportion those amounts among interim periods (for example, because a hospital issues quarterly financial statements or because of a need to include only a portion of a performance year’s estimates in fiscal year results). To avoid the possibility of recognizing revenue in one interim period that might be reversed in another, and in light of the fact that the amount of bonus or penalty is based on the outcome of performance for the entire performance year, FinREC believes that the estimated bonus or penalty should be determined in each interim period on a pro-rata basis in proportion to the services rendered in the interim period, with each interim period bearing a reasonable portion of the anticipated annual amount consistent with the objective in FASB ASC 606-10-25-23. In accordance with FASB ASC 270-10-45-3 and FASB 606-10-32-14, the hospital should continue to evaluate and update the estimate as necessary based on additional information that becomes known in a period.

Interaction of Portfolios, Performance Years, and Fiscal Years

7.6.102 CMS bases bonus and penalty calculations on performance year (that is, calendar year) activity rather than on the hospital’s fiscal year activity, which may result in timing differences. Even when the financial reporting year and the CMS performance year coincide, the cases included in the CMS performance year will differ from those included in the financial reporting year due to the 90-day time lag between the patient’s discharge from the hospital and the end of the patient’s CJR episode. Hospitals must be mindful of these timing differences to ensure that transaction prices appropriately reflect the bonuses or penalties associated with the CJR cases included in revenue for a particular financial reporting period.

7.6.103 As a result of differences between the CMS performance year and a hospital’s fiscal year, a hospital’s revenue recognition process for a fiscal year might involve three portfolios of contracts: one related to the CMS performance year that began during the hospital’s fiscal year; one related to the CMS performance year that ended during the hospital’s fiscal year; and one related to a prior performance year whose second reconciliation (and final settlement) will occur during the hospital’s fiscal year. The chart "Activity in Estimates During the Year Ended June 30, 2019," in paragraph 7.6.108 illustrates, for two June 30 year-end hospitals with different circumstances, how the reduction of the transaction price (constraint) based on the estimate of variable consideration for each of those portfolios might affect revenue recognition for the fiscal year ending June 30, 2019.

7.6.104 These interactions add a layer of additional complexity to revenue recognition that must be taken into account in developing systems and establishing internal controls over CJR program processes related to financial reporting. Potential implications include:

a.     The hospital must ensure that its patients are included in the correct portfolios, taking into account the 90-day difference between the discharge date from the hospital and the end of the episode (which determines the CMS performance year to which the episode will be assigned).

b.     Important metrics such as target episode prices, stop-gain or stop-loss limits, and quality scores are unique to a given performance year. Using the incorrect year’s metrics when making estimates and establishing estimates could cause a material overstatement or understatement of revenue.

c.     Hospitals will need to allocate the effects of adjustments to CJR program estimates and, ultimately, the final determination of a bonus or penalty, between fiscal years in a systematic and rational manner. This will assist the hospital with disclosure requirements in FASB ASC 606-10-50-12A related to disclosure of revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods.

Presence of a Significant Financing Component

7.6.105 Although the timeframe over which the hospital performs the LEJR procedure, receives the MS-DRG payment, receives or pays an interim bonus or penalty settlement at first reconciliation, and makes final settlement with CMS may cover several years, FinREC believes that a significant financing component does not exist because the timing of the payment is at the discretion of CMS and does not involve the patient (that is, the customer). Refer to section "Third-Party Settlement Estimates" in paragraphs 7.6.44–7.6.72 for factors to consider related to determining the existence of a significant financing component in a contract.

7.6.106 For considerations related to step 4, when more than one performance obligation is identified, refer to paragraphs 28–45 of FASB ASC 606-10-32.

7.6.107 For considerations related to step 5, refer to section "Determining the Timing of Satisfaction of Performance Obligations" in paragraphs 7.5.01–7.5.08.

7.6.108 The following example is intended to be an illustration of retrospective adjustments. The actual determination of the retrospective adjustment should be based on the facts and circumstances of an entity’s specific situation.

Example 7-6-11 — Comprehensive Illustration — CJR Step 3 and Step 5

Hospital Y has a June 30 fiscal year end. This illustration shows how the retrospective adjustment associated with CMS Performance Year (PY) 3 (2018) will affect Hospital Y’s financial statements for fiscal years ending June 30, 2018, 2019, and 2020. Note that in the fiscal year ending June 30, 2018, Hospital Y will need to similarly consider the impact of PY2 (2017), as well as PY1 (2016), if Hospital Y is entitled to a bonus or is subject to a penalty.

During the fiscal year ending June 30, 2018, Hospital Y’s MS-DRG payment for LEJR procedures is $12,500. The target episode price for PY3, established by CMS in advance of the performance year, is $25,000. The stop-gain or stop-loss percentage for PY3 is 10 percent of the target episode price, which is the maximum bonus or penalty applicable to Hospital Y.

To simplify the example, it does not include considerations related to incorporating the data for patients whose 90-day post-discharge period is not complete at the end of a reporting period. Refer to "Interaction of Portfolios, Performance Years, and Fiscal Years" (paragraphs 31–33 herein) for additional information.

As of June 30, 2018

Seventy Medicare patients that received LEJR procedures during the fiscal year ending June 30, 2018, have episodes ending in PY3. Hospital’s general ledger reflects $875,000 of patient service revenue for the MS-DRG payments from CMS ($12,500 MS-DRG payment × 70 patients) for those patients. However, because the MS-DRG payments will be retrospectively adjusted by the performance bonus or penalty associated with PY3, Hospital Y must determine how much patient service revenue to recognize in its financial statements for the year ending June 30, 2018, relative to the 70 patients.

The penalty or bonus is determined based on services provided to the patients from the time of admission through the 90 days after a patient’s discharge from Hospital Y. The target episode price established by CMS in advance of the PY3 performance year for an "acceptable" quality score was $25,000. Based on information from CMS, Hospital Y believes the quality score will fall into the "acceptable" range and believes that it is probable that a significant reversal of the cumulative revenue recognized as a result of the quality score possibly being lower will not occur. In PY3, the maximum penalty that can be imposed on Hospital Y in PY3 is capped at $2,500 per episode (10 percent of the target episode price). Similarly, the maximum bonus that Hospital Y could receive is capped at $2,500 per episode (10 percent of the target episode price). Therefore, Hospital Y’s range of potential compensation for each of the 70 patients is $10,000 to $15,000 ($12,500 MS-DRG payment ± $2,500 maximum bonus or penalty). Because Hospital Y has not concluded whether it has earned a bonus or incurred a penalty when PY3 ends, Hospital Y determines that the amount of variable consideration included in the transaction price (and, therefore, recognized) should be constrained. Because Hospital Y determined it will be entitled to at least $10,000 of revenue for each patient, a reduction of the transaction price (constraint) based on the estimate of variable consideration of $175,000 is established to reduce revenue.

The reduction of the transaction price (constraint) for the estimate of variable consideration is calculated as follows:

The journal entry to record the reduction of the transaction price (constraint) is as follows:

At June 30, 2018, the estimated net patient service revenue recognized in the financial statements for services rendered to the 70 CJR patients would be $700,000. Changes to the variable consideration associated with those patients will be reported in subsequent periods.

As of March 31, 2019

PY3 ends halfway through Hospital’s fiscal year ending June 30, 2019. Ultimately, the PY ended December 31, 2018, contained 100 episodes (70 from Hospital Y’s fiscal year ended June 30, 2018, and 30 from the first and second quarters in the fiscal year ending June 30, 2019 — that is, the quarters ended September 30, 2018, and December 31, 2018). During the quarter ended March 31, 2019, Hospital Y determines that it has sufficient data to make a reasonable initial estimate of the PY3 penalty or bonus estimate that was previously constrained.

Hospital estimates that the CMS total spending for the 100 episodes in this portfolio, including the MS-DRG payments made to Hospital Y and the amounts billed for services provided by all other post-acute providers associated with the episodes, will be $2.6 million.

The original target episode price established by CMS of $25,000 was based on an assumption that Hospital Y’s quality score for PY3 would fall within the "acceptable" range. The target episode price will be updated to reflect Hospital Y’s actual quality score earned for the PY, which will be provided in the first reconciliation report that has not yet been received. The range of possible prices is as follows:

Hospital Y also estimates, based on known or knowable information from prior periods and the current period, the various probabilities associated with the quality scores it will likely receive for PY3 as follows:

Based on the foregoing, Hospital Y estimates that its probability-weighted quality-adjusted target price per patient will be $25,425.

The total of the estimated quality-adjusted target episode payments is $25,425 × 100 patients = $2,542,500. The estimated stop-gain or stop-loss amount is $254,250 ($2,542,500 × 10%). In accordance with paragraphs 11 and 12 of FASB ASC 606-10-32, Hospital Y evaluates whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur (that is, whether a constraint on recognition is required) when the uncertainty associated with the variable consideration is subsequently resolved. Based on the information available, management determined that it is probable that a significant reversal of revenue would not occur. As such, Hospital Y would recognize $25,425 of revenue for each patient.

The difference between the total estimated CMS spend and the aggregate estimated target episode prices is $57,500 ($2,600,000 – $2,542,500). Because the difference is less than the estimated stop-loss amount of $254,250, Hospital Y’s estimated liability to the program is $57,500 for PY3. Because the penalty is associated with episodes in two different fiscal years, Hospital Y must apportion the penalty among the episodes in each period in a systematic and rational manner. Hospital Y elects to use a proration based on number of episodes. So, 70 out of 100 in the year ended June 30, 2018 = $40,250 ($57,500 × 70 ÷ 100) and 30 out of 100 in the year ended June 30, 2019 = $17,250 ($57,500 × 30 ÷ 100).

