Revenue Recognition Impacts the Healthcare and Life Sciences Industry
Numerous GAAP pronouncements control this industry. Initially, adistinction must be made as to whether the hospital is a for-profit, not-for-profit, or governmental unit.
For-profit hospitals represent the smallest number in the industry (see www.aha.org). If the hospital is a for-profit unit, it records revenues on the accrual basis and applies general for-profit GAAP guidelines under FASB Concepts Statement (CON) No. 5. Recognition and Measurement in Financial Statements of Business Enterprises. Also, if the for-profit hospital is publicly traded, certain provisions of SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and SAB No. 104, Revenue Recognition, apply. SABs 101 and 104 discuss medical billings for third-party payors and reach the conclusion that collections must occur before revenue is recognized for the collection agent, not the hospital. (See Chapter FIN-I C.3.a for a discussion of these SABs).
Most hospitals in the industry are not-for-profit. They generate most of their revenues from patient services and, to a lesser degree, from grants or contributions. Such entities, unlike their for-profit cousins, use fund accounting since they report no shareholder’s equity but only the change in net assets. FASB Concepts Statement (CON) No. 4, Objectives of Financial Reporting by Nonbusiness Organizations, FASB Statement No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, (dealing with pledges) and FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, assist in defining the revenue recognition basis which, in large measure, is no different from the accrual basis of the for-profit hospital.
Many hospitals in the industry are military-based and are governed by the GASB. The GASB, under Statement No. 34, Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments (as amended by GASB Statements No. 35 and 37), recites the fund accounting aspects including required supplementary information. The GASB also allows the governmental hospital unit to apply all FASB pronouncements that are not in conflict with the GASB Statements.
GASB Statement 34 requires an expanded statement of revenues, expenses, and changes in net assets/equity and adopts the accrual basis in reporting revenues (see GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting). Governmental hospitals must report revenues under GASB Statement 34 net of discounts and allowances by major source of revenue with separate subtotals for operating revenues, expenses, and income or loss.
In summary, notwithstanding the classification (for-profit, not-for-profit, or governmental) of a hospital unit, its primary revenue source is patient revenue. This revenue can be further viewed as routine service, premium service, resident service, etc., and is generally disclosed as operating revenue. To arrive at "net" patient revenue, all adjustments are then made, and third-party payors would be one such adjustment.
Revenue from third-party payors, even if the hospital unit uses a billing-collection agent (as discussed in SABs 101 and 104), will be realized and recognized revenue to the hospital notwithstanding the collection. This is because of the adjustment that the third-party payor reimbursement makes, as an estimate, to the gross patient service revenue. Third-party payor revenue should be recognized at the time the service is rendered, at the hospital’s customary adjusted rates.
As in any service business, cash collections and credit policy are paramount. Most practices report revenues upon tendering of the service, consistent with FASB Concepts Statement (CON) No. 5,Recognition and Measurement in Financial Statements of Business Enterprises. However, despite this standard method of revenue recognition for both cash and third-party payor patients (which is similar to hospital accounting; see the discussion of hospital revenue recognition above), many dental and medical practices adopt the cash basis (not the accrual basis) for revenue recognition. This lends support to record keeping for tax preparation purposes, and the cash-basis records are generally converted to the accrual basis for loan or lease application purposes.
Medical practices treat third-party payors such as Medicaid in much the same manner as hospitals do, with revenue recognition occurring at the time service is tendered, with an adjustment to revenues for experience with third-party payor payments and collectibility of direct billings to patients, resulting in net patient service revenue.
Excerpted by permission. Copyright 2007, Specialty Technical Publishers.