July 1, 2016
Financial Reporting Center –
Revenue Recognition
Working Draft:
Health Care Entities
Revenue Recognition
Implementation Issue
Issue #8-1: Application of Step 1, “Identify the contract(s) with a
customer,” and Step 3, “Determine the transaction price,” in FASB
ASC 606, Revenue from Contracts with Customers, to
arrangements for health care services provided to uninsured and
insured patients with self-pay balances, including co-payments and
deductibles, (collectively referred to as “self-pay” balances).
Expected Overall Level of Impact to Industry Accounting:
Significant
Wording to be Included in the Revenue Recognition Guide:
Background
1. Certain health care entities are required by law or regulation to treat emergency conditions (for example, through
a hospital’s emergency department) and often provide services to uninsured or underinsured patients regardless
of the patient’s ability to pay. More specifically, in 1986, Congress enacted the Emergency Medical Treatment &
Labor Act to ensure public access to emergency services regardless of ability to pay. Additionally, section 1867
of the Social Security Act imposes specific obligations on Medicare-participating hospitals that offer emergency
services to provide a medical screening examination when a request is made for treatment of an emergency
medical condition regardless of an individual's ability to pay.
2. In addition, some not-for-profit health care entities are tax-exempt under Internal Revenue Code (IRC) Section
501(c)(3) as charitable organizations and therefore, have certain requirements to maintain their tax-exempt
status. IRC Section 501(r) imposes certain requirements on organizations that operate one or more hospital
facilities including: establishing written financial assistance and emergency medical care policies, limiting
amounts charged for emergency or other medically necessary care to individuals eligible for assistance under
the hospital's financial assistance policy, and making reasonable efforts to determine whether an individual is
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eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection
actions against the individual.
3. Further, some not-for-profit health care entities provide services to patients regardless of their ability to pay
because of their charitable mission and/or to support their tax-exempt status. There are other types of health
care entities that do not provide emergency services or may not have a stated mission to provide medically
necessary services, but that also provide services to patients before determining their intent or ability to pay.
Determining if an Enforceable Contract Between a Health Care Entity and a Patient Exists
4. FASB ASC 606-10-25-2 discusses that enforceability of the rights and obligations in a contract is a matter of law.
Therefore, a health care entity may consider involvement of internal and/or external legal counsel in making the
overall determination of when a legally enforceable contract with its patients is in place.
5. FASB ASC 606-10-25-1 states that an entity should account for a contract with a customer when all five criteria
of FASB ASC 606-10-25-1 are met. FASB ASC 606-10-25-1a states that one requirement is that the “parties to
the contract have approved the contract (in writing, orally, or in accordance with other customary business
practices) and are committed to perform their respective obligations.” In accordance with FASB ASC 606-10-251a, a health care entity may consider if it has a written contract with the patient by considering whether the patient
signed any forms, such as a patient responsibility form, which would be considered a written contract. If the
health care entity determines it does not have a written contract (for example, the patient refuses to sign a patient
responsibility form), it may consider if it has an oral or implied contract based on the entity’s customary business
practices. If the patient schedules health care services in advance (for example, elective surgery), the health
care entity may consider if it has an oral or implied contract. If the patient does not schedule the services in
advance (for example, a patient that was admitted through the emergency room while unconscious or against
their will), the health care entity may perform an analysis of the specific facts and circumstances to assess
enforceability including looking at customary business practices.
Determining if a Patient Is Committed to Perform His or Her Obligations and if it is Probable That the Entity Will
Collect Substantially All of the Consideration to Which it Expects to Be Entitled
6. Example 3, “Implicit Price Concession,” in paragraphs 102–105 of FASB ASC 606-10-55 illustrates that the health
care entity may be unable to evaluate an uninsured patient’s commitment to perform his or her obligations (for
example, pay for services rendered) or determine if it is probable that it will collect the consideration to which it
is entitled until it obtains certain information about the patient. Until that determination is made, a contract with
the customer cannot be presumed to exist in the revenue model. In the example, the health care entity is not
able to determine whether the patient is committed to perform his or her obligations or that it is probable that it
will collect the consideration to which it is entitled until after the health care entity has provided services.
7. In accordance with FASB ASC 606-10-25-1 if the health care entity determines that the patient or other payor is
not committed to perform his or her obligation(s) or that it is not probable that the entity will collect the
consideration to which it is entitled, the criteria in FASB ASC 606-10-25-1 have not been met and a contract with
a customer does not exist. A health care entity may make this determination based on past history with that
patient or because the patient qualifies for the health care entity’s charity care policy. Example 3 in FASB ASC
606-10-55 indicates that the patient did not qualify for charity care or government subsidies (for example,
Medicaid) and therefore does not illustrate how to apply the guidance in FASB ASC 606 in situations where the
entity obtains some information about the patient but additional time is needed to determine if, and how much,
insurance coverage exists.
8. For example, a patient may be admitted to the emergency room of a health care entity and be unresponsive. The
health care entity is obligated to provide services to the patient as required by law. If the health care entity
subsequently determines that the patient is uninsured, it may try to qualify the patient for Medicaid coverage.