Therefore, the updated estimate of variable consideration associated with the 70 patients treated in fiscal year ended June 30, 2018, is $40,250. Because Hospital Y’s updated estimated experience was more favorable than the amount recorded in the year ended June 30, 2018, an adjustment to the amount recorded is needed. The amount is calculated as follows:

The revised aggregate transaction price is $834,750. The journal entry to record the adjustment of the transaction price (due to the constraint) based on the estimate of variable consideration related to PY3 (2018) is as follows:

The journal entry to record the adjustment of the transaction price (due to the constraint) based on the estimate of variable consideration related to PY3 (2019) is as follows:

These journal entries are reflected in Hospital Y’s quarter ended March 31, 2019, financial statements.

As of June 30, 2019

In the quarter ended June 30, 2019, Hospital Y receives the first reconciliation report for PY3. The total CMS spending shown on the reconciliation report is $2.3 million Hospital Y’s actual quality score is "good," resulting in a total quality-adjusted target price of $2,550,000 ($25,500 × 100 patients); the stop-gain or stop-loss limit is $255,000 ($2,550,000 × 10%); and Hospital is entitled to an interim bonus payment of $250,000 ($2,550,000 – $2,300,000).

Hospital Y evaluates the impact of this information on its estimate of variable consideration previously recorded for the year ended June 30, 2018. Hospital attributes the spending difference to PY3 claims that have not yet been processed by CMS and determines that its original spending estimate of $2.6 million should not be revised. However, the aggregate target episode price will need to be adjusted to reflect the outcome of the quality score. As a result, Hospital Y’s revised estimate of the penalty amount is $50,000 ($2,600,000 – $2,550,000).

The difference between the previous estimate of the penalty and the revised estimate is $7,500 ($57,500 – $50,000). Hospital Y apportions the required "true-up" in the same proportions as it did the original estimate — 70 out of 100 in the year ended June 30, 2018 = $5,250; and 30 out of 100 in the year ended June 30, 2019 = $2,250 resulting in a revised transaction price for the 70 episodes in the year ended June 30, 2018, of $840,000. Hospital Y records the following adjustment related to PY3 (2018):

In addition, Hospital Y records the following adjustment related to PY3 (2019):

Hospital receives an interim payment, which is recorded as follows:

As Hospital Y previously estimated a liability, the interim payment is recorded as an additional liability.

These journal entries are reflected in Hospital Y’s financial statements as of and for the year ended June 30, 2019.

As of June 30, 2020

In the quarter ended June 30, 2020, Hospital Y receives the second reconciliation report for PY3. The total CMS spending shown on the reconciliation report is $2,525,000, indicating Hospital Y has earned a bonus of $25,000 for PY3 ($2,550,000 – $2,525,000). Because CMS paid $250,000 in the interim settlement, Hospital Y will be required to return $225,000 ($250,000 – $25,000) to CMS.

Because Hospital Y had previously estimated that it would pay a penalty of $50,000, a final adjustment of the estimate to reflect the change from penalty to bonus of $75,000 (allocated consistently with prior periods) is recorded. The final aggregate transaction price related to the 70 episodes in the year ended June 30, 2018, is $892,500. Hospital Y records the following adjustment related to PY3 (2018):

In addition, Hospital Y records the following adjustment related to PY3 (2019):

Hospital closes the PY3 settlement and records the actual final settlement with CMS as follows:

Activity in Estimates During the Year Ended June 30, 2019

In the financial statements for the year ended June 30, 2019, the patient service revenue reported by the following two hospitals will be affected by estimates of the transaction price (constraint) associated with three CMS performance years – PY4 (2019), PY3 (2018), and PY2 (2017). The patterns in which each hospital has recognized variable consideration are affected by its varying levels of access to data on which to base estimates.

7.6.109 Continuing care retirement communities (CCRCs) provide residents with a diversity of residential, social, and health care services in accordance with a resident service agreement (resident agreement or contract) specifying the obligations of the CCRC to the resident. Generally, a resident entering a CCRC initially lives in an independent living unit designed for seniors, such as a cottage, duplex, townhome, or apartment. If and when the health of a resident declines, he or she may be permanently transferred to an assisted living facility or a nursing facility, both of which are generally located on the same campus as the independent living units. The health care services provided by CCRCs generally include nursing care and assisted living and may also include home health care, physician services, and other services related to health care. These health care services are provided in addition to the residential services and amenities, including social, recreational, dining, and laundry services. In addition to providing these services to CCRC residents, certain services, predominantly assisted living and nursing services, may be provided to nonresidents. Most CCRCs require some type of entrance (or advance) fee, which may or may not be refundable, and a monthly fee. The entrance fee and monthly fee may vary depending on the type of contract selected by the resident.

7.6.110 This section is focused on Type A life care contracts that are all-inclusive continuing-care contracts that include residential facilities, other amenities, and access to health care services, primarily assisted living and nursing care, for little or no increase in periodic (or monthly) fees, other than increases as stipulated in the resident agreement, generally based on increases in operating costs or inflationary increases. CCRCs should separately assess other types of life care contracts to determine the appropriate accounting under FASB ASC 606, Revenue from Contracts with Customers.

7.6.111 At inception of a CCRC contract (that is, a contract between the CCRC and a new resident), the CCRC is required to apply the guidance in FASB ASC 606 to determine how revenue should be recognized over the term of the contract, based on allocating the contract’s transaction price among the distinct goods or services (performance obligations) promised in the contract.

7.6.127 For Type A life care residents, monthly fees are specified in the resident agreement and are generally fixed with periodic changes based on increases for inflation or in operating costs. The monthly fees entitle the residents to the use of the residential facilities and other amenities, as well as access to health care services. As such, the monthly fees are included in the transaction price as the monthly options to extend the contract term are exercised.

7.6.128 Nonrefundable entrance fees are also specified in the resident agreement and are either nonrefundable at contract inception or are refundable on a decreasing basis for a fixed period of time, at which point the entrance fees become nonrefundable. For Type A life care residents, the nonrefundable entrance fee generally entitles the resident to the use of the residential facilities and other amenities, as well as access to health care services. As such, the nonrefundable entrance fees are a component of the transaction price.

7.6.129 Refundable entrance fees are those entrance fees that are expected to be fully refunded regardless of when the contract is terminated, as well as the refundable portion of resident agreements that are partially refundable.

7.6.130 In accordance with FASB ASC 606-10-32-10, consideration received from a customer should be recognized as a liability if the entity expects to refund some or all of that consideration to the customer and is measured at the amount to which the entity does not expect to be entitled (that is, amounts not included in the transaction price). CCRCs are contractually obligated to return the refundable entrance fees received from residents. As such, in accordance with FASB ASC 606-10-32-10, FinREC believes that the best estimate of the amount of refundable entrance fees received from residents, considering the constraint on variable consideration described in paragraphs 11–13 of FASB ASC 606-10-32, should be recorded as a liability at the inception of the resident agreement and not included in the transaction price because the CCRC expects to refund these amounts when the resident agreement is terminated.

7.6.131 Assessing Significance. FASB ASC 606 requires CCRCs to evaluate whether each of their contractual arrangements with residents provide a significant benefit of financing to either party of the contract. The financing component may be explicitly identified in the contract or, as frequently occurs in this industry, may be implied by payment terms of the contract.

7.6.132 FASB ASC 606-10-32-15 states

...an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer.

7.6.133 As a first step, it is important that the CCRC determine the level at which significance is required to be assessed. Paragraph BC234 of ASU No. 2014-09 states, in part

The Boards clarified that an entity should only consider the significance of a financing component at a contract level rather than consider whether the financing is material at a portfolio level. The Boards decided that it would have been unduly burdensome to require an entity to account for a financing component if the effects of the financing component were not material to the individual contract, but the combined effects for a portfolio of similar contracts were material to the entity as a whole.

7.6.134 The assessment of significance requires the CCRC to apply judgment. Paragraph BC234 of ASU No. 2014-09 states, “that for many contracts, an entity will not need to adjust the promised amount of customer consideration because the effects of the financing component will not materially change the amount of revenue that should be recognized in relation to a contract with a customer.”

7.6.135 The assessment of significance is based upon individual facts and circumstances for each CCRC.

7.6.136 Entrance (Advance) Fees. Paragraphs BC237–BC238 of ASU No. 2014-09 explain that FASB ASC 606 does not include an exemption for advance payments because there may be situations when a significant financing component is present and to ignore the impact would likely skew the amount and pattern of revenue recognition. As such, an evaluation of whether entrance fees are deemed to have a significant financing component must be made. Such evaluations should be made based on the provisions of each resident contract.

7.6.137 CCRC contracts generally do not address the specific use of the entrance fees by the CCRC. As such, CCRCs use entrance fees for various purposes: working capital (that is, provision of services to residents), capital expenditures (including expenditures related to new buildings), refunds of entrance fee amounts due to prior residents, and so on.

7.6.138 As indicated inparagraph 7.6.130, FinREC believes that the refundable entrance fees received by a CCRC from residents are not part of the transaction price. As a result, refundable entrance fees do not need to be considered in a CCRCs significant financing component analysis.

7.6.139 A CCRC should consider all facts and circumstances in assessing whether the nonrefundable entrance fee payment from a resident results in a contract that is deemed to have a significant financing component, including the impact of pricing options (entrance fees vs. monthly fees) presented to potential residents.

