Kimberly McKay

The first and most controversial issue is whether collectibility must be reasonably assured prior to an HCO recognizing revenue. HCOs routinely bill for services for which they may not expect to recover full payment. Current practice results in amounts charged to patients being adjusted for contractual arrangements with third-party payors, allowances for uncollectible accounts or charity adjustments for patients meeting the HCO’s charity care guidelines. Across the industry, charges to uninsured patients have resulted in very low collection rates. For noncharity patients, this has caused HCOs to record revenue at the gross charge with a relatively high bad debt provision classified as an operating expense.

The EITF tentatively agreed collectibility should be reasonably assured prior to HCOs recognizing revenue, and this change should be applied prospectively. However, the EITF did not reach a conclusion on whether collectibility must be assessed on a patient-specific basis or on a broader portfolio of patients. The EITF has asked FASB for more research on applying this interpretation. This would include an alternative of netting the revenue and related bad debt expense. The EITF plans to continue this discussion after the research is complete.

The second issue relates to how HCOs should record professional liabilities and other insured risks, along with their related insurance recoveries. Guidance from the American Institute of Certified Public Accountants Audit and Accounting Guide for Health Care Organizations (Health Care Audit Guide) previously permitted HCOs to net expected recoveries from insurers against the recognized accrual for insurance claims. However, when FASB released its codification for financial statements for interim or annual reporting periods ending after September 15, 2009, the Health Care Audit Guide was no longer considered authoritative. Netting insurance recoveries against the related liability is inconsistent with Subtopic 720-20 of the codification. FASB ratified the EITF’s consensus that HCOs should follow a gross presentation for insurance claims and recoveries. It concluded HCO claims are no different from claims made against other types of entities. Because the HCO is still primarily liable for payment of a claim, the HCO retains the risk of loss for that claim. The HCO should evaluate whether a receivable from the insurance company can be recognized and reported separately from evaluation and recognition of the claim liability.

This change will result in increased liabilities and likely in an increase in insurance recoveries receivable for many HCOs. The most significant impact of this change will be HCOs’ exposure to professional liability risks and other self-insured obligations. For entities with high self-insured retention limits, the change may not be significant. For entities that purchase insurance to cover most professional liability risks, this change could be significant. Entities not currently obtaining an actuarial valuation of their professional liability risks may be required to do so to comply with this new guidance. This new guidance will be applied as of the beginning of the year of adoption, and the effective date will be determined after the exposure period and final FASB approval.

The last issue relates to how the disclosure of charity care should be measured. Under current practice, if a patient meets an HCO’s established charity care guidelines, the amount is not recognized as revenue, but the foregone charges are often disclosed in the footnotes to the financial statements to communicate the level of community benefit provided by the HCO. The measurement of charity care in the footnotes to the financial statements varies among different organizations. Some organizations use their standard charge rates while others have used estimated costs of providing the care. FASB ratified the EITF’s determination that HCOs should disclose charity care using cost as the measurement basis with this change to be applied retroactively. The effective date of this change will be determined after the exposure period and final FASB approval.

FASB has posted two exposure drafts related to the reporting of charity care and insurance liabilities and recoveries on www.fasb.org. Comments related to the exposure drafts are being accepted until May 17, 2010.

The changes will generally affect all nonprofit and proprietary hospitals and other health care organizations. HCOs that follow governmental accounting standards may be affected by some of these changes, depending on their specific election for following FASB statements and the outcome of GASB’s separate codification project.