Depending on the state, the Medicaid qualification process can take from several weeks to over a year. The
health care entity may consider the information in the following paragraphs to determine if a contract, as defined
in FASB ASC 606, exists for a patient whose insurance coverage has not yet been determined (such as “pending
Medicaid”).
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9. Although the party responsible for payment has not yet been determined, the health care entity may have
historical information for pending Medicaid patients to determine the transaction price based on the percentage
of those contracts it estimates will:
a. qualify for Medicaid,
b. qualify for the health care entity’s charity care policy (therefore, those contracts are not within the scope
of the revenue model), and
c.
become uninsured self-pay.
10. This approach of using historical information for pending Medicaid patients may provide a health care entity a
basis to conclude that a patient in “pending Medicaid” status meets the requirements in FASB ASC 606-10-251. FinREC believes this approach may be applied to an individual contract or a portfolio of similar contracts as
described in FASB ASC 606-10-10-04 although in practice will generally be applied to a portfolio of similar
contracts.fn ii In accordance with discussion at the July 2015 TRG meeting and FASB ASC 606-10-32-9, a health
care entity should consider all information that is reasonably available to the entity to estimate variable
consideration whether the guidance in FASB ASC 606 is applied on a portfolio or contract by contract basis. See
Issue 8-2 for further information.
11. A health care entity may estimate the transaction price for an individual contract considering the likelihood of
each outcome for the contract (for example, Medicaid, self pay and charity care) and the expected reimbursement
rate for each. A health care entity may also apply the guidance to a portfolio of contracts fn ii if it reasonably
expects that the effects on the financial statements would not differ materially from applying to an individual
contract. For the percentage of contracts expected to qualify for Medicaid, a health care entity may consider
applying the guidance in FASB ASC 606 in a similar manner as other Medicaid patients. For the percentage of
contracts expected to qualify for charity care, the health care entity would not recognize revenue in accordance
with FASB ASC 954-605-25-10 (which was not amended by FASB Accounting Standards Update (ASU) No.
2014-09). For the percentage of contracts expected to become uninsured self-pay, a health care entity may follow
Example 3 in FASB ASC 606-10-55-102 through 55-105.
12. This approach is consistent with Example 22, “Right of Return,” in FASB ASC 606-10-55-202 through 55-207,
whereby the entity applies historical experience to a portfolio of contracts to estimate products that will be
returned and therefore does not recognize revenue for those products. This is also similar to a health care entity
that estimates the number of patients who will qualify for charity care and therefore does not recognize revenue
for those patients.
13. If a health care entity does not have historical experience to estimate the outcome for a pending Medicaid account
prior to receiving the Medicaid qualification determination (for example, the account is an outlier), it may
determine that a contract does not exist as it has not met the requirements in FASB ASC 606-10-25-1. That is,
the health care entity has not yet determined that the patient or other payor is committed to perform his or her
obligation(s) (that is, pay for services rendered) based on its past history, including whether the patient qualifies
for charity care, or if it is probable that it will collect the consideration to which it is entitled.
14. If at a later date the health care entity determines it has sufficient historical evidence to estimate the outcome for
a pending Medicaid account or the Medicaid program subsequently approves the patient for coverage, the health
care entity would reassess the criteria in FASB ASC 606-10-25-1 to determine if a contract exists in accordance
with FASB ASC 606-10-25-6.
15. If the Medicaid program subsequently denies coverage, the health care entity may attempt to qualify the patient
for its charity care policy. If the patient qualifies for charity care, a contract does not exist for purposes of applying
FASB ASC 606, in accordance with FASB ASC 954-605-25-10. If the patient does not qualify under the health
care entity’s charity care policy, the fact pattern may be similar to the one provided in Example 3 in FASB ASC
606-10-55-102 through 55-105.
16. There are other FASB ASC 606-10-25-1 considerations for a health care entity even when the payor has been
determined. Example 3 in FASB ASC 606-10-55-102 through 55-105 illustrates that, for an uninsured emergency
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room patient for which the health care entity had not previously provided medical services (that is, the health
care entity had no history with that specific patient), the health care entity may designate the patient to a customer
or payor class based on its review of the patient’s information. The review of the patient’s information may include
determining if the patient has insurance coverage, a co-payment, or a deductible. If a patient has no insurance
or if a portion of the balance is due from the patient (for example, a deductible), the health care entity evaluates
the patient's ability and intention to pay in accordance with FASB ASC 606-10-25-1(e), which may include
consideration of whether any negative evidence exists with respect to the health care entity’s history with that
particular patient.
17. A situation in which services were previously provided to the patient and no consideration was collected may
provide strong evidence that the patient does not have the intent or ability to pay. However, if no such evidence
exists, the health care entity may be able to conclude that its expectation related to collectibility for that patient is
no different than for any other patient in the customer class.
18. A health care entity should consider the guidance pertaining to the portfolio approach (as described in FASB ASC
606-10-10-4) to determine if that practical expedient can be applied and, if so, at what level. For example, a
health care entity may evaluate whether to establish separate portfolios for uninsured self-pay patients, patients
with co-payments, patients with deductibles, emergency room self-pay, elective surgery that is not medically
necessary or covered by insurance, etc. Refer to issue 8-2, “Application of the portfolio approach,” for discussion
on application of the portfolio approach for contracts with patients.
