Presentation on theme: "Accounting and Auditing Update"— Presentation transcript:
1Accounting and Auditing Update west virginia chapterAccounting and Auditing UpdateWinter Education ConferenceJanuary 23, 2014
2Presenter: Norman Mosrie, CPA, CHFP, FHFMA Partner, Dixon Hughes Goodman LLP, Charleston, WV A certified healthcare financial professional, Norman serves as Partner-in-Charge of Assurance for the West Virginia region. With his involvement with the American Institute of Certified Public Accountants Healthcare Expert Panel and FASB not-for-profit financial statement project resource group, Norman is actively involved in accounting, financial reporting, and other matters impacting the healthcare and not-for-profit industries. His significant healthcare experience includes financial reporting, acquisition due diligence, corporate compliance, and third party reimbursement for various types of healthcare entities including academic medical centers, community hospitals, nursing homes, home health agencies, physician practices, and research organizations. Norman has developed and led healthcare training programs at the local, area, and national levels. He is a member of various professional and civic organizations that includes being a past Council Member and Healthcare Conference Committee Chairman with the AICPA, Special Review Committee Member with the GFOA, and Past Board Member of the HFMA. Norman graduated summa cum laude from Marshall University where he earned his BBA in Accounting. He is actively involved with his alma mater, including currently serving as the College of Business Advisory Board President.707 Virginia Street, EastSuite 1700Charleston, WV 25301direct
3Discuss recent accounting and auditing standards as well as emerging issues and the expected impact on health care entities
4Health Care Accounting & Auditing Update ASU : “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities”ASU : “Continuing Care Retirement Communities-Refundable Advance Fees”ASU : “Liabilities: Obligation Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”ASU : “Services Received from Personnel of an Affiliate”FASB Project: Discontinued OperationsAccounting For Premier TransactionAccounting Developments Impacting Health CareNew Revenue Recognition StandardsImpact of New Revenue Recognition StandardsImpact of Other Accounting ProposalsCommon Practice Issues – RAC AuditsAccounting for EHR Incentive PaymentsAccounting for ICD-10 Costs
5ASU : “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” Recap and Implementation Matters
6ASU : BackgroundProvided relief for entities that “treat first” and then assess a patient’s ability to payRequested by hospitals with unusually high bad debt expense associated with indigent patients that do not qualify for charity careBad debt expense was significantly distorting operating metricsMisapplication noted in practice by HCOs that assess ability prior to providing servicesStay tuned - FASB revenue recognition project proposed rules would change presentationIssue: how to record revenue and bad debts for a health care entity that doesn’t assess a patient’s ability to pay prior to providing services. This might occur, for example, when a hospital provides emergency care to uninsured patients. In those situations, the hospital’s “due diligence” on what sources of payment might be available typically takes place after the fact.Current guidance allows health care entities to record revenue at an amount that reflects the full price for the care provided to uninsured patients.However, the full or even discounted amount from these patients is rarely collected, resulting in a “gross-up” of revenue and bad debt expense.EITF reached a final consensus that adjusting the presentation of bad debts would best address the issue until the recognition question could be dealt with by the FASB and IASB’s joint revenue recognition project.The new guidance requires health care entities that are affected by the “gross up” of revenue and bad debts to present bad debt expense directly beneath patient service revenue on the face of the income statement as a component of net patient service revenue.Effective in 2012 for public companies, with nonpublic companies receiving an additional one-year deferral.
