United States

Potential effects of ASC 606 on health care entities


In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). ASC 606 provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (GAAP). ASC 606 will not only affect financial statement presentation and disclosure for nonprofit health care organizations, it may also affect reporting in Federal Form 990 – Schedule H (Schedule H), Medicare and Medicaid cost reports, community benefit reporting and state attorney general filings.

Many health care providers, especially nonprofit providers, report patient service revenue net of a provision for bad debts. Most of this bad debt is associated with amounts due from uninsured patients and coinsurance and deductibles from insured patients (collectively referred to as “self-pay” balances). Many nonprofit providers include their provision for bad debt on their Schedule H, community benefit reporting and their state attorney general filings (if applicable).     

ASC 606 has introduced a new term: implicit price concession. The America Institute of Certified Public Accountants (AICPA) Health Care Entities Revenue Recognition Task Force’s issue paper #8-1 (IP #8-1), as published in the AICPA Revenue Recognition Audit and Accounting Guide, Chapter 7, discusses the application of ASC 606 to the identification of the contract or contracts with a customer and determining the transaction price for those patients with self-pay balances. IP #8-1 also provides guidance in determining whether a provider has granted implicit price concessions.

IP #8-1 acknowledges that certain health care providers are required by law or regulation to treat emergency conditions (an example would be a patient presenting through a hospital’s emergency department), prior to assessing the patient’s ability to pay. Additionally, IP #8-1 also acknowledges that many nonprofit health care entities that are tax exempt under section 501(c)(3) of the Internal Revenue Code generally have a mission or purpose to treat patients without regard to their ability to pay as part of their tax-exempt purpose.

IP #8-1 discusses how a health care provider will determine both timing and amount of revenue to be recognized. A significant change in the process of revenue recognition described in IP #8-1, as compared to current practice, will be to effectively change the characterization of much of what has historically been reported as bad debt associated with self-pay balances. If the difference between standard charges and the expected amount to be collected is determined by providers to be either an explicit or implicit price concession, that amount would be reported as a direct reduction of patient service revenue. Bad debt, which is reported as an operating expense under ASC 606, would only apply when certain situations occur.

As a result of adopting ASC 606, many health care providers should expect to see a significant reduction in what is currently reported as bad debt, with a corresponding reduction in net patient service revenue related to explicit and implicit price concessions. ASC 606 is effective for public business entities and conduit bond obligors for reporting periods beginning after Dec. 15, 2017, and for all other entities for annual periods beginning after Dec. 15, 2018. 

Our perspective

Financial statements:
Disclosure of the amount of implicit price concessions is not required under ASC 606. However, health care entities should consider continuing to report their implicit price concessions if their intention is to continue to report these amounts within their community benefit reporting and Form 990. 

Community benefit and IRS reporting:
Health care entities should consider discussing with their national, state and local professional and trade associations the change in guidance and ensure that both the state attorney general and IRS will also consider the amount of the health care entity’s implicit price concessions as analogous to what was previously referred to as bad debt. While the provisions of ASC 606 will change the accounting treatment and presentation, the economic substance of the underlying transactions has not changed.

Medicare cost reporting:
The change in guidance will have to be considered for Medicare cost reporting purposes. The Medicare cost report currently includes bad debt, and also provides for limited additional hospital reimbursement for bad debt originating from Medicare patients. Hospitals and their cost report preparers should review their bad debt policies and determine if changes are needed when ASC 606 is implemented due to the introduction of the implicit price concession concept, although the external financial reporting for much of what was previously reported as bad debt has changed, the economic substance of the underlying transaction—deductible and coinsurance amounts written off as uncollectible—has not changed.

The implementation of ASC 606 has the potential to create confusion and uncertainty for health care executives and board members. Health care entities should proactively educate their executives and board members on the coming changes and expected impacts on the health care entity’s financial reporting.


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