Determining if Amounts That Are Not Probable of Collection From Patients With Self-Pay Balances Constitute
Implicit Price Concessions
19. To determine if it is probable that the health care entity will collect substantially all of the consideration to which
it will be entitled as required in FASB ASC 606-10-25-1(e), a health care entity will need to determine the
transaction price as described in FASB ASC 606-10-32-2. If the transaction price includes an estimate of variable
consideration (for example, a price concession), the transaction price may be less than the stated price in the
contract. FASB ASC 606-10-32-8 discusses two methods for estimating variable consideration (the expected
value method and the most likely amount), the selection of which is dependent on which method an entity expects
to better predict the amount of consideration to which the entity will be entitled. In accordance with FASB ASC
606-10-32-11, some or all of an amount of estimated variable consideration should be considered in the
transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved.
20. FASB ASC 606-10-32-9 indicates that to estimate the transaction price, a health care entity should consider all
information that is reasonably available, including historical, current, and forecasted. As such, the health care
entity should consider the historical cash collections from a customer class identified (for example, self-pay) to
estimate the transaction price for a patient (that is, how much the health care entity expects to be entitled for the
services provided). As explained in Issue 8-2, in accordance with the discussion at the July 2015 TRG meeting
on the portfolio practical expedient and FASB ASC 606-10-32-9, a health care entity is required to consider all
information that is reasonably available to the entity to estimate variable consideration whether the guidance in
FASB ASC 606 is applied on a portfolio or contract by contract basis.
21. Variable consideration can result from discounts, price concessions, or other similar items. FASB ASC 606-1032-7 indicates that variable consideration may be explicitly stated in the contract. In determining whether a health
care entity has provided an implicit price concession to a patient with a self-pay balance, a health care entity
needs to determine, in accordance with FASB ASC 606-10-32-7(a-b), whether “the customer has a valid
expectation arising from an entity’s customary business practices, published policies, or specific statements that
the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is
expected that the entity will offer a price concession,” or “facts and circumstances indicate that the entity’s
intention, when entering into the contract with the customer, is to offer a price concession to the customer.”
22. As noted in paragraph BC194 of FASB ASU No. 2014-09, the Boards decided not to develop detailed guidance
for differentiating between a price concession and impairment losses. Therefore, a health care entity should use
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judgment and consider all relevant facts and circumstances to determine if it has implicitly offered a price
concession or has accepted the risk of default by the patient of the contractually agreed-upon consideration (that
is, customer credit risk). It is important to note that an implicit price concession does not have to be specifically
communicated or offered to the patient by the entity.
23. Under FASB ASC 606-10-32-7(b), to determine whether a health care entity has provided an implicit price
concession to a patient with a self-pay balance, a health care entity should determine whether facts and
circumstances indicate an intention to provide a price concession. Example 3, in paragraphs 102–105 of FASB
ASC 606-10-55 provides a specific set of facts and circumstances related to a hospital that provides medical
services to an uninsured patient in the emergency room. FASB ASC 606-10-55-104 indicates that if a health care
entity “expects to accept a lower amount of consideration”, it may conclude that “the promised consideration is
variable” (that is, the health care entity is providing an implicit price concession).
24. A health care entity may consider the following factors to determine whether it intends to provide an implicit price
concession:

The health care entity has a customary business practice of not performing a credit assessment prior to
providing services (for example, because it is required by law or regulation, or has a mission to provide
medically-necessary or emergency services prior to assessing a patient’s ability or intent to pay).

The health care entity continues to provide services to a patient (or patient class) even when historical
experience indicates that it is not probable that the entity will collect substantially all of the billed amount.
25. If one of those factors are present, FinREC believes that the health care entity has implicitly provided a price
concession to the patient (or patients in the patient class), even if it will continue to attempt to collect the full
amount of billed charges.
26. When a health care entity determines the consideration is variable, the entity would only include in the transaction
price an estimate of the variable consideration that meets the constraint under paragraphs 11–12 of FASB ASC
606-10-32. Therefore, the entity’s calculation of the implicit price concession should incorporate the entity’s
expectations of cash collections at a level at which it is probable that the cumulative amount of revenue
recognized would not result in a significant revenue reversal. Consistent with BC215 of FASB ASU No. 201409, there may be circumstances where the calculation of variable consideration already incorporates the
principles on which the guidance for constraining estimates of variable consideration is based.
27. To assist with the determination of whether it is probable there will not be a significant revenue reversal when
the cash is collected, FASB ASC 606-10-32-12 provides factors for an entity to consider. Below are factors for
health care entities to consider when evaluating if it is probable there will not be a significant revenue reversal
when the cash is collected in contracts with patients with self-pay balances:
a. Whether the amount of consideration from patients with self-pay balances is highly susceptible to factors
outside the entity’s influence (for example, a health care entity may consider the current economic
conditions in the market it serves)
b. The entity’s experience with similar types of contracts (for example, a health care entity may consider
the extent of its experience with similar patients or portfolios of similar patients)
c.