7ASU : HighlightsPrimarily applies to acute-care hospitals that operate emergency roomsASU focuses on primary payor status (i.e., uninsured indigent patients that do not qualify for charity), not deductibles & coinsuranceIf HCO has ability to “gate keep” on which patients it accepts for treatment, ASU likely wouldn’t apply“Significance” language was included to eliminate any notion of a “trip wire” (i.e., if you have a single uninsured indigent patient, then you are in the scope and must apply the guidance)
8Facts Question Response AICPA TPA : “Application of ASU in Consolidated Financial Statements”FactsMulti-entity HCO issues both consolidated and subsidiary financial statementsQuestionShould assessments of “significance” performed for individual subsidiary statements be retained in consolidation? Or should a separate assessment of “significance” be made at the consolidated financial reporting entity level?ResponseDetermination is an accounting policy that should be disclosed and consistently applied from period to period
9Using Policy Election A Using Policy Election B AICPA TPA : “Application of ASU in Consolidated Financial Statements”Stand-alone FSConsolidated FSNursing homeAcute-care hospitalUsing Policy Election AUsing Policy Election BNet Patient Service Revenue$ ,000$ ,000$ 660,000$ ,000Less: Provision for bad debts(180,000)(260,000)NPSR less provision for bad debts200,000280,000480,000400,000Operating expenses:Specific expenses (listed)(105,000)(145,000)(250,000)Provision for bad debts(80,000)-Total operating expenses(185,000)(330,000)Excess of revenues over expenses$ ,000$ ,000$ ,000$ ,000Retain subsidiary-level assessment in consolidationMake a separate assessment at consolidated level
10ASU 2012-01: “Continuing Care Retirement Communities-Refundable Advance Fees”
11ASU 2012-01: Implications for CCRCs What’s changing:Treating a refundable CCRC entrance fee as deferred revenue that is amortized into income over the life of the facility would be appropriate only ifResident agreement specifies that amount of refund payable is limited to the proceeds of reoccupancy of the unitEntity’s policy/practice is to comply with the refund limitationOtherwise, refundable entrance fee should be reported as a refund liabilityThe ASU proposes treating the refundable entrance fee as deferred revenue which is amortized into income over the facility’s life only if:The resident agreement specifies that the amount of refund payable is limited to the proceeds of reoccupancy of the unit andThe entity’s practice is to follow the refund limitationsIf these practices are not in place the entity should report the refund as a liability.
12CCRC Technical Corrections ASU BackgroundSOP 90-8 was the original guidance for refundable feesAmortization of fees refundable through reoccupancy was intended to be a narrow exception“In effect, the CCRC acts as if it were an agent for present and future residents” (“risk” is with the resident)Diversity in practice developed due to misunderstanding of the intent of the original SOPContract terms changed as a result of changing economic conditions and marketing approaches“Dangling Debit” Issue
13ASU 2012-01: Refundable Advance Fees Requires specific language in contract limiting refunds to proceeds of reoccupancyReported as cumulative effect adjustment to beginning net assets or retained earnings of the earliest year presentedHOWEVER: FASB Revenue Recognition Exposure DraftExpected to allow NO amortization of refundable fees
14ASU 2012-01: Refundable Advance Fees Effective DatesFor public entities, fiscal periods beginning after December 15, 2012If your organization has publicly traded debt or conduit debt, you would be considered a public entity for reporting purposes(For example, tax exempt bonds issued through an issuing authority would be conduit debt)For non-public entities, fiscal periods beginning after December 15, 2013Early adoption permittedIf not early adopted, disclosure consideration if materialFor many, will likely need to do the work to calculate whether material or not for disclosure purposes
15ASU 2012-01: Refundable Advance Fees: FSO Calculation Current guidance requires deferred revenue from entrance fees to be off-set against the Future Service Obligation (FSO)No new specific guidance has been issuedAdoption of ASU may result in recording FSOShould record as component of cumulative effect adjustmentImpact needs to be consideredConsult with Actuaries and Auditors
16ASU : “Liabilities: Obligation Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”
17ASU 2013-04: Joint & Several Liability Effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public companies and for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter for nonpublic entitiesGuidance should be applied retrospectively for all periods presentedApplies to separately issued financial statements of entities that have joint & several liability for a fixed obligation (e.g., debt)Addresses question of reporting debt of Obligated Group
18ASU 2013-04: Joint & Several Liability Obligations should be measured as the sum of the following:The amount the reporting entity agreed to pay under the arrangement with its co-obligorsAny additional amount the reporting entity expects to pay on behalf of the co-obligorsDisclosures should include:The nature of the arrangement and relationship with other co-obligorsTotal amount outstanding under the arrangementThe reporting entities recorded liability and any receivable recognizedThe nature of any recourse provisions with other entities
19ASU 2013-06: “Services Received from Personnel of an Affiliate”
20Main ProvisionsRecipient NFP entity recognizes services received from personnel of an affiliate that directly benefits the recipient NFP entityServices measured at the cost recognized by the affiliate for the personnel providing servicesIf it will significantly overstate or understate the value of the service received, the recipient NFP entity may elect to recognize that services received at eitherThe cost recognized by the affiliate for the personnel providing that service, orThe fair value of that serviceDoes not apply when the affiliate charges at least the approximate amount of direct personnel costs or the approximate fair value of services provided