7.6.140 Paragraph BC232(b) of ASU No. 2014-09 explains that

…An entity should consider the combined effect of: (1) the expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; and (2) the prevailing interest rates in the relevant market. Although the Boards decided that the difference in timing between the transfer of goods and services and payment for those goods and services is not determinative, the combined effect of timing and the prevailing interest rates may provide a strong indication that a significant benefit of financing is being provided.

7.6.141 FASB ASC 606-10-32-17 states

[n]otwithstanding the assessment in paragraph 606-10-32-16, a contract with a customer would not have a significant financing component if any of the following factors exist:

a.     The customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer…”

A CCRC should determine whether the timing of the transfer of goods and services (for example, health care) under a CCRC contract are at the discretion of the resident in determining whether the transaction price under the CCRC contract contains a significant financing component.

7.6.142 Paragraph BC233c of ASU No. 2014-09 states, in part

[i]n some circumstances, a payment in advance or in arrears in accordance with the typical payment terms of an industry or jurisdiction may have a primary purpose other than financing…. The primary purpose of those payment terms may be to provide the customer with assurance that the entity will complete its obligations satisfactorily under the contract, rather than to provide financing to the customer or the entity, respectively.

7.6.143 Seniors choose to move into a CCRC primarily for the security that a CCRC provides, which includes the availability of health care in the future, if needed. The payment of the entrance fee provides a resident with assurance that the CCRC will provide the goods and services that have been promised under the terms of the contract. The provision of this assurance by the CCRC should be considered when determining whether a nonrefundable entrance fee arrangement contains a significant financing component. The assessment of whether a nonrefundable entrance fee arrangement contains a significant financing component requires judgement and will be based upon individual facts and circumstances for each entity.

7.6.144 If a CCRC deems a nonrefundable entrance fee arrangement to contain a financing component, a CCRC should apply judgment to determine whether the financing component will materially change the amount of revenue that should be recognized in relation to a contract with a customer (that is, it is a significant financing component). The assessment of what constitutes “significant” will be based upon individual facts and circumstances for each entity. If an entity concludes that the financing component is not significant, the entity does not need to apply the provisions of paragraphs 15–30 of FASB ASC 606-10-32 and adjust the consideration promised in determining the transaction price.

7.6.145 Discount Rate. FASB ASC 606-10-32-19 states, “After contract inception, an entity shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk).”

7.6.146 In accordance with FASB ASC 606-10-32-19, once a CCRC determines that a significant financing component is present and adjusts the promised consideration accordingly, the entity would continue to use the same assumed discount rate for the specific contract assessed unless there is a contract modification that results in the original contract being effectively terminated.

7.6.147 As explained in paragraph 7.6.126, FinREC believes that the resident agreement for a Type A life care resident is a monthly contract with options to renew, and the options to renew generally would not provide a material right to the resident. In accordance with FASB ASC 606-10-55-43, the options to renew should be accounted for only when the resident exercises the options.

7.6.148 FinREC believes that generally, the CCRC should recognize monthly fees as revenue when the services for the month are performed (that is, the CCRC satisfies the performance obligation).

7.6.149 In accordance with paragraphs 42 and 51 of FASB ASC 606-10-55, the CCRC should recognize revenue for the material right associated with access to future services, when those future goods or services are transferred. Judgment is required to determine how to account for the nonrefundable entrance fee. FinREC believes that the nonrefundable entrance fee that contains a material right associated with access to future services (calculated after consideration of any significant financing components as described in paragraphs 7.6.131–7.6.146) should be allocated to optional future periods covering a resident’s life expectancy.

7.6.150 FinREC believes one appropriate method to allocate the nonrefundable upfront fees to the material rights is a method that results in an equal amount allocated to each month, given that the nature of the entity’s performance is that of having the various residential, social, or health care services available to the customer on a when-and-if needed basis each month for as long as the customer remains in the facility. This is similar to an output method that uses a time-based measurement to measure progress toward complete satisfaction of a performance obligation in accordance with FASB ASC 606-10-55-17. A sample calculation using a time-based measure is included in example 7-6-12, “Example of Single Resident — Type A or ‘Life Care’ Contract — Time-Based.”

7.6.151 FinREC believes that another acceptable approach to allocate the nonrefundable upfront fees to the material rights is an approach that is based on when the future estimated costs or services are transferred to a CCRC resident. This is similar to an input method using costs incurred relative to the expected costs to be incurred to measure progress toward complete satisfaction of a performance obligation in accordance with FASB ASC 606-10-55-20. A sample calculation using the cost-to-cost method is included in example 7-6-13, “Example of Single Resident — Type A or ‘Life Care’ Contract — Cost to Cost.” In addition, a CCRC may want to consider the likelihood of a resident using the different levels of health care services when applying the cost-to-cost method.

7.6.152 FinREC believes that it would also be acceptable to apply the practical alternative to estimating the standalone selling price of the material right, as described in FASB ASC 606-10-55-45. Under this approach, the CCRC would allocate the transaction price to the optional periods by reference to the goods or services expected to be provided and the corresponding expected consideration for those future goods or services (for example, the monthly fees). This approach is illustrated in example 51, “Option That Provides the Customer With a Material Right (Renewal Option),” of FASB ASC 606.

7.6.153 The guidance in FASB ASC 606 specifies the accounting for an individual contract with a customer. Entities may use a portfolio approach as a practical expedient to account for contracts with customers as a group, rather than individually, if as required in FASB ASC 606-10-10-4 the financial statement effects are not expected to materially differ from an individual contract approach.

7.6.154 If the CCRC reasonably expects that a portfolio approach would result in recognizing revenue that is not materially different than recognizing revenue on an individual contract basis, it is important for the CCRC to determine, based on the profile of its community, if it has one or multiple portfolios. If residents entering the CCRC are in a similar age cohort and health condition, then one portfolio may be considered. If there are variations in the age cohorts or other factors, then the CCRC might consider using multiple portfolios.

7.6.155 For Type A life care contracts, assuming the CCRC allocates and recognizes the nonrefundable entrance fee as each month’s services are transferred using either a time-based or cost-to-cost (or other appropriate) allocation method, there will be a contract liability balance that will decrease each period based on the amount of the nonrefundable upfront fee allocated to that period.

7.6.156 A CCRC may need to consider updating relevant assumptions at the end of each reporting period if the updates would have a material effect on the determination of revenue recognized during each reporting period. For example, life expectancies may change or, for the cost-to-cost method described in paragraph 7.6.151, the amount of time to be spent by a resident in each level of care that was estimated at contract inception may change. CCRCs should apply judgment to determine the appropriate accounting for a change in an assumption that could affect the amortization of the contract liability balance (the nonrefundable entrance fees).

7.6.157 As documented in paragraph 11 of TRG Agenda Ref. No. 34, March 2015 Meeting — Summary of Issues Discussed and Next Steps, related to Issue 1 in TRG Agenda Ref. No. 32, Accounting for a Customer’s Exercise of a Material Right, one acceptable approach is for the exercise of a material right to be accounted for as a contract modification as the additional consideration received or the additional goods or services provided, or both, when a customer exercises a material right to represent a change in the scope or price, or both, of a contract.

7.6.158 As discussed in paragraph 7.6.125, FinREC believes that the nonrefundable entrance fee paid by a resident under a Type A life care contract creates material rights for access to future services. In accordance with the discussion in TRG Agenda Ref. No. 34, one approach is to account for the exercise of the material rights by the customer as contract modifications. If the CCRC accounts for the exercise of the material rights as contract modifications, the guidance in FASB ASC 606-10-25-13a would apply and the changes in estimates, such as life expectancy or time spent at each level of care, would be accounted for prospectively.

7.6.159 A sample calculation reflecting a revised cost-to-cost methodology as a result of a resident transferring to another level of care earlier than projected at contract inception is included in example 7-6-14.

7.6.160 It is unlikely that the terms of the CCRC resident agreement would be modified after inception; therefore, the contract modification provisions in FASB ASC 606 are not discussed herein. However, if a contract were to be modified after inception, paragraphs 10–13 of FASB ASC 606-10-25 provide guidance for CCRCs to consider.

7.7.01 Health care entities may use a portfolio approach as a practical expedient to account for patient contracts as a collective group, rather than individually, if, as required in FASB ASC 606-10-10-4, the financial statement effects are not expected to materially differ from an individual contract approach. This approach may be applied by health care entities that have a large volume of similar contracts with similar classes of customers (as described in paragraph BC488a of ASU No. 2014-09), to reduce the complexity and cost of applying FASB ASC 606.

7.7.02 It is important that health care entities exercise judgment when determining portfolios. FASB ASC 606 specifies the need for similar characteristics among contracts (or performance obligations) to be grouped together, but permits the application of a “reasonable approach to determine the portfolios that would be appropriate for its types of contracts,” as stated in paragraph BC69 of ASU No. 2014-09. The phrase “similar characteristics,” as stated in FASB ASC 606-10-10-4, is not explicitly defined. FASB explained its rationale for including a portfolio practical expedient in paragraphs BC69–BC70 of ASU No. 2014-09, noting that it would be a practical way to apply FASB ASC 606. FASB specifically indicated that judgment would be required in selecting the size and composition of the portfolio such that the entity would not expect the portfolio results to differ materially from the application of FASB ASC 606 to each specific contract.

7.7.03 Health care entities typically have contracts with patients that may involve different payors and provide different services with different payment terms. The following are some considerations for a health care entity to determine in grouping contracts with similar characteristics for inclusion in a portfolio:

•     Type of service — inpatient, outpatient, skilled nursing, home health, emergency room, elective procedures, non-elective procedures, physician practice, and so on.