How long the period is until the uncertainty is resolved (for example, a health care entity may consider
how long it generally takes to collect the consideration from similar patients)
d. Its practice of offering price concessions or changing payment terms (for example, a health care entity
may adjust the standard charges based on its uninsured discount or prompt-pay discount policy)
e. The number of possible consideration amounts (for example, a health care entity may consider the
historical range of collection history with similar patients and whether the range is broad (significant
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differences from reporting period to reporting period) or narrow (insignificant differences from reporting
period to reporting period))
28. In a contract with a patient with a self-pay balance for an “elective” procedure that is scheduled in advance and
does not involve a medical emergency, the health care entity may be able to assess the patient’s intent and
ability to pay prior to or at the time of service, and determine that it is probable that it will collect substantially all
of the consideration to which it is entitled. In that situation, the health care entity may determine that it has not
provided an implicit price concession.
29. If the health care entity determines that it has not provided an implicit price concession because the factors in
paragraph 24 are not present, it is still required to determine whether it is probable that it will collect substantially
all of the consideration to which it is entitled in order to determine whether it has a contract under FASB ASC
606-10-25-1(e). If a health care entity determines it does not meet the requirements of FASB ASC 606-10-25-1,
it would not recognize revenue until one of the criteria in FASB ASC 606-10-25-7 are met. Refer to the “Other
Considerations” section below for further discussion.
Determining How to Account for Subsequent Changes in the Estimate of the Transaction Price
30. If the entity concludes that it has provided an implicit price concession for the amount it doesn’t expect to collect
(that is, the consideration is variable), the entity must also consider how to account for subsequent changes in
the estimate of the transaction price relating to the amount expected to be received. FASB ASC 606-10-32-14
requires an entity to update the estimated transaction price, including updating the assessment of whether an
estimate of variable consideration is constrained, at the end of each reporting period. This requirement to update
the estimated transaction price applies regardless of whether the entity determines the transaction price based
on an individual contract (individual patient basis) or a portfolio of similar contracts (patient class).
31. Factors that may result in a change in the estimate of the transaction price (that is, when the entity expects to be
entitled to more or less than it originally estimated) prior to receiving payment include whether the health care
entity obtained additional information about an insured patient’s deductible, co-payment or co-insurance
coverage or other information about the patient’s personal financial situation. For example, the health care entity
may subsequently learn that an uninsured patient qualifies for Medicaid or that an uninsured patient qualifies for
charity care.
32. Health care entities that apply the portfolio approach to a patient class will need to consider additional information
they may obtain about patients in the patient class that may result in a change in the estimate of the transaction
price in order to update the estimate of the transaction price each reporting period.
33. When a health care entity determines it has provided an implicit price concession based on the factors discussed
in paragraph 24 or other factors, FinREC believes that subsequent changes to the estimate of variable
consideration should generally be accounted for as increases or decreases in the implicit price concession
(adjustments to patient service revenue). Because the assessment of the implicit price concession inherently
considers the amount the entity expects to collect from the patient (or patient class), FinREC believes that
changes in the entity’s expectation of the amount it will receive from the patient (or patient class) will be recorded
in revenue unless there is a patient-specific event that is known to the entity that suggests that the patient no
longer has the ability and intent to pay the amount due and therefore the changes in its estimate of variable
consideration better represent an impairment (bad debt). FASB ASC 606-10-32-43 states that “amounts allocated
to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period
in which the transaction price changes.” Therefore, if the change in the transaction price occurs after the service
has been provided to the patient, the changes in the estimate of the variable consideration would be recognized
as additional revenue, or a reduction to revenue, in the period in which the estimate of the transaction price
changes.
34. If an entity experiences frequent subsequent adjustments that result in decreases to patient revenue, the entity
should re-assess whether its estimation process, including the constraint, is appropriate. In addition, when an
entity subsequently collects significantly less than its original estimate of variable consideration, there may be
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facts and circumstances that indicate there has been an adverse change in the patient’s credit worthiness (for
example, the patient filed for bankruptcy or lost their job), and the difference may be better classified as an
impairment loss (bad debt) rather than a change in the transaction price. However, as discussed in paragraph
30, an entity is required to update its estimate of the transaction price at the end of each reporting period and
should not wait for subsequent cash collections to do so.
Determining What Constitutes an Impairment Loss or Bad Debt
35. In estimating the transaction price, a health care entity may determine that it has not provided an implicit price
concession (because the factors in paragraph 24 are not present) but rather that it has chosen to accept the risk
of default by the patient, and that uncollectible amounts better represent impairment losses or bad debts. For
example, a health care entity that provides elective surgeries, does not meet the factors in paragraph 24, and
determines that it is probable that it will collect (substantially all of fn i) the consideration to which it is entitled
based on its initial assessment of the patient’s creditworthiness, may determine that any amount it does not
expect to collect represents an impairment loss or bad debt.
