HFMA Issues Position Paper on Medicare & Medicaid Incentive Payments
Author: Bill Leachman
The Healthcare Financial Management Association (HFMA) Principles and Practices Board recently published a position paper related to the accounting for Medicare incentive payments for meaningful use of electronic health records (EHR) in short-term, acute-care inpatient prospective payment system (IPPS) hospitals.
The American Recovery and Reinvestment Act of 2009 (ARRA) includes Medicare and Medicaid incentive payments for meaningful users of certified EHR technology. Hospitals that adopt a certified EHR system and are meaningful users may receive incentive payments for up to four consecutive years for the EHR reporting period. For Medicare purposes, the EHR reporting period is the 90-day period of achieving meaningful use in the first payment year and the federal fiscal year (October 1 through September 30) in subsequent payment years. The key component of receiving EHR incentive payments is demonstrating meaningful use, which is defined as meeting a series of objectives.
The position paper provides an overview and examples of two accounting models used for revenue recognition: the contingency model and International Accounting Standard No. 20 (IAS 20) grant accounting model. The U.S. Securities and Exchange Commission (SEC) has not issued a formal view on accounting for EHR incentive payments. However, preliminary indications are that SEC registrant hospitals are applying a contingency model, so an SEC registrant choosing to apply any model other than the contingency model should consult with SEC staff. Non-SEC registrant hospitals are choosing between the two models as a matter of accounting policy.
The contingency model requires revenue and receivable recognition from the EHR incentive payments to be recorded in the period during which the last remaining contingency associated with the payment is resolved. The identification of contingencies that must be satisfied is the key consideration of applying the contingency model.
Key contingencies include successfully complying with the meaningful use criteria over the EHR reporting period and the discharge information used in the final incentive payment. Additional contingencies to consider are other financial information used in the final incentive payment calculation, such as total charges, charity care charges and patient days. The position paper noted the submission of the cost report and its subsequent desk review or audit by the Centers for Medicare & Medicaid Services likely would not be viewed as contingent events under the contingency model.
Grant Accounting Model
The IAS 20 grant accounting model would recognize revenue only when there is reasonable assurance that the grant will be received, i.e., the funding will be available to pay the grant, and the entity will comply with the conditions attached to the grant, i.e., the hospital will meet meaningful use.
The evaluation of whether achieving meaningful use is reasonably assured in a particular EHR reporting period will be based on the facts and circumstances of the hospital and credit risk of the federal government. It is important that management is able to support, through appropriate documentation, the point at which reasonable assurance is obtained. There are no bright-line criteria, so unique judgment will need to be used for each hospital.
When applying grant accounting, revenue can be recognized through a cliff or ratable revenue method over the EHR reporting period, depending on the hospital’s specific facts and circumstances:
- Cliff recognition – If the hospital’s ability to meet all meaningful use objectives, along with any other specific applicable requirements (compliance requirements), is not reasonably assured until after the EHR reporting period ends, the hospital would recognize grant income and a related receivable at the time it determines and verifies it has met the compliance requirements.
- Ratable recognition – If the hospital is reasonably assured at the outset of an EHR reporting period that it will meet the compliance requirements, the hospital would recognize grant income and a related receivable ratably over the EHR reporting period, i.e., 90 days in the first reporting period. Under the ratable recognition method, if management is not reasonably assured at the beginning of an EHR reporting period that all compliance requirements will be met, but management becomes reasonably assured at some point during the period, the hospital would recognize a catch-up adjustment to record grant income and a related receivable earned up to that point. It would then recognize the remainder over the remaining EHR reporting period.
The estimated incentive payments to be received should not be delayed due to the actual discharge information not being available during the EHR reporting period, as most hospitals can reasonably estimate the discharge information for the payment formula. Hospitals should revise their estimates once the estimated discharge information is replaced by actual discharge information and account for subsequent changes in the estimate as a change in accounting estimate, in accordance with Accounting Standards Codification (ASC) 250-10.
Additional consideration will be needed for presentation of EHR revenue on the financial statements. Depending on a hospital’s facts and circumstances, the revenue could be recorded as operating revenue or, in more limited cases, non-operating. Example disclosures are provided in the position paper.
The position paper does not specifically address accounting and reporting for critical access hospitals, eligible professionals or payments under the Medicaid programs. However, the concepts in the position paper, read in conjunction with the rules applicable to these providers, should be used to determine the appropriate accounting and reporting.
To learn more about how this position paper could affect your organization, contact your BKD advisor.