21Main Provisions: Presentation & Disclosure Recipient NFP Health Care Entities should report as an equity transfer the increase in net assets associated with services receivedOther recipient NFP entities:Update does not prescribe presentation guidance other than prohibits reporting as a contra-expense or contra-assetCorresponding decrease in net assets or creation or enhancement of an asset resulting from the use of services received from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP shall be presented similar to how other such expenses or assets are presentedSubtopic , Related Party Disclosures, applies to services received from personnel of an affiliate
22Effective DateProspectively for fiscal years beginning after June 15, 2014Early adoption is permittedUse a modified retrospective approach under which all prior periods presented upon the date of adoption should be adjusted, but no adjustment should be made to the beginning balance of net assets of the earliest period presented
23Initial Measurement Cost varies from entity to entity Cost should include direct personnel costs incurredCompensationPayroll-related fringe benefits
25Definition of “Discontinued Operation” Current GAAPProposed revised GAAPQualifying thresholdComponent of an entity that comprise operations and cash flows that can be clearly distinguished“Component” could range from an asset group to a reportable segmentComponent that has been disposed of (or is classified as held for sale) thatrepresents a separate major line of business/geographic area of operations oris part of a single coordinated disposal plan oris an acquiree that meets “held for sale” criteria upon acquisitionAdditional requirementsSignificant continuing involvement not permittedOperations and cash flows that have not been eliminated from ongoing operations - not disc opsNot applicableThis slide just shows the differences between current GAAP and the proposed revised GAAP. The proposed revised GAAP basically mirrors IFRS 5.The proposal is expected to raise the threshold for a disposition to qualify as a discontinued operation. Again, the board is looking to IFRS 5, as the basis for the definition of a discontinued operation. The revised definition of a discontinued operation is a component that has either been disposed of, or is classified as held for sale, and:represents a separate major line of business or major geographical area of operations,is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, oris a business that meets the criteria for classification as held for sale upon acquisition.This differs from current GAAP which is focused more so on a component that comprises identifiable operations and cash flows. The other key difference is that the concept of assessing continuing involvement and continuing cash flows in determining whether a disposal qualifies as a discontinued operation is expected to be eliminated. Although such information will no longer be utilized in the determination of discontinued operations, it will be detailed in the required footnote disclosures.In addition, the proposal is expected to require expanded disclosures for disposals of components, whether or not the components qualify as discontinued operations.
26Illustration #1 No Perhaps Current GAAP Proposed GAAP Assume ABC Health System operates a nursing home. ABC agrees to sell the nursing home in a transaction that will close subsequent to year-end. After the sale, ABC will continue to be involved in managing some of the nursing home’s administrative functionsMay ABC present the nursing home as a discontinued operation in its current year financial statements?Current GAAPNo“Significant continuing involvement” precludes discontinued operations treatmentProposed GAAPPerhapsAssuming the following criteria are met:Major line of business/geographical areaSingle coordinated plan to disposeHeld for saleThe proposal is expected to raise the threshold for a disposition to qualify as a discontinued operation. The revised definition of a discontinued operation is acomponent that has either been disposed of, or is classified as held for sale, and:represents a separate major line of business or major geographical area of operations,is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, oris a business that meets the criteria for classification as held for sale upon acquisition.The proposal will no longer preclude presentation as a discontinued operation if (a) there are operations and cash flows that have not been eliminated from ongoing operations or(b) there is significant continuing involvement with the component after the disposal transaction.
27Illustration #2Same facts, but assume ABC operated five nursing homes and was planning to sell only oneMay ABC present the sold nursing home as a discontinued operation?Current GAAPNo“Significant continuing involvement” precludes discontinued operations treatmentProposed GAAPProbably notWould likely fail the “major line of business” criterionOne entity out of five may not be considered “major”Example with major line of business
28Discontinued Operations: Proposed Disclosures For individually material components classified as discontinued operationsReconciliation of component’s major income and expense items to after-tax income or loss from discontinued operations reported on face of income statementReconciliation of component’s major classes of assets and liabilities to amounts presented on the face of balance sheetDisclosure of cash flows by categoryFor continuing ownership interest post-disposalEntity’s ownership interest before and after disposal transactionIncome/loss from entity’s ongoing noncontrolling interest and the line item in which it is presented
29Discontinued Operations: Proposed Disclosures Individually material components NOT classified as discontinued opsPre-tax profit of loss attributable to the disposed componentProfit or loss attributable to the parent (if noncontrolling interest)Reconciliation of component’s major classes of assets and liabilities classified as “held for sale” to amounts presented on the face of the balance sheetBecause the proposal raises the reporting threshold, the board decided to require additional disclosures about disposals of individually material components that are not classified as discontinued operations.Bridge the gap.As stated earlier, the revised ED is expected to be released this month with a 150 day comment period.