36. In determining what constitutes an impairment loss, a health care entity considers the effects of customer credit
risk after the determination that the arrangement meets the criteria for a contract under FASB ASC 606-10-25-1,
and revenue and a receivable are recognized for the services provided. For example, a health care entity may
have collection experience with a customer class that indicates it collects substantially all (for example, 98%) of
the amount it bills to that customer class. The contracts with those patients would meet FASB ASC 606-10-25-1
and the health care entity would recognize revenue and receivables for the amount it bills (100%) along with a
provision for bad debts (2%) based on valuation of the receivables. An example of where an impairment loss
may be recorded after contract inception for a self-pay patient balance may be the subsequent inability of a
patient to pay his or her portion of a bill for an elective procedure as a result of his or her loss of employment or
filing for bankruptcy and for which the health care entity had assessed the patient’s ability to pay prior to providing
the service and expected to collect substantially all of the amount billed.
Other Considerations
37. In accordance with FASB ASC 606-10-25-1(a-e), a contract with a customer exists only when all of the criteria
are met. In addition to the criteria in (a) and (e) discussed in previous paragraphs, a health care entity should
also consider the criteria for a contract in FASB ASC 606-10-25-1(b) through (d) to determine that a contract with
a patient exists within the scope of the model. This includes identifying each party’s rights regarding the goods
or services transferred (a health care entity has a right to payment for services provided to patient), identifying
payment terms (generally gross charges less any contractual adjustments or self-pay discounts), and that the
contract has commercial substance (entity expects its cash flows to change as a result of the services provided).
38. For arrangements with patients that do not meet one or more of the criteria in FASB ASC 606-10-25-1, the health
care entity should continually reassess the arrangement as facts and circumstances change, in accordance with
FASB ASC 606-10-25-6. If partial payment is received, the health care entity should reassess whether the criteria
in FASB ASC 606-10-25-1 are met and a contract with a customer exists, including whether it has provided an
implicit price concession. If consideration is received from the patient and the criteria in FASB ASC 606-10-25-1
are still not met, the health care entity would apply the guidance in paragraphs 7–8 of FASB ASC 606-10-25 to
determine when to recognize the consideration received as revenue.
39. FASB ASC 606-10-25-7 indicates that when a contract with a customer does not meet the criteria in paragraph
606-10-25-1 and an entity receives consideration from the customer, the entity should recognize the
consideration received as revenue only when one or more of the following events has occurred:
a. The entity has no remaining obligations to transfer goods or services to the customer, and all, or
substantially all, of the consideration promised by the customer has been received by the entity and is
nonrefundable.
b. The contract has been terminated, and the consideration received from the customer is nonrefundable.
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c.
The entity has transferred control of the goods or services to which the consideration that has been
received relates, the entity has stopped transferring goods and services to the customer (if applicable)
and has no obligation under the contract to transfer additional goods or services, and the consideration
received from the customer is nonrefundable.
40. In accordance with FASB ASC 606-10-25-7, a health care entity would have to determine that the consideration
received from the patient is nonrefundable. If the consideration received is nonrefundable, the service has already
been performed for the patient and all or substantially all of the consideration promised by the patient has been
received, revenue may be recognized under FASB ASC 606-10-25-7(a). If the consideration received is
nonrefundable and the contract is considered terminated, revenue may be recognized under FASB ASC 606-1025-7(b). A health care entity would have to assess when the contract is terminated. Contract termination is a
legal matter and may require involvement of legal counsel. If the consideration received is nonrefundable and
the health care entity has stopped performing services to the patient and has no obligation to perform additional
services under the contract, revenue may be recognized under FASB ASC 606-10-25-7(c).
41. In accordance with FASB ASC 606-10-25-8, if a health care entity does not meet the guidance in FASB ASC
606-10-25-7 to recognize revenue it would recognize the consideration received from the patient as a liability
until one of the events in FASB ASC 606-10-25-7 occurs or until the criteria in FASB ASC 606-10-25-1 are
subsequently met (see FASB ASC 606-10-25-6).
42. When determining the transaction price, the health care entity should also consider whether a significant
financing component exists, as required in FASB ASC 606-10-32-15 through 32-20. fn iii
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Appendix A – Illustrative Examples The following examples are meant to be illustrative, and the determination
of the application of the guidance in FASB ASC 606 should be based on the individual facts and circumstances.
Note: The illustrative examples based on a single contract are intended to expand on Example 3, “Implicit Price
Concession,” in paragraphs 102–105 of FASB ASC 606-10-55. However, many health care entities may elect to
use the portfolio approach (as described in FASB ASC 606-10-10-4) for recognizing revenue from self-pay
patients. fn ii
Example 1 – Implicit Price Concession Based on Single Contract – Uninsured self-pay patient with no
uninsured discount
1. A hospital treats a patient with an emergency condition and does not assess the patient’s ability to pay at the
time of service. Upon discharge, the hospital determines that the patient does not have insurance coverage,
does not qualify for financial assistance (that is, the hospital’s charity care policy, hospital uninsured discount
policy or government entitlement program) and is therefore considered an “uninsured self-pay” patient. The
standard charges for services provided to the patient are $10,000 and a bill is sent to the patient for this
amount.
2. The hospital intends to pursue collection of the entire amount and may engage the use of external collection
agencies to do so. That is, the hospital does not intend to give up collecting the billed amount. However, the
hospital has a long history of providing services to uninsured self-pay patients and collecting amounts that
are substantially less than its standard charges because it is required to provide emergency services
regardless of the patient’s ability to pay under the Social Security Act. Based on its experience with similar
uninsured self-pay patients, the hospital only expects to collect $1,000 from the patient.
