Understanding Revenue Recognition In Healthcare Accounting

Posted by admin on April 1, 2022

To keep your business running smoothly, it's important to be up-to-date on the latest healthcare accounting regulations. One of the most important changes in recent years is Revenue Recognition. This new standard affects how healthcare providers account for revenue generated from services provided. 

This blog post will discuss Revenue Recognition and how it impacts healthcare providers. We'll also provide some steps to comply with the new standard.

What Is Revenue Recognition?

In healthcare accounting, revenue recognition records revenue from net patient services rendered. Revenue can be generated from various sources, such as outpatient visits, inpatient admissions, and ancillary services. 

Healthcare organizations must carefully follow revenue recognition rules to ensure that they are reporting accurate financial information.

Follow These 5 Steps To Revenue Recognition

Step 1- Take A Look At Customer Contracts

One of the first things a healthcare organization should do to prepare for the new standards is to evaluate its current contracts in light of the revised standard. The following four criteria must all be satisfied to determine whether a contract exists and revenue is recognized under ASU 2014-09:

  • Both sides have approved the contract.
  • The rights of each party to deal in the commodities may be determined.
  • The terms of payment for the items and services may be established.
  • The contract contains the business value.
  • The entity will likely receive the payment it is owed.

Step 2- Identify the distinct obligations in the agreement or agreements

A performance obligation is to promise the consumer a particular good or service or a collection of distinct goods or services; whether the customer gains from the item or service on its own depends on if it's distinct.

If the claimed item or service is not unique, it should be combined with other promised products or services until a bundle of different ones emerges. It's critical to think about how you'll calculate revenue when creating your plan. For example, distinct models should be created as needed in inpatient and outpatient treatment.

Step 3- Determine The Transaction Price

Revenue will be recognized under the new standard on a transaction rather than a contract basis. The guidance states that an entity should estimate the transaction price, which is the amount it expects to receive in exchange for transferring a performance obligation to a client.

Several criteria must be considered when determining the transaction price:

  • Healthcare businesses must determine which of their contracts are fixed, variable, or have features of both contract types.
  • The variable-consideration amount specified in a contract must be estimated and adjusted regularly.
  • The variable-consideration amount specified in a contract must be estimated and adjusted regularly.
  • Third-party settlements are another income modeling aspect that must be considered when calculating the transaction price.
  • The money paid at the end of each period should be estimated utilizing one of the two methods.

Step 4- Allocate The Transaction Price To The Contract's Performance Obligations

The transaction price should be assigned to each performance obligation in proportion to the amount of consideration the seller expects to be entitled to in exchange for transferring the good or service to the client.

 From a revenue modeling perspective, primary versus secondary account balances should be split into distinct payer groups, allowing prior rates to be applied based on comparable adjudication history. 

Step 5- Recognize Revenue As Soon As The Company Fulfills A Performance Criterion

A service is transferred, and revenue recognition occurs over a period of time if the patient receives the benefits offered by the entity's performance, such as during chemotherapy or a similar medical procedure.

The revenue modeling process involves considering accruals on late charges and in-house, discharge-not-final-billed, and recurring outpatient accounts to verify transaction price and ensure that income is recognized correctly.

Work With Professional Medical Accountants

The new revenue recognition standards will affect every healthcare professional, so it is important to understand the changes and how they will impact your business. Roberts Accounting has professional accountants who are willing to help you adapt to these changes.

 Contact us today for a consultation. We can develop a plan that will ensure your business is compliant with the new standards.

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