31Accounting for Premier Transaction Premier is a supplier of surgical and medical supplies to healthcare providers and was owned by approximately 181 U.S. hospitals, health systems and other health-care organizations.On August 23, 2013, Premier filed a registration statement with the SEC for an initial public offering of its common stock.On September 25, 2013, the Pricing Committee for Premier approved the final terms of the initial public offering and the newly issued Class A common shares of Premier, Inc. began trading on September 26, 2013.
32Accounting for Premier Transaction The public offering will change the investment structure for the holdings of its ownersPrior to the restructuring, the owners held equity ownership in two legal entities: a services company and an operating companyAs part of the transaction, the owners exchanged their ownership interest in these two entities for class B shares in newly formed Premier Inc (which also provides class B unit ownership in a newly established LLP that is wholly owned by Premier, Inc)The class B shares become convertible, at the option of the holder, into cash or class A shares, in various tranches, over a period of 7 yearsIn connection with the reorganization, Premier entered into a tax receivable agreement with the member owners to pay certain tax receivable benefits over a 15 year period.
33Accounting for Premier Transaction Accounting issue considerations:Does the exchange of equity ownership in the old entities for class B shares in Premier Inc. require any new accounting for the holders of these shares?As the class B shares become convertible into class A shares, is there any accounting prior to the conversion options being exercised (i.e. equity method)?What is the amount of gain that should be recognized for the shares that were sold in October 2013?Should the transaction be evaluated under the nonmonetary exchange guidance in ASC 845, the vendor relationship guidance in ASC 605 or some other guidance?Should a value be assigned to the tax receivable agreement?
34Accounting for Premier Transaction Due to the focused attention regarding the accounting treatment for this transaction, it is suggested that entities consult with their auditors regarding the appropriateness of the accounting treatment based on their own facts and circumstancesStay tuned for accounting guidance on this matter
36New Revenue Recognition Standards Background - The FASB and IASB are in the final stages of issuing revenue recognition that will supersede all existing guidanceThe core principles of revenue recognition are:Identify the contractIdentify separate performance obligationsDetermine the transaction priceAllocate the transaction price to the separate performance obligationsRecognize revenue when (or as) the entity satisfies a performance obligation
37Impact of New Revenue Recognition Standards Revenue recognition for indigent and self-pay patientsThe exposure draft was not clear whether or how health care entities should recognize revenue associated with indigent and self-pay patientsRecently, the boards tentatively decided to include a “collectability” threshold for recognitionContracts with Medicare/Medicaid:Can use either “most likely amount” or “expected value” in estimating variable consideration, whichever is best predictor
38Impact of New Revenue Recognition Standards Revenue transactions involving multiple contractual relationshipsAs many as four different parties may be associated with a revenue transaction involving a hospitalUnder the proposal, the “customer” is the patientThird-party payor makes payment on the patient’s behalf; it is not a separate “contract with a customer”
39Impact of New Revenue Recognition Standards Scope of prepaid health service contractsCurrently, these contracts are within the scope of ASC 954 – Health Care EntitiesUncertainty exists with respect to whether these contracts are within the scope of the new exposure draft related to Insurance contractsPrepaid health services contracts – contract acquisition costsUnder ASC 954 acquisition costs related to prepaid health services contracts are expensedUnder the new exposure draft incremental costs are capitalized if the entity expects to recover those costsAs a practical expedient, these costs can be expensed if the amortization period is less than one year
40Impact of Other Accounting Proposals Not-for-profit financial reporting project –Operating indicatorShould there be a defined operating indicator for non-health care NPOs?If so, what are the implications of that decision on HCO “performance” indicator?FASB has tentatively decided that net assets should be classified as either those with donor-imposed restrictions or those without donor-imposed restrictionsi.e., eliminate distinction between temporary and permanent restrictions on face of financial statements
42Common Practice Issues: RAC Audits Under the Tax Relief and Health Care Act of 2006, there is a permanent nationwide Recovery Audit Contractor (RAC) programThe objective of RAC audits is to detect and recoup improper payments in the Medicare fee for service programRAC audits have resulted in significant payment reductionsHowever, audit activities in many states are still slow
