Original Publish Date: April 21, 2020
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), could significantly change the timing of supplemental revenue recognition under the California Hospital Quality Assurance Fee Program (CA QAF) for California private hospitals.
Below is an overview of legacy and current legislation, key implications, and next steps for your hospital.
Key Changes
The Healthcare Financial Management Association (HFMA) released an issue analysis last fall, providing additional clarity into accounting and reporting for provider tax programs and similar arrangements under ASC Topic 606.
Topic 606 provides a single model for evaluating revenue recognition. Prior to Topic 606, FASB’s revenue recognition guidance was industry-centric and inconsistent across industries. Legacy health care industry revenue recognition guidance was codified in ASC Topic 954, Health Care Entities.
Topic 954 Requirements
This guidance, along with nonauthoritative guidance—such as technical questions and answers from the American Institute of Certified Public Accountants (AICPA)—directed providers toward a legal entitlement model of revenue recognition as it relates to provider-tax programs like the CA QAF.
Federal provider tax program regulations and state legislation required the Centers for Medicare and Medicaid Services’ (CMS) approval of three separate components for provider tax programs to be operative and eligible for federal matching funds:
Due to this requirement, provider accounting policies historically required CMS program and managed care contract approval before revenue could be recognized, regardless of whether or not the program was likely to be approved.
Topic 606 Requirements
Topic 606 introduces a different approach that is more flexible in terms of timing and the amount of revenue recognized for supplemental payments under the CA QAF.
Supplemental payments from a provider tax program are considered variable consideration for providing patient services to Medicaid patients. According to the guidance, an entity should include variable consideration in the transaction price if it isn’t constrained and it’s probable that a significant reversal in the amount of cumulative revenue recognized won’t occur.
Constraint Considerations
There are a few factors to consider when evaluating constraints on variable consideration:
Because the CA QAF has been operating under the same or similar model for a decade and is in its sixth iteration, the state and its hospital providers have significant experience with the program and approvals of program components with CMS. The prevalence of provider tax programs throughout the United States is also a factor to consider because it relates to experience with similar types of contracts.
Consequently, using the guidance under Topic 606, a provider might determine that CMS’ official approval of the state’s waiver and plan amendment application aren’t constraints on variable consideration. In this scenario, the fee-for-service component of the 2019–2021 program, for example, may be recognized on an accrual basis at the start of that iteration of the QAF—July 1, 2019—even if the CMS’ program approval wasn’t received until March 2020.
Managed Care Contract Amendments
The state has a consistent, if delayed, history of approving managed care contract amendments from CMS throughout the tenure of the QAF program. Historically, this would be an important, predominant factor when evaluating constraints to recognition of the managed care component of variable consideration. However, relatively recent regulatory changes to managed care payments in the provider tax program may impact that evaluation for the current program.
Beginning July 1, 2017, federal rules now require a directed payment reimbursement methodology for managed care supplemental payments. This methodology is based on current utilization in addition to the pass-through payment reimbursement methodology similar to previous program iterations.
CMS Response
The state has approved preprints of directed payment cycles under the CA QAF, which may indicate that CMS doesn’t have concerns about the structure of the provider tax program. However, CMS has yet to approve contract amendments for any directed payment cycle under the CA QAF.
Consequently, historical experience may not be a positive factor when evaluating existence of a constraint to recognition of variable consideration for the managed care component of the CA QAF beginning July 1, 2017.
Lack of contract approval from CMS may lead to a different conclusion for fee-for-service and managed care components regarding constraints to variable consideration. Accrual of estimated managed care supplemental revenue under one or both reimbursement methodologies prior to CMS contract approval may not be appropriate until the state has more experience with CMS contract approval under the directed payment methodology.
COVID-19 Implications
It isn’t clear if the COVID-19 pandemic is a factor in the likelihood of altering the CA QAF approval process. Providers should review all available information, including draft models received and how they compare to actual experiences, when evaluating appropriate recognition treatment.
Who’s Impacted
Topic 606 and the above changes apply to all FASB reporters, which includes most private hospitals in California. Hospitals reporting under Governmental Accounting Standards Board (GASB) standards won’t be affected by Topic 606 changes.
GASB is currently working a preliminary views document for its own revenue and expense project, which will likely evaluate a performance obligation model very similar to FASB’s Topic 606. However, the guidance isn’t likely to be effective for several years.
Expense Recognition
Topic 606 doesn’t address expense recognition. The expense recognition and reporting policies related to the QAF program wouldn’t change either. Recognition of expenses associated with the QAF program would still coincide with the recognition of revenue because of the program’s unwind provisions within the enabling regulations.
Gross Versus Net Reporting
While not a revenue recognition matter, HFMA’s issue analysis did address gross versus net reporting for supplemental payments and associated QAF expenditures. Gross presentation of revenues and expenses remains appropriate because regulations prohibit a direct or indirect guarantee of the return or offset of quality assurance fees with supplemental revenue.
Next Steps
Topic 606 will likely impact the amount and timing of revenue recognition for a number of hospitals in California. It’s important to closely evaluate Topic 606 and HFMA’s Issue Analysis to determine if it’s necessary to change your legacy revenue recognition policies related to the CA QAF program.
We’re Here to Help
If you have questions about this standard change, would like to discuss the supplemental reimbursement program for California hospitals, or are experiencing implementation issues, contact your Moss Adams professional.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty.
For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see our dedicated web page detailing COVID-19 implications for you and your business.
Brian Conner has practiced public accounting since 1993 and is the National Practice Leader for Hospitals. He provides audit, tax, and consulting services to integrated health systems, hospitals, ancillary providers, mental and convalescent health facilities, and medical groups. You can reach him at (209) 955-6114 or brian.conner@mossadams.com.
Kimberly Sokoloff has practiced public accounting since 2004. She serves clients in the health care industry, providing financial statement audit and tax-exempt bond offering services to integrated health systems, hospitals, health plans, medical groups, clinics, and continuing care retirement communities. She can be reached at (925) 482-5720 or kimberly.sokoloff@mossadams.com.
Katherine Jackson has been in public accounting for 15 years. She primarily provides financial statement and single audit services to not-for-profit, health care, and governmental organizations. She can be reached at (916) 503-8197 or katherine.jackson@mossadams.com.