•     Type of payors — insurance contract (Blue Cross, Aetna, Emblem Health, and so on), insurance contract with patient responsibility (co-pay, deductible), governmental programs (Medicare, Medicaid), uninsured self-pay, and so on. In some cases, there may be multiple payors (for example, insurance and co-payment) in a single patient contract. Health care entities may also consider the size of co-pay or deductible (for example, high deductible).

•     Whether contracts are entered into at or near the same time (for example, the same quarter).

A health care entity may include some or a combination of the preceding considerations in its determination of a portfolio.

7.7.04 Based on FASB ASC 606-10-10-4, FinREC believes that a health care entity should consider both the sufficiency of the portfolio data (that is, how much experience it has with a portfolio) and the homogeneity of the data (that is, the similarity of patient accounts within a portfolio) to ensure that revenue recognized on a portfolio basis results in no material differences when compared with an individual contract approach.

7.7.05 It is important that a health care entity make a determination about whether to apply the portfolio approach on a system-wide basis (for example, some or all the health care facilities in a health care entity’s system) or tailor a separate approach for each individual health care facility in the system. Some of the considerations in this determination may be if the health care facilities have the same contracted insurance reimbursement rates, charge master pricing, mix of services, and so on. An additional consideration is whether contracts from different billing systems can be included in a portfolio or if the characteristics are different such that they should not be in the same portfolio.

7.7.06 Health care entities may consider historical cash collections and reimbursement rates by type of service or payor, or both, and then group those contracts with similar collection history or reimbursement rates into a portfolio. Once the collection history or reimbursement rates are determined, applying these historical rates to individual contracts or a portfolio of contracts should not change the result materially because the same historical or reimbursement rates are used in both cases and would support the requirement in FASB ASC 606-10-10-4 that the financial statement impact of applying the guidance to a portfolio of contracts does not differ materially from applying this guidance to individual contracts. A health care entity should monitor these portfolios and update them periodically to account for changes in collection patterns and reimbursement rates of different classes of patients, implementation of state insurance exchanges, and changes to Medicaid and other state or local plans as required under FASB ASC 606-10-10-4.

7.7.07 A health care entity may also consider applying the portfolio approach to similar performance obligations if there are multiple performance obligations identified in its contracts with patients or customers.

7.7.08 Because the portfolio approach, as described in FASB ASC 606-10-10-4, was designed as a practical expedient, it is important that a health care entity exercise discretion and judgment in determining whether to apply the method to some or all of its contracts with patients. In addition, health care entities may decide to apply the portfolio approach to one class of patients but not to another. That is, a health care entity may apply an individual contract approach for some contracts (for example, significant balance accounts), and a portfolio approach to the rest of its accounts.

7.7.09 If a health care entity chooses not to apply the portfolio approach to some or all of its contracts, then it would apply the revenue model on a contract-by-contract basis.

7.7.10 FinREC believes that a contract can be added to a portfolio when the health care entity determines that the contract has similar characteristics with the other contracts in the portfolio such that the financial statement impact would not differ materially, and similarly, that a contract should be removed from a portfolio if the health care entity subsequently identifies that the contract does not have similar characteristics with other contracts in the portfolio in accordance with FASB ASC 606-10-10-4.

7.7.11 It may take up to several weeks after providing service to a patient for a health care entity to determine the payor for the contract (for example, whether the patient is eligible for Medicaid, qualifies for charity care, or is uninsured). In the interim, it is important that the health care entity determine the portfolio classification of the individual patient for revenue recognition purposes. Some health care entities may initially classify a patient as pending Medicaid and subsequently reclassify the patient to Medicaid, self-pay, or charity care once eligibility has occurred. Refer to “Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles”, included in paragraphs 7.6.01–7.6.43 for further considerations regarding patients classified as Medicaid pending.

7.7.12 Some health care entities may reclassify the remaining self-pay balance (co-payments or deductibles) into a separate portfolio after the insurance payor has paid.

7.7.13 In accordance with FASB ASC 606-10-32-9, health care entities should consider all information (historical, current, and forecast) that is reasonably available to the entity to estimate variable consideration when determining the transaction price, whether the guidance in FASB ASC 606 is applied on a portfolio or contract-by-contract basis. Estimates may include

•     contractual adjustments under third-party payor arrangements and governmental programs such as Medicare and Medicaid;

•     discounts to self-pay patients, if provided; and

•     implicit price concessions provided to certain self-pay patients as discussed in “Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles,” included in paragraphs 7.6.01–7.6.43, and example 3 in paragraphs 102–105 of FASB ASC 606-10-55.

7.7.14 At the July 2015 TRG meeting, the TRG discussed if an entity is applying the portfolio practical expedient when it considers evidence from other, similar contracts to develop an estimate using the expected value method. As noted in paragraph 25 of TRG Agenda Ref. No. 44, July 2015 Meeting — Summary of Issues Discussed and Next Steps:

In some circumstances, an entity will develop estimates using a portfolio of data to account for a specific contract with a customer. For example, to account for a specific contract with a customer, an entity might consider historical experience with similar contracts to make estimates and judgments about variable consideration and the constraint on variable consideration for that specific contract. On question 1, TRG members agreed with the staff’s view that the use of a portfolio of data is not the same as applying the portfolio practical expedient.

7.7.15 Thus, in accordance with the discussion at the July 2015 TRG meeting on the portfolio practical expedient, an entity is not required to apply the portfolio practical expedient when considering evidence from other, similar contracts to develop an estimate of variable consideration. An entity could choose to apply the portfolio practical expedient, but it is not required to do so. At each reporting period, in accordance with FASB ASC 606-10-32-14, a health care entity should compare the characteristics of the contracts included in the historical experience to the characteristics of the portfolio or individual contract to which the historical evidence is being applied. The entity’s considerations of the applicable historical experience to apply to a contract (or portfolio) may be similar to its determination of which portfolios it may use, as discussed in paragraph 7.7.03. Historical collection experience for a contract (or a portfolio of contracts) may include historical experience from more than one payor source (for example, insurance payment and patient co-payment).

7.7.16 It is critical that the discussions and conclusions reached in this section be read in conjunction with the discussions and conclusions reached in the following revenue recognition implementation issues:

a.     “Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles” in paragraphs 7.6.01–7.6.43

b.     “Application of the Portfolio Approach” in paragraphs 7.7.01–7.7.15

c.     “Application of FASB ASC 606 to Continuing Care Retirement Community Contracts” in paragraphs 7.6.109–7.6.162

d.     “Accounting for Contract Costs” in paragraphs 7.7.61–7.7.73

e.     “Third-Party Settlement Estimates” in paragraphs 7.6.44–7.6.72

f.     “Risk Sharing Arrangements” in paragraphs 7.6.73–7.6.108

g.     “Identifying Performance Obligations” in paragraphs 7.2.01–7.2.09 and “Determining the Timing of Satisfaction of Performance Obligations” in paragraphs 7.5.01–7.5.08

7.7.17 FASB ASC 606-10-50-1 states the following:

The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:

a.     Its contracts with customers (see paragraphs 606-10-50-4 through 50-16)

b.     The significant judgments, and changes in the judgments, made in applying the guidance in this Topic to those contracts (see paragraphs 606-10-50-17 through 50-21)

c.     Any assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with 340-40-25-1 or 340-40-25-5 (see paragraphs 340-40-50-1 through 50-6).

7.7.18 FASB ASC 606-10-50-2 states the following:

An entity shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.

7.7.19 FASB ASC 606-10-50-3 states the following:

Amounts disclosed are for each reporting period for which a statement of comprehensive income (statement of activities) is presented and as of each reporting period for which a statement of financial position is presented. An entity need not disclose information in accordance with the guidance in this Topic if it has provided the information in accordance with another Topic.

7.7.20 A health care entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market is not required to make certain of the disclosures required of public entities. These differences are described further in each of the following sections.

Disaggregation of Revenue

7.7.21 FASB ASC 606-10-50-5 states that “[a]n entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.”

7.7.22 In accordance with FASB ASC 606-10-50-6, if the health care entity applies FASB ASC 280, Segment Reporting, the health care entity should also disclose sufficient information to enable users of its financial statements to understand the relationship between the disclosure of disaggregated revenue (in accordance with FASB ASC 606-10-50-5) and revenue information that is disclosed for each reportable segment. Based on the guidance in paragraphs 1 and 5 of FASB ASC 606-10-50, a health care entity may consider evaluating the guidance in paragraphs 89–91 of FASB ASC 606-10-55 when selecting the disaggregated revenue categories.

7.7.23 A health care entity may disclose revenue by the major type of payor (for example, Medicare, Medicaid, commercial insurance, self-pay) as each payor generally pays different rates for services, which impacts the nature, amount, timing, and uncertainty of revenue and cash flows. A health care entity should consider the level of disaggregation based on the significance of each payor to its revenue, how its different arrangements with those payors impact the nature, amount, timing, and uncertainty of revenue and cash flows, how it internally analyzes its major payors, and how it presents its payors externally in earnings releases, annual reports, or investor presentations. For example, Medicaid may be disaggregated from Medicaid managed care or commercial insurance may be disaggregated by significant commercial payors, and self-pay may be disaggregated between uninsured self-pay and copayments and deductibles. FinREC believes that a health care entity should consider if disaggregation is by primary payor or if primary payors should be separately disclosed which may include copayments and deductibles).