43Common Practice Issues: RAC Audits Question: Is it appropriate for an HCO to record a revenue reserve at the date the services are rendered for Medicare revenue that it believes CMS will “take back” as a result of future adjustments and/or findings?HCOs should make a reasonable estimate of the amounts it expects to receive from third-party payers and such estimates shall be recorded in the period that the related services are renderedASC states “Estimates of contractual adjustments, other adjustments, and the allowance for uncollectibles shall be reported in the period during which the services are provided even though the actual amounts may become known at a later date
44Common Practice Issues: RAC Audits There is significant diversity in practice on how health care entities are estimating and recording recoveries for claims under appealWhen an entity receives notification from CMS of the payment reduction it means that the revenue criteria has not been met – so the company must evaluate whether this isa change in estimate, ora correction of a prior period error
45Common Practice Issues: RAC Audits Error versus Changes to EstimatesDue to the complexities involved in billing medical services, such conclusions will likely require a significant amount of judgmentThe audit findings should be carefully reviewed and management should assess whether the findings were:Errors: Mathematical mistakes, systemic input errors, oversight or misuse of available information, misapplication of known contract terms, etc.Changes in estimates: Changes due to variances in the interpretations of regulations and contracts, clarification provided through new information, and experience provided for improved judgment, etc.Management should also review its accounting and reporting policies and processes to determine if such policies and processes did consider, or should have considered, the need for an allowance at the date of service for such audit findings
46Common Practice Issues: RAC Audits If this is considered to be a change in estimate thenan accrual for RAC adjustment should be recordedthis is generally a contra revenue adjustment along with the set up of a corresponding liabilityThere is a diversity of practice on when to record a receivable for recoveries on appealed claimsThere are two alternate views on this topic
47Common Practice Issues: RAC Audits View 1:This view is based on ASC , ContingenciesSince it not certain that the provider’s appeal will be successful, no receivable or related gain should be recorded until the appeals process is complete
48Common Practice Issues: RAC Audits View 2:This view is based on SOP 00-1,“Auditing Health Care Third-Party Revenues and Related Receivables,” which states that “The fact that information related to the effects of future program audits, administrative reviews, regulatory investigations, or other actions does not exist does not lead to a conclusion that the evidence supporting management's assertions is not sufficient to support management's estimates”Under this view, estimating recoveries for the successful appeal of denied RAC claims would be appropriate
49Common Practice Issues: RAC Audits However, this estimate should be based on provider specific facts and circumstances and the success rate of the organization during prior appeals process related to similar claimsWhile industry data can be used to corroborate company estimates, many believe that can’t be the sole support for recording claims recoveriesSome Firm’s have taken the position that View 1 is the only acceptable response in absence of provider specific data as described above so need to discuss with your auditor early in the estimation process
50Common Practice Issues: RAC Audits If an entity suspects that it may have billed for services that are potentially not reimbursable then they should:implement changes to billing practices and/or clinical operations on a prospective basis andevaluate whether revenue recognition criteria were met related to services previously billed and record adjustments based on whether it was a change in estimate or error correctionIf the entity is concerned about potential RAC adjustments that have not yet been identified they should record estimated contractual adjustments based on specifically identified issues and a general reserve should not be recorded if it is not supported by entity-specific data
51Common Practice Issues: RAC Audits For more information on this topic, please refer to the HFMA white paper at:
52HFMA Issue AnalysisThe issue analysis includes information on the accounting for RAC audit adjustments, as well as an appendix with questions and responses that were used to develop the issue analysisThe issue analysis provides guidance on:When a health care entity receives a notification of a RAC audit adjustmentWhen a health care entity suspects it may have billed for and/or been paid for services that are potentially nonreimbursableWhen a health care entity is concerned about potential RAC adjustments for issues that have not yet been identifiedWhen a health care entity receives notification of a RAC audit adjustment recovery
53Accounting for Electronic Health Record (EHR) Incentive Payments
