No. 2012-03
12 January 2012
Technical Line
Financial reporting development
Accounting for incentive
payments for using
electronic health records
In this issue:
What you need to know
Overview ........................................... 1
• Eligible hospitals have begun receiving payments under the federal
government’s electronic health records incentive payment program and need
to determine the appropriate accounting.
Background ....................................... 2
Medicare program .......................... 2
Medicaid program........................... 2
Key considerations ............................ 3
Gain contingency model .................. 3
Grant accounting model .................. 5
Appendix A: Example of a calendar
year-end entity .............................. 8
Appendix B: Example of a 30 June
year-end entity ............................ 10
• The SEC staff has indicated that SEC registrants should apply a gain
contingency model.
• Companies that do not file with the SEC may conclude that the grant
accounting model described in IAS 20 is an appropriate accounting model to
follow when recognizing income from these payments.
Overview
Many questions have arisen about the appropriate accounting treatment for
incentive payments under the Medicare and Medicaid programs for certain eligible
professionals and hospitals that meaningfully use certified electronic health record
(EHR) technology. The government payments were authorized by the American
Recovery and Reinvestment Act of 2009 to promote the meaningful use of EHR.
The staff of the Securities and Exchange Commission (SEC) has indicated that SEC
registrants should apply a gain contingency accounting model. We believe there are
two potentially acceptable methods for companies that do not file financial
statements with the SEC — by analogy to the gain contingency guidance within US
GAAP or by analogy to the governmental grant guidance within the International
Financial Reporting Standards (IFRS).
This publication discusses the SEC staff’s view and the accounting implications of
these incentive payments for issuers and non-issuers that operate hospitals.
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Background
Medicare program
Under the Medicare EHR incentive program, a hospital can earn up to four incentive
payments from federal fiscal years 2011 to 2016 (federal fiscal years begin
1 October and end 30 September), also known as the payment years. Incentive
payments are earned by achieving and maintaining “meaningful use” objectives
established by the Centers for Medicare & Medicaid Services (CMS). Some hospitals
have already achieved “meaningful use” of EHR under the first-year requirements
and received preliminary incentive payments for the federal fiscal year ended
30 September 2011.
In the first payment year, hospitals are required to achieve and maintain
meaningful use for 90 consecutive days. In subsequent payment years, meaningful
use must be maintained for the entire 365-day federal fiscal year (referred to as
the “compliance period” in this document). Payments will be made to qualifying
hospitals about four to six weeks after the hospital has electronically attested to
its compliance. Payments are calculated using a predetermined formula based
primarily on discharges and the following variables from the hospital’s cost report
(for a 12-month cost report year):
The criteria to receive
Medicare and Medicaid
EHR incentive payments
are generally the same,
but the payment
calculation is different.
•
Medicare and Medicare Advantage inpatient days
•
Total inpatient days
•
Total charges
•
Charity care charges
The preliminary payment is based on data from the most recently filed cost report
when the hospital attests that it has met the meaningful use criteria. The final
payment is determined using data in the settled 12-month cost report for the
hospital’s fiscal year that begins during the payment year. Illustrations of the time
lines for Medicare EHR payments for calendar year-end and 30 June year-end
hospitals can be found in Appendices A and B, respectively.
Medicaid program
Although Medicaid is a state program, the federal government is funding all of the
Medicaid EHR payments to eligible hospitals. Only acute care and children’s
hospitals are eligible to receive these payments. For an acute care hospital to
qualify, at least 10% of its patient volume must be Medicaid patients. Children’s
hospitals have no Medicaid threshold. Each state has some discretion to determine
the formula for calculating Medicaid patient volume; however, the data must be
from a period within one year before a hospital registers to participate in the
incentive program.