7.7.24 In addition to the major type of payor disaggregation disclosure, a health care entity might also consider whether the nature, amount, timing, and uncertainty of revenue and cash flows are impacted by factors such as geographical considerations (for example, regions of the country that a health care system uses when evaluating financial performance or making resource allocation decisions), method of reimbursement (for example, percent of charges, cost, fixed, capitated, or risk sharing), timing of transfer of goods or services (for example, inpatient and outpatient services, which occur over time or sales of retail pharmacy and equipment, which occur at a point in time), and whether the health care entity has different operating segments or service lines (for example, hospital inpatient, hospital outpatient, nursing home, physician, home care, health plan, assisted/independent living, and other non-health care services).

7.7.25 FASB ASC 606-10-50-7 indicates that the quantitative disaggregation disclosure guidance in paragraphs 5–6 of FASB ASC 606-10-50 and paragraphs 89–91 of FASB ASC 606-10-55 is not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. However, if an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market elects not to provide those disclosures, it must provide, at a minimum, revenue disaggregated according to the timing of transfer of goods or services (for example, revenue from goods or services transferred to customers over time, and revenue from goods transferred to customers at a point in time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Contract Balances

7.7.26 In accordance with FASB ASC 606-10-45-1, “[w]hen either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.”

7.7.27 When a health care entity has an unconditional right to payment, subject only to the passage of time, the right is treated as a receivable (refer to FASB ASC 606-10-45-4). For a health care entity, patient accounts receivable, including billed and unbilled accounts, including in-house patients, for which the health care entity has the unconditional right to payment, and estimated amounts due from third-party payors for retroactive adjustments, are receivables if the entity’s right to consideration is unconditional and only the passage of time is required before payment of that consideration is due. For unbilled accounts, including in-house patients, a health care entity should evaluate its payor arrangements and potentially consult with legal counsel to determine whether it has an unconditional right to payment at the end of each reporting period.

7.7.28 FASB ASC 606-10-45-3 states that “[i]f an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer.” Nonrefundable advance payments by a patient to a health care entity before goods or services are provided (for example, long-term care residents and continuing care retirement communities [CCRC] advance fees) are contract liabilities. A contract liability does not include amounts that are expected to be refunded pursuant to, for example, rights of return, or other provisions. In those cases, a separate refund liability must be recorded (refer to FASB ASC 606-10-32-10).

7.7.29 FASB ASC 954-310-45-1 states that

[a]lthough the aggregate amount of receivables may include balances due from patients and third-party payors (including final settlements and appeals), the amounts due from third-party payors for retroactive adjustments of items such as final settlements or appeals shall be reported separately in the financial statements.

7.7.30 FASB ASC 606-10-45-5 indicates that an entity is not prohibited from using alternative descriptions in the statement of financial position for contract assets and contract liabilities, although the entity should provide sufficient information for a user of the financial statements to distinguish between receivables and contract assets.

7.7.31 FASB ASC 606-10-50-8 requires a health care entity to make certain disclosures regarding contract balances. Those requirements and considerations for a health care entity are as follows:

a.     “The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.” For many health care entities, receivables (for example, patient accounts receivable or estimated amounts due from third-party payors for retroactive adjustments) are likely to be presented on their balance sheets as separate line items. Health care entities should also consider whether contract assets are separately presented on their balance sheet. If it is determined that sufficient information is not presented on the balance sheet, the opening and closing balances of receivables, contract assets, and contract liabilities should be disclosed in the notes to the financial statements. CCRC and similar entities with other contract balances (for example, nonrefundable advance fees) may also need to consider disclosure of additional details.

b.     “Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period.” Health care entities will need to disclose reductions in a contract liability balance as a result of services provided during the reporting period. For example, this may apply to CCRCs and similar entities with nonrefundable advance fees recorded as contract liabilities.

7.7.32 In accordance with FASB ASC 606-10-50-9, a health care entity “shall explain how the timing of satisfaction of its performance obligations (see paragraph 606-10-50-12(a)) relates to the typical timing of payment (see paragraph 606-10-50-12(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.” A health care entity might explain how CCRC nonrefundable advance fees are recognized or disclose that patients and third-party payors are generally billed several days after services are rendered to a patient. Amounts related to services provided to patients for which the entity has not billed and that do not meet the conditions of unconditional right to payment at the end of the reporting period are presented as contract assets. Amounts billed that have not yet been collected and that meet the conditions for unconditional right to payment are presented as patient receivables, not contract assets.

7.7.33 Paragraph 10 of FASB ASC 606-10-50 states that “[a]n entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information.” FASB ASC 606-10-50-10 provides examples of changes in an entity’s balances of contract assets and contract liabilities such as a business combination or a cumulative catch-up adjustment to revenue, including adjustments arising from a change in the estimate of the transaction price (and any changes in the assessment of whether an estimate of variable consideration is constrained). Changes in contract liabilities of CCRCs may include changes in nonrefundable advance fees.

7.7.34 FASB ASC 606-10-50-11 indicates that the disclosure requirements in paragraphs 8–10 and 12A of FASB ASC 606-10-50 related to timing of the satisfaction of its performance obligations and explanation of the significant changes in the contract asset and liability balances during the reporting period are not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. However, if an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market elects not to provide these disclosures, the entity should provide the disclosure in FASB ASC 606-10-50-8a, which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.

Performance Obligations

7.7.35 Refer to the section “Identifying Performance Obligations,” in paragraphs 7.2.01–7.2.09 and the “Determining the Timing of Satisfaction of Performance Obligations” section in paragraphs 7.5.01–7.5.08 for discussion on accounting for performance obligations.

7.7.36 Paragraph 12 of FASB ASC 606-10-50 includes disclosure requirements regarding performance obligations. Those requirements and the considerations for a health care entity are as follows:

a.     “When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement.” A health care entity may disclose that it satisfies some of its performance obligations at the time goods are provided (for example, retail sale of medical equipment or pharmaceuticals), while other performance obligations may be satisfied over time (for example, inpatient or outpatient services and certain services provided by continuing care retirement communities).

b.     “The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 11–13 of FASB ASC 606-10-32.)” A health care entity may disclose that it typically enters into agreements with third-party payors (Medicare, Medicaid, commercial insurance, HMOs, and similar payors) that provide for payments at amounts different from its established charges and that the arrangement terms provide for subsequent settlement and cash flows that may occur well after the service is provided. Similarly, a health care entity may disclose that it offers uninsured patients certain discounts from charges and may include implicit price concessions in the estimate of the transaction price based on historical collection experience. Those amounts are estimated each reporting period. If applicable, FinREC believes that a health care entity should disclose how it estimates retroactive settlements with third-party payors and whether those amounts are constrained. A CCRC may disclose payment terms (for example, monthly and advance fees) and whether advance fees are refundable or not. A CCRC may also need to disclose whether there is a significant financing component included in its payment arrangements (see the section, “Application of FASB ASC 606 to Continuing Care Retirement Community Contracts” in paragraphs 7.6.109–7.6.162).

c.     “The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent).” A health care entity may disclose the different services it provides (for example, inpatient, outpatient, long-term care, home health, and so on).

d.     “Obligations for returns, refunds, and other similar obligations.” A hospital will disclose credit balances that represent refunds owed to patients and third-party payors and CCRCs will disclose whether it has advance fees that are refundable and the related terms.

e.     “Types of warranties and related obligations.” A health entity will need to determine whether it has provided warranties or has related obligations and disclose these, if applicable.

7.7.37 FASB ASC 606-10-50-12A states, “An entity shall disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).” If a health care entity determined a change in the implicit price concessions, discounts and contractual adjustments, or third-party settlements that it estimated in a previous reporting period, it will need to disclose the impact that this change in the estimate of the transaction price had on revenue in the reporting period.

Transaction Price Allocated to the Remaining Performance Obligations

7.7.38 An entity should disclose information about its remaining performance obligations in accordance with FASB ASC 606-10-50-13, subject to certain exceptions in paragraphs 14–14A of FASB ASC 606-10-50. Certain types of health care providers may have remaining performance obligations at the end of the reporting period, including hospitals with in-house patients, CCRCs, providers with multi-visit procedures, entities that offer prepaid services, and those with bundled payments. They are required to disclose a description of the following:

a.     The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period

b.     An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the entity should disclose in either of the following ways:

1.     On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations

2.     By using qualitative information.

7.7.39 FASB ASC 606-10-50-14 states that

[a]n entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if either of the following conditions is met:

a.     The performance obligation is part of a contract that has an original expected duration of one year or less.

b.     The entity recognizes revenue from the satisfaction of the performance obligation, in accordance with paragraph 606-10-55-18.

7.7.40 FASB ASC 606-10-55-18 states the following:

[I]f an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.

7.7.41 FASB ASC 606-10-50-14A states the following:

An entity need not disclose the information in paragraph 606-10-50-13 for variable consideration for which either of the following conditions is met:

a.     The variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property accounted for in accordance with paragraphs 606-10-55-65 through 55-65B.

b.     The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b), for which the criteria in paragraph 606-10-32-40 have been met.

7.7.42 FASB ASC 606-10-50-14B states, “The optional exemptions in paragraphs 606-10-50-14(b) and 606-10-50-14A shall not be applied to fixed consideration.”

7.7.43 In accordance with FASB ASC 606-10-50-15:

An entity shall disclose which optional exemptions in paragraphs 606-10-50-14 through 50-14A it is applying. In addition, an entity applying the optional exemptions in paragraphs 606-10-50-14 through 50-14A shall disclose the nature of the performance obligations, the remaining duration (see paragraph 606-10-25-3), and a description of the variable consideration (for example, the nature of the variability and how that variability will be resolved) that has been excluded from the information disclosed in accordance with paragraph 606-10-50-13. This information shall include sufficient detail to enable users of financial statements to understand the remaining performance obligations that the entity excluded from the information disclosed in accordance with paragraph 606-10-50-13. In addition, an entity shall explain whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 606-10-50-13. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 606-10-32-11 through 32-13).