54Medicare Acute Care EHR Accounting & Reporting: PPS HFMA Issue Analysis Paper December 2011Overview of Accounting Models for acute-care inpatient hospitals that are paid under the inpatient prospective payment system – Two AlternativesContingencyGrantSEC registrants vs. Non-registrantsProvides practical assistance on this issue but is not authoritative
55Medicare Acute Care EHR Accounting & Reporting: PPS Contingency Accounting ModelContingencies must be resolved prior to recognizing revenueCompliance with meaningful use for full reporting period (i.e., any continuous 90 days in FFY in first year and full FFY after that)Discharge information related to discharges in the hospital’s cost report year that begins in EHR reporting periodEHR reporting period is based on Federal fiscal year of October 1 through September 30thConsequently, under this model typically the contingency related to discharge and other final payment calculation data is not met until the last day of the cost report year
56Medicare Acute Care EHR Accounting & Reporting: PPS Contingency Accounting Model (continued)Incentive payment income recorded entirely in period last contingency resolvedCareful consideration should be given to all potential contingencies and entities should support and document how any such contingencies were considered and/or resolvedSEC has informally indicated that registrants should follow this model
57Medicare Acute Care EHR Accounting & Reporting: PPS IAS 20 Grant Accounting Model (1)Grant income is recognizedHospital complies with grant requirementsPayment is reasonably assuredCliff recognitionHospital unable to determine compliance until after EHR reporting period has endedIncome recognized all at once(1) International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance
58Medicare Acute Care EHR Accounting & Reporting: PPS Grant Accounting Model (continued)Estimation recognition“Reasonable assurance” of compliance with minimum number of meaningful use criteria and other grant requirementsIncome recognized ratably over the EHR reporting period once “reasonable assurance is met”If reasonable assurance met during interim point during the reporting period, then a cumulative catch-up adjustment is made, with remaining income recognized ratably over remainder of compliance periodIf reasonable assurance is no longer met, previously recognized income should be reversed and treated as a change in accounting estimate
59Medicare Acute Care EHR Accounting & Reporting: PPS Reasonable assurance is judgmentalHow long has the hospital been operating an EHR system?How far along is the hospital with implementing computer physician order entry (CPOE)?How reliable are the processes and controls in place?Is the hospital doing the bare minimum to qualify for meaningful use (i.e., in Stage 1, hospitals have to comply with 14 core objectives and 5 of 10 menu set objectives)?NOTE: Management should be able to adequately support, through appropriate documentation, the point at which the hospital met or will meet the applicable requirements
60Medicare Acute Care EHR Accounting & Reporting: PPS Use of estimates in income recognitionIncentive payments are based on statutory formulaIf compliance with other requirements is reasonably assured, hospital may estimate inputs (e.g., total discharges, charity charges) to formula to determine income to be recognizedNeed to make estimates should not delay recognition of incomeAs estimated inputs are later replaced by actual inputs, management will revise estimates as necessary and account for as a “change in accounting estimate resulting from new information”, similar to current accounting for third party settlements
61Medicare Acute Care EHR Accounting & Reporting: PPS Statement of operations presentationPrivate and not-for-profit hospitalsOperating or non-operating on a facility basis that complies with existing GAAPRegardless, should be presented separately from patient revenuesGovernmental hospitalsGASB standards identify what should be reported in the non- operating cash flows categoryRevenue associated with operating cash flows (i.e., EHR incentive payments) should be reported as operating revenue (but separate from patient revenues)
62Medicare Acute Care EHR Accounting & Reporting: PPS DisclosuresAccounting policy including financial statement presentation, method of income recognition, and location in statement if not apparent on face of the statementGeneral description of the programBased on best estimates subject to audit by the Federal government or its designee, with changes in estimate recognized in the period knownMaterial changes in prior year estimates impacting current year incomeOverall extent of disclosures impacted by materiality
63Medicaid EHR Incentive Payments: PPS State Medicaid programs may also establish their own EHR meaningful use incentive programs; each state is unique—carefully consider specific state facts and circumstancesConcepts in the HFMA Medicare issues paper may be helpful in determining accounting policyAcute care hospitals may receive EHR incentive payments from both Medicare and Medicaid, if eligible for both programs