3. The facts and circumstances indicate that the entity’s intention when entering into the contract with the
customer was to provide an implicit price concession to the customer because: (a) the hospital is required to
provide emergency services regardless of the patient’s ability to pay under the Social Security Act; and (b)
the hospital continues to provide services to uninsured self-pay patients even when historical experience
indicates that it is not probable that the entity will collect substantially all of the billed amount. Therefore (after
consideration of the constraint in FASB ASC 606-10-32-11 and 32-12), the hospital determines that $1,000
is the transaction price. The hospital concludes that it is probable that it will collect the $1,000 and that the
other criteria in FASB ASC 606-10-25-1 are also met and therefore records patient revenue and accounts
receivable of $1,000.
4. FASB ASC 606-10-32-14 requires the hospital to update the estimated transaction price, including updating
the assessment of whether the estimate of variable consideration is constrained, at the end of each reporting
period. If the entity subsequently determines it will collect $1,100, instead of the $1,000 it initially estimated,
FinREC believes the entity should generally account for the difference as a reduction to the implicit price
concession (that is, an increase to the estimate of the transaction price) in accordance with FASB ASC 60610-32-42 and 32-43 because the entity has additional information to update its estimate of the transaction
price.
5. If the entity subsequently determines it will only collect $900, instead of the $1,000 it initially estimated, it will
need to evaluate whether it has obtained any adverse information regarding the patient’s financial condition
to determine if an impairment exists. If no adverse information regarding the patient’s financial condition has
been obtained, FinREC believes the entity should generally account for the difference as an increase to the
implicit price concession (that is, a reduction to the estimate of the transaction price), because the health
care entity determined that it intended to provide an implicit price concession. If an entity experiences
frequent subsequent adjustments that result in decreases to patient revenue, the entity should re-assess
whether its estimation process, including its application of the constraint, is appropriate.
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Example 2 – Implicit Price Concession Based on Single Contract – Uninsured self-pay patient with
uninsured discount
6. A hospital treats a patient with an emergency condition. The hospital is required to provide emergency
services regardless of the patient’s ability to pay under the Social Security Act as well as based on its stated
mission. In addition, based on the requirements of IRC 501(r), the hospital makes reasonable efforts to
determine whether patients are eligible for assistance under its financial assistance policy.
7. During the patient’s hospital stay and before discharge, the hospital determines that the patient qualifies for
the hospital’s uninsured discount policy and grants the patient a 75% discount (that is, an explicit price
concession) similar to a contractual adjustment for local managed care companies. The standard charges
for services provided to the patient are $40,000. Upon billing, the hospital discounts the charges by 75%, or
$30,000, based on its uninsured discount policy.
8. The discounted charges for services provided to the patient are $10,000 and a bill is sent to the patient for
this amount. The hospital intends to pursue collection of the amount billed and may engage the use of
external collection agencies to do so. That is, the hospital does not intend to give up collecting the billed
amount. However, based on its experience with similar patients, the hospital only expects to collect $1,000
from the patient. The hospital has a history of providing services to uninsured patients and collecting amounts
that are substantially less than its discounted charges.
9. The facts and circumstances indicate that the entity’s intention when entering into the contract with the
customer was to provide a price concession to the customer because: (a) the hospital is required to provide
emergency services regardless of the patient’s ability to pay under the Social Security Act; (b) as per its
stated mission and in accordance with IRC 501(r), the hospital is required to limit amounts charged for
emergency services to individuals eligible for assistance under the hospital's financial assistance policy; and
(c) the hospital continues to provide services to uninsured self-pay patients even when historical experience
indicates that it is not probable that the entity will collect substantially all of the billed amount. Therefore (after
consideration of the constraint in FASB ASC 606-10-32-11 and 32-12), the hospital determines that $1,000
is the transaction price. The hospital concludes that it is probable that it will collect the $1,000 and that the
other criteria in FASB ASC 606-10-25-1 are also met and records patient revenue and accounts receivable
of $1,000.
Example 3 – Implicit Price Concession Based on Portfolio Approach – Uninsured self-pay patients
10. A hospital elects to apply the portfolio approach (as described in FASB ASC 606-10-10-4) for recognizing
revenue from uninsured self-pay patients. fn ii The hospital identifies the “uninsured self-pay” customer class
as a portfolio of contracts based on qualitative and quantitative factors, including an analysis that shows that
the uninsured self-pay customer class shares similar collection patterns based on historical information (that
is, variances from reporting period to reporting period in the percentage of collections have been insignificant
in the aggregate). Therefore, the hospital concludes that the expected outcome from using a portfolio
approach is not expected to materially differ from an individual contract approach.
11. During the reporting period, the uninsured self-pay portfolio has total gross charges of $1,000,000. Based on
its historical experience with the uninsured self-pay customer class, the hospital determines that these
patients qualify for financial assistance (for example, charity care policy, uninsured discount policy) totaling
$750,000, or 75%. Therefore, the adjustments of $750,000 represent discounts (explicit price concessions)
and are included as a reduction to the transaction price.