The total payment (across all years) a hospital can receive from the Medicaid
program is determined in the first year of participation based on a predetermined
formula. The total is then spread across eligible years of participation. States can
define the eligible years and the percentage paid each year, but there must be a
minimum of three and a maximum of six eligible years. The total payment includes
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the following variables from the hospital’s cost report year that ends in the federal
fiscal year before the first payment year:
•
Discharges
•
Discharges from the three preceding years
•
Medicaid and Medicaid managed care inpatient bed days
•
Total inpatient bed days
•
Total charges
•
Charity care charges
No adjustments are made to the calculation in subsequent years of participation.
However, acute care hospitals are required to demonstrate annually that they meet
the 10% Medicaid patient volume threshold.
Unlike the Medicare EHR program, the Medicaid program does not require hospitals
to demonstrate meaningful use in the first payment year. Hospitals are required to
demonstrate only that they have adopted, implemented or upgraded certified EHR
technology. In the second payment year, they are required to achieve and maintain
meaningful use status for 90 consecutive days. In subsequent years, meaningful
use status must be maintained for the entire 365-day compliance period.
Key considerations
We do not believe it would be appropriate to treat EHR incentive payments as
revenue. The assistance is being granted by the federal government to promote the
meaningful use of EHR and to encourage hospitals to take action that they would
not likely have taken if the assistance had not been provided. The payments are not
being provided in return for hospital services.
Because there is no specific US GAAP that addresses the accounting for
government grants, questions have arisen about the accounting for these
payments. ASC 105-10-05-21 states that “[i]f the guidance for a transaction or
event is not specified within a source of authoritative GAAP for that entity, an
entity shall first consider accounting principles for similar transactions or events
within a source of authoritative GAAP for that entity and then consider
nonauthoritative guidance from other sources.” The latter category can include
guidance issued by the International Accounting Standards Board (IASB).
We believe there are two potentially acceptable methods for companies that do not
file financial statements with the SEC — by analogy to the gain contingency
guidance in US GAAP or by analogy to the governmental grant guidance in IFRS.
Gain contingency model
We understand the SEC staff has informally expressed a view that, while it would
object to an analogy to the IFRS guidance for grant accounting for EHR incentive
payments, it would not object to hospitals using the gain contingency model in ASC
450-30,2 which deals with uncertain cash inflows. As a result, we believe SEC
registrants should apply the gain contingency model. We believe this model is also
acceptable for non-issuers.
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ASC 450 does not permit the recognition of gain contingencies until resolution of
the uncertainty confirms that an asset has, in fact, been acquired (that is, a gain is
recognized only when it is certain). Further, based on the guidance in ASC 450, it
would not be appropriate to recognize incentive payments based on the probability
of compliance or other factors affecting the calculation of the payment.
Under a gain contingency model, income from Medicare incentive payments for
meaningful use of EHR technology can be recognized after:
•
The completion of 90 consecutive days of meaningful use in the first payment
year and 365 consecutive days of meaningful use in the second through
fourth years
•
The 12-month cost report period beginning during the payment year has been
completed (total discharges, Medicaid and Medicaid managed care inpatient
bed days, total inpatient bed days, total charges and charity care charges are
known or can be reasonably estimated)
How we see it
Non-issuers can
apply either the gain
contingency model or the
grant accounting model.
Even though the final incentive payment is not known until the cost report used
to calculate it has been audited and settled by CMS or its intermediaries, there is
no longer uncertainty about whether an asset exists. The audited cost report
data used in determining the final incentive payment is reasonably estimable
based on historical experience, and although it is unavailable for several years
following the cost report period, that unavailability does not preclude
recognition of income.
Because Medicaid incentive payments are based on data from the cost report for
the year ended during the federal fiscal year before the first payment year, the
only contingency that must be resolved before recognizing Medicaid incentive
payments is, in the first year, the adoption, implementation or upgrade of
meaningful use software, and in subsequent years, the completion of the 90-day
or 365-day compliance period.
Under this approach, preliminary payments received before resolution of those
contingencies should be recorded as deferred income. Further, hospitals with
significant prior cost report experience should quantify the potential effect of any
intermediary or governmental adjustments to the cost report data and adjust the
estimated final incentive payment, if appropriate.