64Critical Access Hospitals (CAH): Revenue From Meaningful-use Incentive Payments Because CAHs are otherwise reimbursed on a reasonable cost basis and not pursuant to a prospective payment system (PPS), the incentive payment methodology for CAHs is different than it is for PPS hospitalsIncentive payments are in lieu of amount CAH would have received under reasonable cost principlesIncreased reimbursement (20%)Acceleration of other amountsCAH can expense reasonable costs incurred for purchase of depreciable assets in a single year cost report upon meeting 90 day meaningful use requirement
65CAHs: Revenue From Meaningful-use Incentive Payments A diversity in practice has been observed with respect to how critical access hospitals (CAHs) recognize revenue from meaningful-use incentive paymentsJournal of Accountancy article August 2013 at:
66CAHs: Revenue From Meaningful-use Incentive Payments The following are the different view points related to revenue recognition:Under the first view earnings process is complete in the period when the meaningful use criteria is met and the entire payment is recognized as net patient revenue at that timeUnder the second view defer the payment upon receipt and amortize it into income as net patient revenue during the periods over which the technology is depreciatedUnder the third view treat the incentive payment as a government grant and recognize as deferred income (grant income or grant income and net patient revenue for normal depreciation component) over the useful life of the asset acquired or deduct the payment in calculating the carrying amount of the asset thus recognizing a reduced depreciation expense
67CAH Incentive Payments Medicare payments to CAHs are based on actual reasonable costs incurred associated with qualified EHR technology (i.e. cost reimbursed)Incentive payments are in lieu of amount CAH would have received under reasonable cost principlesIncreased reimbursement (20%)Acceleration of other amountsCAH can expense reasonable costs incurred for purchase of depreciable assets in a single year cost report upon meeting 90 day meaningful use requirement
68CAH EHR AccountingEntities should consider your particular facts and circumstancesASC provides general guidance regarding disclosure related to accounting policies including that entities should disclose any principles involving “a selection from existing acceptable alternatives”
70Accounting for System Upgrades – ICD-10 Implementation Preliminary stageApplication development stagePost-implementation stageASC – Internal Use Software CostsICD-10 changes duringOnce software is placed in service [With existing software system], it can be difficult to determine whether subsequent changes should be capitalized or expensed.In evaluating whether or not to capitalize the costs assigned to upgrades, only upgrades or enhancements that can be demonstrated to have "additional functionality beyond the original software" would be capitalized. If upgrades or enhancements to not, they are expensed as maintenance.Increased functionality = upgradeIncreased efficiency = maintenanceCosts of training useNew system installation
71ICD-10 System UpgradesSystem upgrade = modification of existing systemGenerally, costs of modifying existing systems are expensedOnly certain costs of changes that result in “additional functionality” can be capitalizedAdditional functionality: modifications that enable the software to perform tasks that it was previously incapable of performingSpecific facts and circumstances should be considered in evaluating whether any modifications result in additional functionalityEach entity’s project is unique
72Helpful Chart from ASC 720-45-55 Legend:a = Expense as incurred per ASCb = Expense as incurred per ASCc = Capitalize per ASC
73Assessing “additional functionality”: Some Factors to Consider Pointer towards “additional functionality”Extent and types of changes made to software designMore changes/more complicated changesExtent of additional coding required, additional software processes developedMore extensive coding required; more software processes addedAbility to use additional coding capabilities beyond submitting claimsSystem changes that harness the more detailed billing code data for other purposesHow changes are billed by vendorSeparately billedPast history of system upgradesSignificant time since last upgrade; history of modifications that were capitalizedComplexity of interfaces between billing system and downstream systems More/higher complex interfaces will involve more significant changesProfessional judgment should be applied in evaluating preponderance of evidence provided by these and other factors.
74ICD-10 System Upgrades: Key Takeaways Applicable guidanceASC (Internal Use Software Costs)ASC (Business Project Reengineering)Much of the cost will likely be expensedSome costs associated with “upgrades/ enhancements” may be capitalizableBut only applies to certain costs incurred during application development stageMust enable system to perform functions it previously was not capable of performing (“additional functionality”)“Additional functionality” is assessed based on analysis of each entity’s facts and circumstancesHow does the entity plan to utilize the additional information?EP issued a TPA on these matters in June 2012