The Financial Accounting Standards Board’s impending revenue recognition standard and Medicare’s new value-based reimbursement program are forcing health care providers to cope with two changing sets of methodologies at the same time.
That’s creating headaches for Medicare providers who have to adapt to two shifting models. The Obama administration has been encouraging alternative payment models as an outgrowth of the Affordable Care Act to push down health care costs. Under these payment models, health care providers would be held accountable for the quality and cost of care delivered to patients. They would have a financial incentive to coordinate care for their patients, so they would be less likely to have duplicative or unnecessary X-rays, screenings and tests. In 2015, the Department of Health and Human Services set a goal of tying 85 percent of all traditional Medicare payments to quality or value by 2016 and 90 percent by 2018 through programs such as the Hospital Value Based Purchasing and the Hospital Readmissions Reduction Programs.
Separately, FASB and the International Accounting Standards Board released their long-awaited revenue recognition standard in 2014. It takes effect for public companies at the end of this year and for private companies at the end of next year.
“The big issue is we’ve got two new things,” said Steven Shill, assurance partner for the BDO Center for Healthcare Excellence & Innovation. “We’ve got the new revenue recognition standard, and we have creative new reimbursement methodologies that are being pioneered by Medicare pushed into the system.”
He has been hearing concerns from BDO’s clients in the health care industry about the changing standards and payment models.
“A number of our clients have now approached us from different parts of the health care delivery continuum, and they’re kind of scratching their heads,” said Shill.
Some of his health care clients are telling him they’re relieved they aren’t public companies because they get an extra year to adjust to the revenue recognition standard.
“But in other cases some of our clients are public and they’re scratching their heads equally because it’s no longer sufficient to put in a 10-K filing saying that you’re evaluating something that’s due for implementation within a year’s time,” said Shill. “The SEC would be questioning that.”
The value-based reimbursement model focuses on efficiency and cost effectiveness as a way to control costs. It started last year with hip and knee replacement surgery in 67 metropolitan areas and later expanded into cardiac patient care.
“Historically the health care industry was very unique in that Medicare reimbursement was not focused on efficiency and effectiveness,” said Shill. “It was more of a ‘heads and beds’ type of approach. If somebody was taken ill and treated in a hospital and they were discharged and got ill again, the whole cycle would re-engage and the doctors and hospitals would be able to bill again and effectively Medicare would have to pay again, often costing taxpayers a bundle. There was no real focus on having the patient convalesce and get healthy and get out of the healthcare system. So Medicare tried to find a number of pain points where they said this is costing us a lot of money. The first pain point was comprehensive joint replacement. They went for the low-hanging fruit and comprehensive joint replacement was focused on hip and knee replacements. That’s an area where a lot of geriatric patients tend to cost a significant amount to the health care delivery system.”
The Centers for Medicare & Medicaid Services set a targeted reimbursement for a roughly 90-day episode of care, for example, from the day a patient goes into the hospital, has a joint replacement, is discharged, and goes into post-acute care, such as a nursing home, rehab, or physical therapy.
“With that, all of a sudden the health care continuum and the reimbursement mechanisms changed from a normal fee for service approach, in other words, the hospital charging and paying what they got, and then the nursing home charging what they were expecting to receive, and the physical therapist, and so on,” said Shill. “Now all of a sudden that entire supply chain is now placed at risk because there’s a target. If you came in above the target, Medicare would want to take money back, and if you came in below the target they would pay you a bonus. What this resulted in was a really significant shift in the patterns in which health care providers do business.”
Hospitals became responsible for the over- and undercharges. “The other thing Medicare said was hospitals, because you get the biggest chunk and because you’re able to direct the traffic, or because you have this position to direct the traffic, you’re going to be held responsible for the overs and unders relative to these bundled targets,” said Shill. “All of a sudden that created from a business standpoint hospitals looking very, very carefully at their post-acute discharge network. They said, ‘Well, let’s not buy that, that provider’s too expensive, that one’s too inefficient.’ That kind of narrowed their networks. And they put in other mechanisms from a business, operational and clinical standpoint to control cases.”