Appendices A and B illustrate the accounting for incentive payments using a gain
contingency model for a calendar year-end and 30 June year-end entity,
respectively.
Presentation and disclosure
Because these incentive payments do not represent revenue, by default they
should be considered other income. Rule 5-03(b) of Regulation S-X requires that,
for SEC registrants, other income be presented under the heading “non-operating
income.” If material, the income must be separately presented in the income
statement or in the footnotes to the financial statements.
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How we see it
Not-for-profit health care entities have certain flexibility when determining how
to present items within the performance indicator. It is a long-standing practice
in the health care industry for hospitals to present income, other than patient
service and premium revenue, related to their ongoing and central activities as
“other revenue” within income from operations. If a hospital concludes that
these incentive payments are related to its ongoing and central activities, it may
choose to present the payments accordingly. Other hospitals may conclude that
the incentive payments are peripheral to their ongoing and central activities and
may present the incentive payments in a nonoperating classification within the
performance indicator.
Disclosures in the footnotes should include the nature of the transaction and the
method of accounting used to recognize the incentive payments. This is of particular
importance for nonpublic entities that have a choice of acceptable accounting
methods. Hospitals should also disclose that the amount of income recognized is
based on cost report data, which is subject to audit by CMS or its intermediaries, and
that amounts recognized are subject to change. The amount of material changes in
accounting estimate relating to income should be disclosed. In addition, hospitals
should disclose the fact that their attestation of compliance with the meaningful use
criteria is subject to audit by the federal government or its designee.
In SEC Financial Reporting Codification Section 501,3 the SEC staff indicates that it
also expects registrants to discuss, if material, the nature, amount and effect of
federal financial assistance on their financial condition or results of operations in
Management’s Discussion and Analysis.
Grant accounting model
ASC 450-10-05-64 points out that “[n]ot all uncertainties inherent in the
accounting process give rise to contingencies. Estimates are required in financial
statements for many ongoing and recurring activities of an entity. The mere fact
that an estimate is involved does not of itself constitute the type of uncertainty
referred to in the definition of a loss contingency or a gain contingency.” Some
believe that the gain contingency literature does not apply to EHR incentive
payments because these payments are earned, based on the actions of the hospital,
and the uncertainty in the amount to be received does not constitute a gain
contingency. Instead, they believe that the substance of the asset is a grant from
the government, which is addressed explicitly in IFRS.
As a result, we believe that some non-issuers may conclude that grant accounting
in IAS 205 is the most appropriate accounting model for recognizing income from
both the Medicare and Medicaid EHR incentive programs.
IAS 20 considers the accounting for two types of grants: grants related to assets
and grants related to income. IAS 20 defines grants related to assets as grants
whose primary condition is that an entity qualifying for them should purchase,
construct or otherwise acquire long-term assets. All grants that are not related to
assets are considered grants related to income.
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How we see it
We believe the following considerations support accounting for the EHR
incentive payments as grants related to income under IAS 20:
• The criteria set forth by both the Medicare and Medicaid EHR programs to
earn incentive payments are based on meeting defined objectives, and are not
based on the purchase of assets.
• Hospitals that have existing EHR technology are eligible to receive payments.
• In its final rule, CMS states, “The incentive payments are not direct
reimbursement for the purchase and acquisition of such technology, but
rather are intended to serve as incentives for EPs and eligible hospitals to
adopt and meaningfully use certified EHR technology.”
IAS 20 states that income from government grants should not be recognized until
there is reasonable assurance that (1) the entity will comply with the conditions
attaching to them; and (2) the grants will be received. Based on the history of the
Medicare and Medicaid programs, we believe it is reasonable to conclude that the
grants will be paid by the federal government.
We believe EHR incentive
payments meet the
definition of “grants
related to income”
under IAS 20.
Using the guidance from IAS 20, a hospital could begin ratably recognizing income
over a compliance period once management is reasonably assured of program
compliance for the entire 90-day or 365-day period. When evaluating whether
achieving meaningful use is reasonably assured, management should consider the
hospital’s individual facts and circumstances, including:
•
How long has the hospital’s EHR technology been operating?
