Practical Takeaways for Finance Teams
- Reevaluate contract collectability using updated data to better manage cash flow and reduce risk.
- Take a closer look at value-based contracts — especially those with financing or variable payment structures.
- Make sure the disclosures account for changes in payer mix and revenue models.
- Revisit internal controls to stay ahead of contract changes and revenue estimation challenges.
Understanding ASC 606 and Its Impact on Healthcare
ASC 606, Revenue from Contracts with Customers, was introduced to standardize revenue recognition for organizations across all industries. It replaced a mix of industry-specific accounting rules with one cohesive, principle-based framework. This represents a significant change for healthcare entities, especially in their approach to self-pay patient accounting, bundled service payments, and value-based care revenue recognition.
ASC 606 focuses on aligning revenue recognition healthcare practices with the actual transfer of goods and services to customers. This alignment relies on enforceable contracts and measurable performance obligations. As payment models grow more complex, ASC 606 offers both a framework and a challenge. Providers must evaluate collectability, clearly define obligations in contracts, and implement more consistent and transparent financial reporting practices across different payer types.
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The Five-Step Revenue Recognition Model
ASC 606 lays out a clear five-step process for recognizing revenue, which is essential for healthcare finance. For a breakdown of the five-step revenue recognition model under ASC 606, see Understanding Healthcare Audits in Senior Care.
Key Implementation Issues for Healthcare Entities
The American Institute of CPAs (AICPA) formed a Health Care Entities Revenue Recognition Task Force to address the different revenue streams that health care organizations face. The task force focuses on developing revenue recognition issues specific to health care entities. Their goal is to provide useful information and examples for applying the new revenue recognition standard.
The AICPA Revenue Recognition Guide tackles several important challenges. The following are the key revenue recognition standards in healthcare:
1. Self-Pay and High-Deductible Patients
Healthcare providers need to assess if a valid contract is in place and whether collection is probable. Providers use responsibility forms, local laws, and data trends to assess financial responsibility. If collection is uncertain, we need to defer revenue recognition. This is important when managing self-pay patients and estimating cash flow.
2. Portfolio Approach to Patient Accounting
ASC 606 allows providers to take a portfolio approach, making it easier to estimate transaction prices for similar contracts. This is particularly effective for categorizing patient types like self-pay, Medicaid, or charity care, while applying historical collection rates.
If historical data indicates that a provider collects 20% of charges from self-pay patients, it recognizes that 20% as revenue and records the rest as an implicit price concession. This model works well if it produces results that are consistently aligned with individual contract assessments and is updated regularly to ensure accuracy.
As Louisville becomes a national hub for aging care innovation, healthcare organizations that serve senior populations need to focus on how they evaluate bundled services, including long-term care, independent living, and hospice, under ASC 606. Identifying distinct performance obligations in elder care settings can be quite complex.
3. Value-Based and Risk-Sharing Arrangements
With shared savings and performance-based contracts, revenue often depends on meeting outcome-based metrics. Initially, early AICPA guidance didn’t cover this, but ASC 606 now requires that we constrain these performance-based estimates until we have enough certainty about the results.
Providers need to adhere to ASC 606-10-32 to figure out when and how much revenue to recognize under these arrangements, making sure it aligns with actual performance and contract terms.
As value-based care grows, particularly in response to affordability concerns and life expectancy gaps in regions like Louisville, it’s essential to focus on accurate performance tracking and timely revenue management.
4. Disclosure Requirements and Transparency
ASC 606 emphasizes detailed and transparent disclosures. Healthcare providers must present:
- Revenue generated from contracts stands apart from other income sources.
- Disaggregated revenue based on timing, type of service, or geography
- Starting and ending balances of receivables, contract assets, and liabilities
- Recognized impairment losses on receivables
- Significant judgments and updates in revenue recognition policies
- Transition-related disclosures when applicable
These disclosures help stakeholders have a clear understanding of the financial reporting implications tied to complex contracts and variable reimbursement models. Updates to the AICPA Guide in 2023-2024 have enhanced guidance in this area, particularly regarding performance-based reimbursement models.
Financial transparency helps healthcare professionals argue for reimbursement and structural change as demographic shifts and cost obstacles increase, especially in aging-focused regions like Louisville.