Those include clawbacks when there are overcharges in the supply chain, and those can lead to accounting problems, particularly when the revenue recognition standard is factored into the equation.
“From an accounting standpoint, there are a couple of challenges,” said Shill. “We’ve got this new way of doing business, this reimbursement, and we overlay a new revenue recognition literature, and we’ve got a lot of variables that can cause a lot of confusion, and this is confusion that we’re seeing in the industry.”
He pointed to the five-step process in the new revenue recognition standard, which includes identifying whether there is a contract, identifying the separate performance obligations, determining a transaction price, allocating the transaction price to the performance obligation, and then recognizing revenue when the performance obligation has been satisfied. That can get complicated when Medicare uses averages to estimate how much should be charged by different providers in the supply chain.
“When you start looking at step 3, the transaction price, what it says over there is you have to estimate it, and there’s got to be at least a 70 percent probability that some of the revenue you recognize doesn’t get clawed back,” said Shill. “And the real challenge is health care providers are finding that because of their lack of visibility and inability to actually extrapolate the past, and an ever-changing future, it can be very difficult to actually get these estimates right. There are going to be a lot of hit and miss type estimates that are going to be made. There are going to be a lot of challenges by auditors, saying, ‘How do get that, because you recognized $100 of revenue as a nursing home, but yet when all was said and done, when Medicare came back and the piper came piping, $50 of that $100 was clawed back.’”
The mechanism of gain sharing and loss sharing in the Medicare supply chain complicates matters even more.
“That is a mechanism that gets put into place that allows for hospitals, once they get clawed back, to go back and claw back from each and every one of the participants in their supply chain,” said Shill.
The model has recently expanded beyond hip and joint replacements to cardiac care, for heart attacks and for bypasses, as well as to hip fractures.
“Those have become even more challenging because invariably those individuals enter through the emergency rooms,” said Shill. “You then get through step 1 of the revenue recognition question, and that’s identifying the contract, i.e., does the patient have a contract with the provider? And in that instance, when somebody enters through the emergency room, you’re not able to assess whether the patient has a contract because the patient might be unconscious or unable to respond, so that in turn adds more challenges.”
He pointed out that the American Institute of CPAs has set up an expert panel to address questions such as these. “They’re not a standard-setting mechanism, but really more of an interpretive one, and I think there’s been some conversations about looking at portfolios overall,” said Shill. “The question is, with for example heart attacks, when a portfolio approach is used, the recommendation in assessing the question of collectability under the portfolio approach under step 1 is based on drilling down and looking at all cases that have a similar profile, i.e., all heart attack victims from the same payer, from the same facts and circumstances, and you might not necessarily have 100 heart attack victims coming into your emergency room every month.”
Making matters worse is that the average costs are a moving target that Medicare aims to drive ever lower.
“We think this is a real issue,” said Shill. “One of our nursing home provider clients is now scratching their heads, saying, ‘We’re part of the supply chain. We’re a member of a number of different supply chains. In other words, hospitals discharge to us, a number of different hospitals discharge to us for hips and joints, for cardiac, for chronic obstructive pulmonary disease, etc. And so we don't know where we stand relative to our supply chain. In other words, there’s a specific cost of our cases and we don’t know where the median is trending at because every year what’s going to happen is that as more and more providers get more and more efficient, that target, or that bundled reimbursement for say a hip or joint, is going to change. It’s probably going to get lower and lower because that’s how Medicare is going to drive the reduction of costs. That movement becomes very, very hard to predict, given that the best that most providers have is a look back, not a look forward. It’s going to take a lot of data analytics and a lot of data crunching and significant judgment to get to appropriate revenue recognition over here or for value-based reimbursement.”
Even with the all-but-certain repeal of the Affordable Care Act, Shill believes that value-based reimbursement is here to stay.
“The value-based reimbursement methodology has some real legs and they’re already seeing the benefits of it, certainly in the hip and joint replacements, and that’s been around for almost a year,” said Shill. “It’s broadening. There are more and more diagnoses that are being added and more and more metropolitan service areas. The biggest issue is it’s evolving at the same time as the new revenue recognition standard is evolving.”
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.