For health care entities, an example of performance obligations that are recognized over time may relate to those services provided to acute care patients in a hospital at period end (in-house patients) that have not yet been billed. However, because the in-house patient is typically discharged within the following fiscal year, a health care entity may elect to apply the optional exemption in FASB ASC 606-10-50-14a and would only make the required qualitative disclosures. Other health care entities may have other types of performance obligations remaining at the end of the reporting period and they would need to determine whether they meet the other optional exceptions provided in paragraphs 14b and 14A of FASB ASC 606-10-50 and, if not, make the disclosures required in FASB ASC 606-10-50-13.

7.7.44 The descriptive disclosures of an entity’s performance obligations of FASB ASC 606-10-50-12 are required for all entities, but FASB ASC 606-10-50-16 indicates that the disclosure requirements in paragraphs 13–15 of FASB ASC 606-10-50 related to remaining performance obligations are not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

Significant Judgments in the Application of the Guidance

7.7.45 FASB ASC 606-10-50-17 states the following:

An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in this Topic that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following:

a.     The timing of satisfaction of performance obligations (see paragraphs 606-10-50-18 through 50-19)

b.     The transaction price and the amounts allocated to performance obligations (see paragraph 606-10-50-20)

7.7.46 A health care entity will provide disclosure of the judgments, and any significant changes, that it makes in the determination of the amount and timing of revenue recognized. This might include how the entity determines explicit and implicit price concessions for uninsured self-pay patients and insured patients with co-payments and deductibles, and any constraints on revenue. A hospital may describe when it satisfies performance obligations for the services it provides (for example, inpatient and outpatient services). A CCRC may describe when it satisfies its performance obligations, how the transaction price is determined, including entrance fees and monthly fees, and how the transaction price is allocated. A medical practice that performs multi-visit procedures may describe when it satisfies its performance obligations, how it determines the transaction price, and how it allocates the transaction price to each performance obligation or visit.

7.7.47 Determining the amount of implicit price concessions for contracts to provide health care services to uninsured and insured patients with co-payments and deductibles will likely involve significant judgments for many health care entities (refer to the “Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles” section in paragraphs 7.6.01–7.6.43). While not required by FASB ASC 606, a health care entity may consider disclosing the amount of implicit price concessions included in estimating the transaction price each reporting period. This disclosure may provide meaningful information to users of financial statements in evaluating the judgments made by management in estimating the transaction price.

Determining the Timing of Satisfaction of Performance Obligations

7.7.48 If a health care entity has performance obligations that are satisfied over time, the health care entity should disclose both of the following, in accordance with FASB ASC 606-10-50-18:

a.     The methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied). For example, a health care entity might measure progress toward the complete satisfaction of the performance obligation by measuring costs incurred relative to the total expected costs, or charges incurred relative to the total expected charges.

b.     An explanation of why the methods used provide a faithful depiction of the transfer of goods or services. For example, a health care entity might indicate that costs or charges incurred to date are a faithful depiction of the entity’s performance (that is, transfer of goods or services to the patient).

7.7.49 For performance obligations satisfied at a point in time, a health care entity should disclose, in accordance with FASB ASC 606-10-50-19, the significant judgments made in evaluating when a customer obtains control of promised goods or services. A health care entity might consider the indicators of transfer of control from FASB ASC 606-10-25-30 in determining its disclosure.

Determining the Transaction Price and Amounts Allocated to Performance Obligations

7.7.50 Refer to the “Arrangements for Health Care Services Provided to Uninsured and Insured Patients With Self-Pay Balances, Including Co-Payments and Deductibles” section in paragraphs 7.6.01–7.6.43, and the “Application of FASB ASC 606 to Continuing Care Retirement Community Contracts” section in paragraphs 7.6.109–7.6.162 for discussion on determining the transaction price.

7.7.51 Paragraph 20 of FASB ASC 606-10-50 requires health care entities to disclose information about the methods, inputs, and assumptions used for all of the following:

a.     “Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring noncash consideration.” A health care entity may disclose that implicit price concessions included in the estimate of the transaction price are based on historical collection experience. A health care entity also may disclose how it estimates retroactive settlements with third-party payors. If applicable, a CCRC may disclose how it estimates the significant financing component included in its payment arrangements (see the “Application of FASB ASC 606 to Continuing Care Retirement Community Contracts” section in paragraphs 7.6.109–7.6.162).

b.     “Assessing whether an estimate of variable consideration is constrained.” A health care entity may disclose that its historical experience and range of potential outcomes take into account the constraint in the estimate of variable consideration or the factors considered in constraining the transaction price.

c.     “Allocating the transaction price, including estimating standalone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable).”

d.     “Measuring obligations for returns, refunds, and other similar obligations.” A CCRC may disclose that it estimates its refundable advance fee each reporting period based on its historical experience.

7.7.52 FASB ASC 606-10-50-21 indicates that the following disclosure requirements are not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market:

a.     FASB ASC 606-10-50-18b, which states that an entity should disclose, for performance obligations satisfied over time, an explanation of why the methods used to recognize revenue provide a faithful depiction of the transfer of goods or services to a customer

b.     FASB ASC 606-10-50-19, which states that an entity should disclose, for performance obligations satisfied at a point in time, the significant judgments made in evaluating when a customer obtains control of promised goods or services

c.     FASB ASC 606-10-50-20, which states that an entity should disclose the methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price. However, if an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market elects not to provide these disclosures, the entity should provide the disclosure in FASB ASC 606-10-50-20b, which states that an entity should disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained.

Practical Expedients

7.7.53 Based on the guidance in FASB ASC 606-10-50-22, a health care entity should disclose its policy for electing either of the following:

a.     The practical expedient provided by FASB ASC 606-10-32-18 about the existence of a significant financing component

b.     The practical expedient provided by FASB ASC 340-40-25-4 about incremental costs of obtaining a contract

7.7.54 FASB ASC 606-10-50-23 indicates that the disclosure requirements of FASB ASC 606-10-50-22 related to election of the practical expedients for existence of a significant financing component and incremental costs of obtaining a contract, respectively, are not required for an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

Assets Recognized From the Costs to Obtain or Fulfill a Contract With a Customer

7.7.55 Refer to the “Accounting for Contract Costs” section in paragraphs 7.7.61–7.7.73 for discussion on assets recognized from the costs to obtain or fulfill a contract with a customer.

7.7.56 If a health care entity capitalized costs to obtain or fulfill a contract with a customer in accordance with paragraphs 1 or 5 of FASB ASC 340-40-25, it is required to make the following disclosures:

a.     A health care entity should describe both of the following in accordance with FASB ASC 340-40-50-2:

i.     The judgments made in determining the amount of the costs incurred to obtain or fulfill a contract with a customer in accordance with FASB ASC 340-40-25-1 or 25-5

ii.     The method it uses to determine the amortization for each reporting period.

b.     A health care entity should disclose all of the following in accordance with FASB ASC 340-40-50-3:

i.     The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraphs 1 or 5 of FASB ASC 340-40-25), by main category of asset (for example, costs to obtain contracts with customers, precontract costs, and set-up costs)

ii.     The amount of amortization and any impairment losses recognized in the reporting period

c.     Health care entities may apply the practical expedient provided in FASB ASC 340-40-25-4, which allows the health care entity to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. In accordance with FASB ASC 340-40-50-5, health care entities that have elected the practical expedient provided in FASB ASC 340-40-25-4 should disclose that fact. Certain other health care entities (for example, CCRCs) may incur material costs to obtain customer contracts and if so they should provide the disclosures described previously (see the “Accounting for Contract Costs” section in paragraphs 7.7.61–7.7.73).

7.7.57 FASB ASC 340-40-50-6 indicates that an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market may elect not to provide the disclosures in paragraphs 3 and 5 of FASB ASC 340-40-50.

7.7.58 The following examples are illustrative only and only include disclosures related to FASB ASC 606. For instance, these examples do not include the disclosures that might be required by FASB ASC 275-10-50, Risks and Uncertainties; FASB ASC 954-280-45, Health Care Entities—Segment Reporting (regarding major customers); and FASB ASC 954-605-50-3, Health Care Entities—Charity Care. It is important that the actual determination of the appropriate disclosures be based on materiality and a health care entity’s specific facts and circumstances. These examples illustrate how the disclosure guidance in FASB ASC 606 might be applied to certain health care entities. Other presentations also may be appropriate depending on the nature of the entity, how the entity manages its business, and the conclusions it makes about revenue recognition.

7.7.59 The following example is applicable to a health care entity that is either a public business entity or a not-for-profit health care entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. This example assumes that the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers are separately presented or disclosed on the health care entity’s financial statements.

Example 7-7-1 — Public Entity or Entity With Public Debt

Patient Care Service Revenue

Patient care service revenue is reported at the amount that reflects the consideration to which the Organization expects to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payors (including health insurers and government programs), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. Generally, the Organization bills the patients and third-party payors several days after the services are performed or the patient is discharged from the facility. Revenue is recognized as performance obligations are satisfied.

Performance obligations are determined based on the nature of the services provided by the Organization. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges. The Organization believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to patients in our hospital(s) receiving inpatient acute care services or patients receiving services in our outpatient centers or in their homes (home care). The Organization measures the performance obligation from admission into the hospital, or the commencement of an outpatient service, to the point when it is no longer required to provide services to that patient, which is generally at the time of discharge or completion of the outpatient services. Revenue for performance obligations satisfied at a point in time is generally recognized when goods are provided to our patients and customers in a retail setting (for example, pharmaceuticals and medical equipment) and the Organization does not believe it is required to provide additional goods or services related to that sale.