12. The discounted charges for services provided to the patients total $250,000. However, the hospital has a
history of providing services to uninsured patients and collecting payments that are substantially less than
its discounted charges. Based on its collection history from patients in this customer class, the hospital
concludes it is probable it will collect $50,000 of the discounted charges from the uninsured self-pay patients
in the portfolio. In addition, based on an assessment of other facts and circumstances, the entity concludes
that the other criteria in FASB ASC 606-10-25-1 are met.
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13. Because the facts and circumstances indicate that the entity’s intention, when entering into the contracts with
the patients, was to provide an implicit price concession, it may conclude that $50,000 is the transaction price
(variable consideration) after consideration of the constraint in FASB ASC 606-10-32-11 and 32-12 and
record patient revenue and accounts receivable of $50,000.
14. FASB ASC 606-10-32-14 requires the hospital to update the estimated transaction price, including updating
the assessment of whether the estimate of variable consideration is constrained, at the end of each reporting
period. If the hospital subsequently determines it will collect $55,000, instead of the $50,000 it initially
estimated, FinREC believes the entity should generally account for the difference as a reduction to the implicit
price concession (that is, an increase to the estimate of the transaction price) in accordance with FASB ASC
606-10-32-42 and 32-43 because the entity has additional information to update its estimate of the implicit
price concession.
15. If the entity subsequently determines it will only collect $45,000, instead of $50,000 it initially estimated, it will
need to evaluate whether it has obtained any adverse information regarding the financial condition of the
patients in the portfolio to determine if an impairment exists. If no adverse information regarding the patients’
financial condition has been obtained, FinREC believes the entity should generally account for the difference
as an increase to the implicit price concession (that is, a reduction to the estimate of the transaction price),
because the health care entity determined that it intended to provide an implicit price concession. If an entity
experiences frequent subsequent adjustments that result in decreases to patient revenue, the entity should
re-assess whether its estimation process, including its application of the constraint, is appropriate.
Example 4 – Implicit Price Concession Based on Single Contract – Insured patient with high deductible
plan
16. An urgent care clinic treats an insured patient with a high deductible plan but, prior to providing service, does
not determine whether or not the patient has a patient responsibility (for example, whether or not the patient
has met their deductible for the period) and, if so, whether the patient has the ability to pay it. The standard
charges for the services provided to the patient are $5,000. After services are provided, the patient presents
proof of coverage with a commercial insurance company. Based on its contract with the commercial payor,
the clinic determines there is a contractual adjustment of $3,000 (that is, an explicit price concession)
17. The clinic has a history of providing services to insured patients with high deductible plans and collecting
amounts that are substantially less than its billed charges. The clinic considered that the services were
provided early in the calendar year and therefore, patients with high deductible plans may not have met their
deductible. Based on its historical experience with patients with high deductible plans during similar time
periods in prior years, the clinic estimates that it only expects to collect $200 for the contract. The clinic
intends to pursue collection of the $2,000 amount billed and may engage the use of external collection
agencies to do so. That is, the clinic does not intend to give up collecting the billed amount.
18. Because the facts and circumstances indicate that the entity’s intention, when entering into the contract with
the customer, was to provide an implicit price concession, it concludes that $200 is the transaction price
(variable consideration) after consideration of the constraint in FASB ASC 606-10-32-11 and 32-12. The
clinic concludes that it is probable that it will collect the $200 and that the other criteria in FASB ASC 60610-25-1 are also met and records patient service revenue and accounts receivable of $200.
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Example 5 – Implicit Price Concession Based on Portfolio Approach – Insured patients with high
deductible plans
19. An urgent care clinic elects to apply the portfolio approach (as described in FASB ASC 606-10-10-4) for
recognizing revenue from patients.fn ii The urgent care clinic identifies a portfolio of contracts for patients with
high deductible plans provided by insurance carrier A based on qualitative and quantitative factors, including
an analysis that shows that the customer class shares similar collection patterns based on historical
information (that is, variances from reporting period to reporting period in the percentage of collections from
period to period have been insignificant in the aggregate). Therefore, the urgent care clinic concludes that
the expected outcome from applying a portfolio approach is not expected to materially differ from an individual
contract approach.
20. During the reporting period, the portfolio of insured patients with high deductible plans provided by insurance
carrier A has total gross charges of $500,000. Based on its agreement with this insurance carrier, the urgent
care clinic recognizes a contractual adjustment of 60%, or $300,000, of gross charges. Therefore, the
adjustments of $300,000 represent explicit price concessions and reduce the transaction price. The
discounted charges for services provided to the patients total $200,000.
21. The urgent care clinic has a practice of providing services to patients with high deductible plans even though
it historically collects amounts that are substantially less than its discounted charges from patients in this
customer class. The clinic considered that the services were provided early in the calendar year and
therefore, patients with high deductible plans may not have met their deductible. Based on the collection
history from this customer class during similar time periods in prior years, the urgent care clinic concludes it
is probable it will collect $80,000 of the discounted charges from the customers in the portfolio. The $80,000
was determined based on amounts expected to be received from patients and amounts expected to be
received from insurance carrier A for patients who have met all or a portion of their deductible. In addition,
based on an assessment of other facts and circumstances, the entity concludes that the other criteria in
FASB ASC 606-10-25-1 are met.