•
How long has the hospital achieved meaningful use of the technology?
•
How many of the meaningful use objectives does the hospital currently meet?
•
How reliable are the internal controls and IT general controls of the hospital?
Appendices A and B illustrate the accounting for EHR incentive payments received
using a grant accounting model for a calendar year-end and 30 June year-end
entity, respectively.
Consistent with accounting for the incentive payments using a gain contingency
model, hospitals accounting for the incentive payments using grant accounting with
significant prior cost report experience should quantify the potential effect of any
intermediary or governmental adjustments to the cost report data and adjust the
estimated final incentive payment, if appropriate.
Presentation and disclosure
IAS 20 states that grants related to income can be presented in either of the
following ways:
6
•
A credit in the income statement, either separately or under a general heading
such as “other income”
•
A reduction to the related expense
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Because hospitals may not need to incur expenses to receive EHR incentive
payments (e.g., a hospital may have implemented EHR technology before the
program began), we believe these payments generally should be separately
presented under the heading of “other income” or “other revenue.” Presentation in
the income statement or statement of operations would be consistent with the
presentation using the gain contingency model.
The appropriate financial statement disclosure of grants depends on the specific
circumstances. If the amount of grants received is material, the method of
accounting for the assistance should be included in the disclosure of accounting
policies. Disclosure may also include the following:
•
Amount received or receivable
•
Amount included in income or deferred
•
Basis for recognizing any deferred amounts
•
Terms and conditions of receipt
•
Unfilled conditions and any contingent liability for repayment
Hospitals should also consider disclosing that the amount of grant income
recognized is based on management’s best estimate and cost report data that is
subject to audit by CMS or its intermediaries and that amounts recognized are
subject to change. The amount of material changes in accounting estimate relating
to grant income should be disclosed. In addition, a hospital should disclose the fact
that its attestation of compliance with the meaningful use criteria is subject to audit
by the federal government or its designee.
Endnotes:
________________________
1
2
3
4
5
ASC Topic 105-10, Generally Accepted Accounting Principles — Overall
ASC Topic 450-30, Contingencies — Gain Contingencies
SEC Financial Reporting Codification, Section 501, Management’s Discussion and Analysis
ASC Topic 450-10, Contingencies — Overall
AS 20, Accounting for Governmental Grants and Disclosure of Government Assistance
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Appendix A: Example of a calendar year-end entity
Incentive payment time line
In the first payment year (1 October 2010 through 30 September 2011), Hospital A
completed its 90-day meaningful use compliance period on 17 July 2011 and
submitted its attestation on 8 August 2011. On 12 September 2011, Hospital A
received a preliminary incentive payment of $650,000. The preliminary payment
was based on the data in the 12-month cost report for the year ended 31 December
2010. The final payment will be based on the settlement of the 12-month cost
report for the year ended 31 December 2011. Settlement of the cost report is
expected to occur in April or May of 2013, and the final incentive payment will be
adjusted at that time. Management estimates that the final incentive payment for
the first payment year will be $675,000.
In the second payment year (1 October 2011 through 30 September 2012), it
completed its 365-day meaningful use compliance period on 30 September 2012
and submitted its attestation on 2 November 2012. On 19 January 2013, Hospital
A received a preliminary incentive payment of $800,000. The preliminary payment
was based on data in the 12-month cost report for the year ended 31 December
2011. The final payment for the second payment year will be based on the
settlement of the 12-month cost report for the year ended 31 December 2012.
Settlement of the cost report is expected to occur in April or May of 2014, and the
final incentive payment will be adjusted at that time. Management estimates that
the final incentive payment for the second payment year will be $850,000.