5. Identifying Performance Obligations
ASC 606 requires providers to identify each promise in a contract and evaluate if it represents a distinct performance obligation. The growth of telehealth and remote care in Kentucky has broadened how performance obligations are defined, particularly when services are delivered virtually across geographic areas or through hybrid models.
A service stands out when:
- The patient can gain from it independently or alongside other easily accessible resources, and
- It is clearly distinguishable from other services outlined in the contract.
For example, diagnostic imaging often stands out and is recognized separately, whereas routine inpatient care is typically bundled into one performance obligation. Accurately identifying these obligations is essential for proper allocation of the transaction price and revenue timing.
Navigating ASC 606 in healthcare isn’t one-size-fits-all.
Our advisors can help you apply these principles to your unique payer mix and patient care model.
AICPA Guidance and Industry Updates
The AICPA Health Care Entities Revenue Recognition Task Force is actively refining guidance on how to apply ASC 606 in the healthcare sector. Chapter 7 of the AICPA Revenue Recognition Guide offers insights into both finalized and developing interpretations on important revenue recognition topics. This chapter serves as a valuable resource for healthcare providers as they navigate the complexities of reimbursement models, variable considerations, and bundled services.
The task force has identified several implementation issues, and below is a summary of their status:
Summary Table of Implementation Issues
Issue # | Description | Status |
1 | Self-pay balances: contract existence and transaction price | Finalized |
2 | Portfolio approach to patient contracts | Finalized |
3 | CCRC: Type A contracts and fee recognition | Out for Exposure |
4 | CCRC: Future services and facility use | Out for Exposure |
5 | Significant financing component | Out for Exposure |
6 | Disclosure requirements | Finalized |
7 | Accounting for contract costs | Out for Exposure |
8 | Third-party settlement estimates | Out for Exposure |
9 | Bundled payments | Out for Exposure |
10 | Performance obligations | Finalized |
Providers should regularly check Chapter 7 of the guide as updates are released to stay aligned with best practices and evolving interpretations. Keep in mind that you can access Chapter 7 either through the AICPA’s official website or by reaching out to your LBMC advisor for the most up-to-date guidance and analysis.
LBMC partners with mid-sized and enterprise healthcare organizations to simplify revenue recognition and strengthen financial reporting. With offices in Chattanooga, Memphis, Louisville, Nashville, Knoxville, and Charlotte, plus remote support, the firm supports clients across the Southeast.
Conclusion
ASC 606 is changing the way healthcare organizations handle revenue recognition, encouraging providers to adopt more accurate, data-driven financial reporting. Whether you’re dealing with self-pay arrangements or intricate performance-based contracts, it’s essential to grasp performance obligations, ensure contract enforceability, and maintain transparent disclosures.
As reimbursement models change, aligning with ASC 606 goes beyond just compliance; it serves as a strategic advantage. Organizations can enhance financial outcomes, support patient care, and maintain resilience in a changing environment by improving revenue recognition, healthcare policies, and investing in robust processes.
LBMC’s healthcare advisory team is ready to help you interpret guidance, implement best practices, and future-proof your approach to healthcare finance ASC 606. Connect with LBMC’s audit and assurance team for insights tailored to your organization.
Content provided by Jeremy Conner, Senior Manager in LBMC’s Audit division. He works with healthcare clients in the Nashville and Louisville markets. He can be reached at jeremy.conner@lbmc.com.
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Frequently Asked Questions (FAQ)
What is ASC 606?
ASC 606 is a revenue recognition standard that offers a consistent, principle-based framework for recognizing revenue in a consistent manner across various industries.
How does ASC 606 affect healthcare providers?
ASC 606 significantly impacts how healthcare entities recognize revenue, particularly in self-pay, bundled, and value-based care arrangements. It requires providers to assess contract enforceability, estimate collectability, and identify performance obligations with greater precision.
What is the portfolio approach?
The portfolio approach allows healthcare providers to group similar patient contracts — such as those for self-pay or government programs — and apply collective revenue estimates based on historical data. This simplifies accounting while maintaining compliance with ASC 606 if the outcome is materially like individual contract assessments.
What are performance obligations?
Performance obligations are distinct goods or services promised in a contract. They must be separately identified and accounted for if the patient can benefit from them independently or in combination with other readily available resources.
Where can I find more information?
Refer to Chapter 7 of the AICPA Revenue Recognition Guide for healthcare-specific issues, or contact LBMC’s healthcare advisory team for tailored guidance.