Navigating the New Healthcare Revenue Recognition Model

After years of fanfare, controversy, debate, and deferrals, the effective date of the new standard for revenue recognition is finally upon us. The new standard is effective for public entities (including not-for- profit entities with publicly-traded conduit debt) for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period.

The new standard is found in Accounting Standards Codification (ASC) Topic 606 Revenue from Contracts with Customers and represents a complete overhaul of the existing guidance for revenue recognition. We advise healthcare providers and related organizations to take immediate action to 1) study the standard, 2) evaluate its potential impact, and 3) create a playbook for successful implementation at your organization.

Even with the effective date looming, many issues are still being debated about how to apply the standard to healthcare entities. This is largely due to the unique nature of the industry - unlike a typical commercial enterprise, the vast majority of fees for healthcare services are paid by third parties such as insurance companies, managed care companies, or government programs like Medicare and Medicaid. The amounts paid are typically not the ‘rack rate’ gross charge for the service, but rather they vary based on payer, site of care, and multiple other factors, and are often subject to regulatory review and retroactive adjustment.

Further, the transformational challenges being confronted by healthcare providers with respect to the continuing transition away from traditional fee-for-service reimbursement and toward alternative payment models, revenue sharing, and other forms of risk-based contracts create further complexities in implementing the new revenue recognition standard.

Various standard setting organizations continue to deliberate these issues and publish implementation guidance for specific industries, including healthcare entities. However, even with the ongoing dialogue, there are many things healthcare providers and related organizations can - and must - do to prepare themselves now. The first step is understanding the five-part framework of the standard.