Because all of its performance obligations relate to contracts with a duration of less than one year, the Organization has elected to apply the optional exemption provided in FASB ASC 606-10-50-14a and, therefore, is 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 previously 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.

The Organization determines the transaction price based on standard charges for goods and services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with the Organization’s policy, and implicit price concessions provided to uninsured patients. The Organization determines its estimates of contractual adjustments and discounts based on contractual agreements, its discount policies, and historical experience. The Organization determines its estimate of implicit price concessions based on its historical collection experience with this class of patients.

Agreements with third-party payors typically provide for payments at amounts less than established charges. A summary of the payment arrangements with major third-party payors follows:

•     Medicare. Certain inpatient acute care services are paid at prospectively determined rates per discharge based on clinical, diagnostic, and other factors. Certain services are paid based on cost-reimbursement methodologies subject to certain limits. Physician services are paid based upon established fee schedules. Outpatient services are paid using prospectively determined rates.

•     Medicaid. Reimbursements for Medicaid services are generally paid at prospectively determined rates per discharge, per occasion of service, or per covered member.

•     Other. Payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations provide for payment using prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates.

Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of investigations by governmental agencies, various health care organizations have received requests for information and notices regarding alleged noncompliance with those laws and regulations, which, in some instances, have resulted in organizations entering into significant settlement agreements. Compliance with such laws and regulations may also be subject to future government review and interpretation, as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Organization’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have upon the Organization. In addition, the contracts the Organization has with commercial payors also provide for retroactive audit and review of claims.

Settlements with third-party payors for retroactive 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. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor, and the Organization’s 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. Adjustments arising from a change in the transaction price were not significant in 20X2 or 20X1. [Or, disclose the amounts and explain significant adjustments.]

Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance, which vary in amount. The Organization also provides services to uninsured patients, and offers those uninsured patients a discount, either by policy or law, from standard charges. The Organization estimates the transaction price for patients with deductibles and coinsurance and from those who are uninsured based on historical experience and current market conditions. The initial estimate of the transaction price is determined by reducing the standard charge by any contractual adjustments, discounts, and implicit price concessions. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to patient service revenue in the period of the change. For the years ended December 31, 20X2 and 20X1, additional revenue of $XXX and $XXX, respectively, was recognized due to changes in its estimates of implicit price concessions, discounts, and contractual adjustments for performance obligations satisfied in prior years. Subsequent changes that are determined to be the result of an adverse change in the patient’s ability to pay are recorded as bad debt expense.

Consistent with the Organization’s mission, care is provided to patients regardless of their ability to pay. Therefore, the Organization has determined it has provided implicit price concessions to uninsured patients and patients with other uninsured balances (for example, copays and deductibles). The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts the Organization expects to collect based on its collection history with those patients.

Patients who meet the Organization’s criteria for charity care are provided care without charge or at amounts less than established rates. Such amounts determined to qualify as charity care are not reported as revenue.

The Organization has determined that the nature, amount, timing, and uncertainty of revenue and cash flows are affected by the following factors: payors, geography, service lines, method of reimbursement, and timing of when revenue is recognized. The following tables provide details of these factors.

The composition of patient care service revenue by primary payor for the years ended December 31 is as follows:

Revenue from patient’s deductibles and coinsurance are included in the preceding categories based on the primary payor.

The composition of patient care service revenue based on the regions of the country the Organization operates in, its lines of business, method of reimbursement, and timing of revenue recognition for the years ended December 31, 20X2 and 20X1 are as follows:

[Notes: 1. Although not included in this example, a similar table would be required for 20X1 for comparative purposes. 2. FASB ASC 606-10-50-6 would require a reconciliation of this information to the segment disclosures for a public business entity.]

Financing component

Example A

The Organization has elected the practical expedient allowed under FASB ASC 606-10-32-18 and does not adjust the promised amount of consideration from patients and third-party payors for the effects of a significant financing component due to the Organization’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payor pays for that service will be one year or less. However, the Organization does, in certain instances, enter into payment agreements with patients that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract.

Example B

The Organization has entered into contracts with patients that provide for payments ratably over two years with no stated interest rate. The Organization adjusts the promised amount of consideration due from these patients using discount rates ranging from X percent to XX percent to account for the effects of the financing component. For the years ended December 31, 20X2 and 20X1, interest income of $XX and $XX, respectively, was recognized. At December 31, 20X2 and 20X1, the unamortized discount was $XX and $XX, respectively.

Contract costs

Example A

The Organization has applied the practical expedient provided by FASB ASC 340-40-25-4 and all incremental customer contract acquisition costs are expensed as they are incurred, as the amortization period of the asset that the Organization otherwise would have recognized is one year or less in duration.

Example B

The Organization has elected to apply the practical expedient provided by FASB ASC 340-40-25-4, and expense as incurred the incremental customer contract acquisition costs for contracts in which the amortization period of the asset that the Organization otherwise would have recognized is one year or less. However, incremental costs incurred to obtain customer contracts for which the amortization period of the asset that the Organization otherwise would have recognized is longer than one year are capitalized and amortized over the life of the contract based on the pattern of revenue recognition from these contracts. The Organization regularly considers whether the unamortized contract acquisition costs are impaired if they are not recoverable under the contract. During the year ended December 31, 20X2, $XX of unamortized costs were expensed as a result of the impairment analysis. During the years ended December 31, 20X2 and 20X1, the Organization recognized amortization expense of $XX and $XX, respectively. At December 31, 20X2 and 20X1, the unamortized customer contract acquisition costs are $XXX and $XXX, respectively, and are presented in other assets on the accompanying balance sheets.

7.7.60 The following example is applicable to a health care entity that is other than a public business entity or a not-for-profit health care entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, that elected the disclosure exclusions of paragraphs 7, 11, 16, 21, and 23 of FASB ASC 606-10-50, and FASB ASC 340-40-50-6. This example assumes that the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers are separately presented or disclosed on the health care entity’s financial statements.

Example 7-7-2 — Entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market

Patient Care Service Revenue

Patient care service revenue is reported at the amount that reflects the consideration to which the Organization expects to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payors (including health insurers and government payors), and others and includes variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations. Generally, the Organization bills the patients and third-party payors several days after the services are performed or the patient is discharged from the facility. Revenue is recognized as the performance obligations are satisfied.

Performance obligations are determined based on the nature of the services provided by the Organization. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges. The Organization believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to patients in our hospitals receiving inpatient acute care services or patients receiving services in our outpatient centers or in their homes (home care). The Organization measures the performance obligation from admission into the hospital, or the commencement of an outpatient service, to the point when it is no longer required to provide services to that patient, which is generally at the time of discharge or completion of the outpatient services. Revenue for performance obligations satisfied at a point in time is generally recognized when goods are provided to our patients and customers in a retail setting (for example, pharmaceuticals and medical equipment), and the Organization does not believe it is required to provide additional goods or services related to that sale.

The Organization determines the transaction price based on standard charges for goods and services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients in accordance with the Organization’s policy, or implicit price concessions provided to uninsured patients. The Organization determines its estimates of contractual adjustments and discounts based on contractual agreements, its discount policies, and historical experience. The Organization determines its estimate of implicit price concessions based on its historical collection experience with this class of patients.

Agreements with third-party payors provide for payments at amounts less than established charges. A summary of the payment arrangements with major third-party payors follows:

•     Medicare. Certain inpatient acute care services are paid at prospectively determined rates per discharge based on clinical, diagnostic, and other factors. Certain services are paid based on cost-reimbursement methodologies subject to certain limits. Physician services are paid based upon established fee schedules. Outpatient services are paid using prospectively determined rates.

•     Medicaid. Reimbursements for Medicaid services are generally paid at prospectively determined rates per discharge, per occasion of service, or per covered member.

•     Other. Payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations provide for payment using prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates.

Laws and regulations concerning government programs, including Medicare and Medicaid, are complex and subject to varying interpretation. As a result of investigations by governmental agencies, various health care organizations have received requests for information and notices regarding alleged noncompliance with those laws and regulations, which, in some instances, have resulted in organizations entering into significant settlement agreements. Compliance with such laws and regulations may also be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Organization’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have upon the Organization. In addition, the contracts the Organization has with commercial payors also provide for retroactive audit and review of claims.

Settlements with third-party payors 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. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Organization’s 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.

Consistent with the Organization’s mission, care is provided to patients regardless of their ability to pay. Therefore, the Organization has determined it has provided implicit price concessions to uninsured patients and other uninsured balances (for example, copays and deductibles). The implicit price concessions included in estimating the transaction price represents the difference between amounts billed to patients and the amounts the Organization expects to collect based on its collection history with those patients.

Patients who meet the Organization’s criteria for charity care are provided care without charge or at amounts less than established rates. Such amounts determined to qualify as charity care are not reported as revenue.

Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance, which vary in amount. The Organization also provides services to uninsured patients and offers those uninsured patients a discount, either by policy or law, from standard charges. The Organization estimates the transaction price for patients with deductibles and coinsurance and from those who are uninsured based on historical experience and current market conditions. The initial estimate of the transaction price is determined by reducing the standard charge by any contractual adjustments, discounts, and implicit price concessions based on historical collection experience. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to patient service revenue in the period of the change. Subsequent changes that are determined to be the result of an adverse change in the patient’s ability to pay are recorded as bad debt expense.

