Healthcare Revenue Recognition

When healthcare entities record patient service revenue, ASC 606 Revenue from Contracts with Customers governs how it is recorded. ASC 606 requires a five-step process to recognize revenue.  The fifth step, recognizing revenue when (or as) the entity satisfies a performance obligation, can be challenging for healthcare organizations, since the healthcare revenue cycle is complex. For example, the timing of the billing for the revenue often lags behind the date of service due to internal processing time, billings to primary insurance, and billings to secondary insurance. Because of this, healthcare organizations must take steps to ensure that revenue is properly recorded and recognized, as recognizing revenue when a patient is billed or when a service is paid is incorrect reporting under the guidance of ASC 606’s step five when reporting under US GAAP.

For example, a healthcare organization may record revenue into the general ledger when it is billed. In this scenario, the healthcare organization has a Board Meeting in January to review the December monthly results. If there are services provided in December that are not billed until January, then the December financial results will not include all the revenue that was earned during December. To combat this issue, healthcare organizations can implement the following:

1. Maintain revenue reports that capture data by patient date of service and include charges, adjustments, and payments received relevant to a particular service. The focus should be on recognizing revenue at the date of service as required under ASC 606.
2. Set strategies to encourage timely billing and establish specific deadlines to have billings completed, such as within five business days. This allows organizations to have confidence that the revenue will be completely represented in the reporting period.
3. After each period’s billing deadline, reconcile the general ledger amounts recorded to the revenue report that shows revenue earned by date of service for the same period.
4. Verify that revenue recorded in the general ledger is representative of the revenue by date of service. In this step, it is important for management to ensure that the proper entries are made so that net patient service revenue reflects what is reasonably expected to be collected on the services. This is discussed further in the article “Calculating Contractual Adjustments and Allowances for Implicit Price Concessions.”

Healthcare organizations can face challenges in financial reporting given the complex nature of the healthcare revenue cycle. The principle of recognizing revenue when the healthcare organization has earned the patient service revenue is important to have consistent and proper reporting in accordance with ASC 606. Because of this, healthcare entities must implement methods to ensure revenue is being recorded and recognized properly.

If you have questions about the information outlined above, McKonly & Asbury’s experienced professionals are here to help. Learn more about their Healthcare practice by visiting their Healthcare industry page or by contacting the Director of our Healthcare practice, Partner Janice Snyder.

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