22. Because the facts and circumstances indicate that the entity’s intention, when entering into the contracts with
these customers, was to provide implicit price concessions to the customers, it may conclude that $80,000
is the transaction price (variable consideration) after consideration of the constraint in FASB ASC 606-1032-11 and 32-12 and records patient service revenue and accounts receivable of $80,000.
Example 6 – No Implicit Price Concession Based on Single Contract – Uninsured self-pay patient
23. An uninsured self-pay patient schedules an elective cosmetic surgery at an outpatient surgery center that
has a policy of performing a credit assessment prior to providing elective surgery to its patients. The gross
charges for the procedure are $4,000. Prior to surgery, the outpatient surgery center assesses the patient’s
ability to pay and grants the patient special pricing of $3,000 (that is, an explicit price concession or discount
of $1,000) which is similar to what it would charge an insured patient. The outpatient surgery center collects
$1,500 upfront and agrees to bill the patient the remaining $1,500 after the surgery. Based on its credit
assessment, the outpatient surgery center determines that it is probable that it will collect the remaining
$1,500 due from the patient and does not intend to provide a further price concession or discount. The
outpatient surgery center records patient service revenue of $3,000, accounts receivable of $1,500 and cash
of $1,500.
24. Based on a subsequent change in facts and circumstances, the surgery center determines that it only expects
to collect $500 of the $1,500 billed to the patient. Therefore, the remaining $1,000 that it does not expect to
collect represents an impairment loss (bad debt expense).
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Example 7 – Implicit Price Concession Based on Portfolio Approach – Insured patients with co-payment
25. A health care entity provides services to patients during a reporting period and determines that they are
covered by insurance carrier B and that each patient has a patient responsibility (co-payment). Because of
its not-for-profit mission, the health care entity does not have a policy of assessing patients’ intent and ability
to pay their patient responsibility portion prior to providing service.
26. Because of the similar characteristics of the patients (that is, each patient is covered by insurance carrier B
and has a co-payment), the health care entity applies a portfolio approach. fn ii This portfolio of contracts is
identified based on qualitative and quantitative factors and the entity concludes that the expected outcome
from using a portfolio approach is not expected to materially differ from an individual contract approach.
27. Its insurance carrier B portfolio includes both the insurance and co-payment amounts. The standard charges
for services provided to patients in this portfolio total $1,000,000 for the reporting period. Based on its
contractual agreement with insurance carrier B, the health care entity applies contractual adjustments of
50%, or $500,000, and nets these adjustments against the standard charges. The contractual adjustments
represent explicit price concessions. The contractual adjustments are recognized as a reduction to the
transaction price. The remaining charges of $500,000 include $475,000 in amounts due from insurance
carrier B and $25,000 in co-payment amounts due from the patients.
28. Based on its historical experience, the health care entity expects to collect all of the amounts due from
insurance carrier B ($475,000) but only expects to collect 40% or $10,000 of the co-payment amounts due
from the patients. In total, the health care entity expects to collect $485,000. Because the health care entity
has a business practice of providing services to patients regardless of their ability to pay, it determines that
the $15,000 it does not expect to collect of patient co-payments represents an implicit price concession.
Therefore, the health care entity determines that the transaction price, after consideration of the constraint
in paragraphs 11–12 of FASB ASC 606-10-32, is $485,000 (gross charges of $1,000,000, less contractual
adjustments of $500,000, less the implicit price concessions of $15,000) and that collection of substantially
all of the transaction price is probable.
29. The health care entity determines that the other criteria of step 1 in FASB ASC 606-10-25-1(a) through (e)
are met as it has legally enforceable contracts with the patients, the contracts have commercial substance,
the services provided and payment terms can be identified, and the parties have approved the contracts.
30. The health care entity would only include the estimate of variable consideration ($485,000) in the transaction
price after consideration of the constraint in FASB ASC 606-10-32-11 and 32-12. The health care entity
considers the likelihood of a revenue reversal and the potential magnitude of a reversal considering its level
of experience with similar types of contracts, the range of possible outcomes, the amount of time before
payment is expected, and the susceptibility to external factors.
31. Based on its expectation of payment from insurance carrier B, the health care entity concludes that it is
probable that a significant revenue reversal in the cumulative amount of revenue recognized ($485,000) will
not occur as the uncertainty is resolved (that is, as payments are received).
32. The health care entity recognizes patient revenue and accounts receivable of $485,000. If the entity
subsequently determines it will collect more or less than the amount initially estimated, the entity should
account for the difference similar to Example 3 above
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Endnotes:
fn i FASB ASU No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. As noted in the
basis for conclusions paragraph 4, FASB ASU No. 2011-07 was intended to be an interim step in addressing revenue
recognition for uninsured self-pay patients who do not qualify for charity care until the FASB's joint project on revenue
recognition is completed.
fn i Refer to issue 8-2, “Application of the portfolio approach to contracts with patients,” for discussion on application of the
portfolio approach.
fn iii Refer to issue 8-5, “Significant Financing Components,” for further discussion of the assessment of a significant
financing component for contracts with patients with self-pay balances.
Comments should be received by September 1, 2016, and sent by electronic mail to Andy
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