The Organization has determined that the nature, amount, timing, and uncertainty of revenue and cash flows are affected by the following factors:

•     Payors (for example, Medicare, Medicaid, managed care or other insurance, patient) have different reimbursement and payment methodologies

•     Length of the patient’s service or episode of care

•     Geography of the service location

•     Method of reimbursement (fee for service or capitation)

•     Organization’s line of business that provided the service (for example, hospital inpatient, hospital outpatient, nursing home, and so on)

For the years ended December 31, 20X2 and 20X1, the Organization recognized revenue of $XX and $XX, respectively, from goods and services that transfer to the customer over time and $XX and $XX, respectively, from goods and services that transfer to the customer at a point in time.

7.7.61 Health care entities may enter into various contracts in which they incur incremental costs of obtaining a contract or costs to fulfill a contract. Examples of these arrangements are CCRC contracts, prepaid health plans, risk-sharing contracts, or other contacts in which a health care entity incurs costs to acquire or fulfill a contract that are not in the scope of existing cost guidance (for example, fixed assets).

7.7.62 Health care service providers incur costs that are related to securing a contract with customers (for example, patients, residents, or members). Examples of these costs are marketing, advertising, costs to enroll members, commissions, incentive compensation, salaries and benefits, processing costs, actuarial, and legal expenses. Health care entities should evaluate costs associated with acquiring new contracts to determine if these costs meet the requirements for capitalization as an asset under paragraphs 1–3 of FASB ASC 340-40-25 or should be expensed as incurred. In accordance with FASB ASC 340-40-25-1, "an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs." To determine if the costs are recoverable, a health care entity may consider the pricing of the contract and whether the incremental costs could be recovered through direct reimbursement under the contract or recovered through the margin inherent in a contract. If a health care entity determines that its contract acquisition costs are not recoverable, then the health care entity should expense those costs in accordance with FASB ASC 340-40-25-1.

7.7.63 FASB ASC 340-40-25-2 indicates that “[t]he incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract that the entity would not have incurred had the contract not been obtained...” Identifying if costs are incremental to the contract likely will require analysis of how the various contracts are obtained, which costs are directly associated with the contracts, and if those costs would have been incurred regardless of the outcome of securing the contract. Examples of costs that may qualify to be capitalized as incremental costs include the following:

a.     Sales commissions

b.     Contingent legal fees (fees that are payable only if there is a successful negotiation of a contract)

c.     Other costs incurred only as a result of obtaining the contract

7.7.64 Paragraphs 2–4 of FASB ASC 340-40-55 provide an example of incremental costs of obtaining a contract and note that sales commissions to employees may be considered incremental. CCRCs often enter into sales commission arrangements related to obtaining new entrance fee contracts. In accordance with FASB ASC 340-40-25-3, sales commissions that are directly related to sales achieved during a time period typically represent incremental costs that would require capitalization. FinREC believes some bonuses and other compensation that is based on other quantitative or qualitative metrics (that is, profitability or performance evaluations not tied to the sales of contracts) typically do not meet the criteria for capitalization because they are not directly related to obtaining a contract.⁴

7.7.65 As FASB ASC 340-40-25-3 describes, those "costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained." For example, travel costs to deliver a proposal, external legal fees to perform due diligence, and salaries related to personnel working on a specific contract proposal would likely have been incurred regardless of whether the contract was obtained and, therefore, would not be considered incremental. As discussed in FASB ASC 340-40-25-8a, general and administrative costs are expensed as incurred unless they are explicitly charged to the contract, in which case, the entity would apply FASB ASC 340-40-25-7.

7.7.66 Historically, CCRCs were allowed to capitalize the initial costs of acquiring a contract under FASB ASC 954-340-25. These costs included the costs of acquiring initial continuing care contracts that had the following characteristics:

a.     Costs incurred to originate a contract.

b.     Costs resulting from and that are essential to the acquisition of the initial contract.

c.     The costs are incurred through the date of substantial occupancy but no later than one year from the date of completion construction.

These costs typically reflected costs of processing the contract, such as evaluating the prospective resident’s financial condition, negotiating contract terms, processing contract documents, and marketing salaries to solicit potential initial residents. However, FASB ASC 954-340-25 has been superseded and, therefore, costs of acquiring a contract need to be evaluated under FASB ASC 340-40-25, as noted in paragraph 7.7.62. In most cases, the salary costs and other costs to originate a contract are paid even if the contract is ultimately not executed. FinREC believes that generally the initial costs incurred to market a facility and process the contract are not incremental to obtaining a specific contract and, therefore, should be expensed as incurred.⁵

7.7.67 At the date of initial application, an organization should evaluate if there are any unamortized costs that no longer qualify for capitalization under FASB ASC 340-40. FASB ASC 606-10-65-1 allows entities two options when transitioning to the guidance under FASB ASC 606. The first option is full retrospective application of FASB ASC 606, which requires reflecting the cumulative effect of the change on the opening equity balance of the earliest period presented and adjusting the financial statements for each prior period presented to reflect the effect of applying FASB ASC 606, as described in FASB ASC 606-10-65-1d1. As an alternative, under FASB ASC 606-10-65-1d2, entities may apply the amendments to FASB ASC 606 retrospectively with the cumulative effect recognized at the date of initial application. Under this transition method, an entity may elect to apply this guidance retrospectively either to all contracts at the date of initial application or only to contracts that are not completed at the date of initial application. Under either method, the unamortized costs that no longer qualify for capitalization would be derecognized through a cumulative effect adjustment, either as of the beginning of the earliest period presented under FASB ASC 606-10-65-1d1 or as of the beginning of the period of adoption under FASB ASC 606-10-65-1d2.

7.7.68 As a practical expedient, FASB ASC 340-40-25-4 notes that an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For example, in a prepaid health contract situation, an organization may have incremental costs of a contract, but the contract period is often for a one-year period, in which case, the practical expedient could be applied. In determining the contract period, an organization should evaluate the time period that services are provided to the customer and not the overall relationship with the payor, who is acting as a third party to pay for some or all of the services on the patient’s behalf. For further discussion of the payor relationship, refer to paragraph 7.6.46 of the section, "Third-Party Settlement Estimates." If an organization incurs additional incremental costs of obtaining a contract for a subsequent renewal period, those costs should be evaluated for capitalization under FASB ASC 340-40 and the practical expedient under FASB ASC 340-40-25-4. (See further discussion in paragraph 7.7.70 related to the amortization period for capitalized costs to obtain the initial contract.) A CCRC entrance fee contract typically spans the life of the resident which, in most cases, is greater than a year, and so the practical expedient would not apply.

7.7.69 In accordance with FASB ASC 340-40-25-6 for costs to fulfill a contract, a health care entity should first determine if the cost is within the scope of other FASB ASC guidance (such as FASB ASC 330, Inventory; FASB ASC 360, Property, Plant, and Equipment; and FASB 720-35 on advertising costs). In order for a health care entity to capitalize costs of fulfilling a contract that is not within the scope of existing FASB ASC cost guidance, all the criteria in FASB ASC 340-40-25-5 are required to be met, including the criterion in FASB ASC 340-40-25-5b that "the costs generate or enhance resources of the entity that will be used by the entity in satisfying (or in continuing to satisfy) performance obligations in the future." For example, most costs of labor and supplies do not solely generate or enhance resources to be used to satisfy performance obligations in the future.

7.7.70 As described in FASB ASC 340-40-35-1, an asset recognized either for incremental costs of obtaining a contract with a customer or for costs incurred to fulfill a contract "shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates" (periods of expected contract renewals would be included, unless a commission paid on a contract renewal is commensurate with the commission paid on the initial contract).⁶ In addition, FASB ASC 340-40-35-2 states that, "an entity shall update the amortization to reflect a significant change in the entity’s expected timing of transfer to the customer of the goods or services to which the asset relates." FASB ASC 250-10 requires such a change to be accounted for as a change in accounting estimate. Such a change could be indicative of impairment of the related assets, and entities should evaluate the facts and circumstances to determine the appropriate conclusions.

7.7.71 In accordance with FASB ASC 340-40-35-1, the asset recognized for contract acquisition costs capitalized in accordance with FASB ASC 340-40-25-1 related to a CCRC entrance fee contract should be amortized on a systematic basis that is consistent with the transfer to the customer of the services or goods to which the asset relates. As discussed in paragraphs 7.6.149–7.6.152 of the section, "Application of FASB ASC 606 to Continuing Care Retirement Community Contracts," there are various appropriate methods for a CCRC to measure progress that are generally categorized as output methods and input methods. For a CCRC entrance fee contract, FinREC believes that the amortization of related contract acquisition costs capitalized in accordance with FASB ASC 340-40-25-1 should mirror the pattern of transfer of the goods and services.

7.7.72 For other contracts that have multiple performance obligations, it is important that health care entities apply judgment to determine how to amortize the asset consistent with the pattern of performance for the underlying performance obligation or obligations. For example, an organization could allocate the asset to the individual performance obligations on a relative basis and amortize each respective portion of the asset based on the pattern of the performance for that individual underlying performance obligation. An alternative method would be to amortize the single asset using one measure of performance considering all the performance obligations in the contract.⁷

7.7.73 FASB ASC 340-40-35-3 describes that "[a]n entity shall recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized..." for incremental costs of obtaining a contract with a customer or for costs incurred to fulfill a contract exceeds:

a.     The amount of consideration that the entity expects to receive in the future and that the entity has received but has not recognized as revenue, in exchange for the goods or services to which the asset relates ("the consideration"), less

b.     The costs that relate directly to providing those goods or services and that have not been recognized as expenses (see paragraphs 340-40-25-2 and 340-40-25-7).