Recognition of Medicare EHR incentive payments using a gain
contingency model
Hospital A receives its first preliminary incentive payment of $650,000 on
12 September 2011. At the time of payment, Hospital A will record the cash as
deferred income. The estimated final incentive payment of $675,000 will be
recognized as income on 31 December 2011 (the point at which the contingencies
associated with both the compliance with the meaningful use criteria and the
availability of data from the applicable cost report year are resolved). The $25,000
difference between the preliminary payment received and management’s best
estimate of the final incentive payment (including consideration for the potential
effect of any intermediary or governmental adjustments to the cost report data) will
be recorded as an amount due to or from Medicare.
Hospital A receives its second preliminary incentive payment of $800,000 on
19 January 2013. Both of the contingencies are resolved on 31 December 2012,
prior to the receipt of the preliminary incentive payment. Therefore, Hospital A will
record income and a receivable from Medicare for management’s best estimate of
the final incentive payment, $850,000 (including consideration for the potential
effect of any intermediary or governmental adjustments to the cost report data),
on that date.
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Recognition of Medicare EHR incentive payments using a grant
accounting model
Hospital A received its first preliminary incentive payment of $650,000 on
12 September 2011. Hospital A implemented its EHR technology in 2004 and
started to use it meaningfully in 2008. As no additional staff training or capital
outlay was required to meet the meaningful use objectives stated by CMS,
Hospital A’s management determined that it was reasonably assured that the
hospital would comply with meaningful use objectives set forth for the entire 90-day
compliance period, and therefore ratably recognized the estimated final payment of
$675,000 from the EHR incentive program from 19 April 2011 (the first day of the
compliance period) to 17 July 2011.
Additionally, because management was reasonably assured that the hospital
would comply with the meaningful use objectives set forth for the entire 365-day
compliance period, Hospital A recognized $212,500 ($850,000 x 3/12), of the
estimated income from the second payment year in its fiscal year ending
31 December 2011. The remainder of the payment would be recognized ratably
over the first nine months of 2012.
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Appendix B: Example of a 30 June year-end entity
Incentive payment time line
In the first payment year (1 October 2010 through 30 September 2011), Hospital B
completed its 90-day meaningful use compliance period on 17 July 2011 and
submitted its attestation on 8 August 2011. On 12 September 2011, Hospital B
received a preliminary incentive payment of $650,000. The preliminary payment
was based on the data in the 12-month cost report for the year ended 30 June
2010, because Hospital B had not yet submitted its cost report for the year ended
30 June 2011. The final payment will be based on the settlement of the 12-month
cost report for the year ended 30 June 2012. Settlement of the cost report is
expected to occur in October or November of 2013, and the final incentive
payment will be adjusted at that time. Management estimates that the final
incentive payment for the first payment year will be $675,000.
In the second payment year (1 October 2011 through 30 September 2012), it
completed its 365-day meaningful use compliance period on 30 September 2012
and submitted its attestation on 2 November 2012. On 19 January 2013, Hospital A
received a preliminary incentive payment of $800,000. The preliminary payment
was based on data in the 12-month cost report for the year ended 30 June 2012,
because in payment year two, Hospital B submitted its annual cost report before
completing the attestation. The final payment will be based on the settlement of the
12-month cost report for the year ended 30 June 2013. Settlement of the cost
report is expected to occur in October or November of 2014, and the final incentive
payment will be adjusted at that time. Management estimates that the final
incentive payment for the second payment year will be $850,000.
Recognition of Medicare EHR incentive payments using a gain
contingency model
Hospital B receives its first preliminary incentive payment of $650,000 on
12 September 2011. At the time of payment, Hospital B will record the cash as
deferred income. The estimated final incentive payment of $675,000 will be
recognized as income on 30 June 2012 (the point at which compliance with the
contingencies associated with both the compliance with the meaningful use criteria
and the availability of data from the applicable cost report year are resolved). The
$25,000 difference between the preliminary payment received and management’s
best estimate of the final incentive payment (including consideration for the
potential effect of any intermediary or governmental adjustments to the cost report
data) will be recorded as an amount due to or from Medicare.
Hospital B receives its second preliminary incentive payment of $800,000 on
19 January 2013. At the time of payment, Hospital B will record the cash as
deferred income. Both of the contingencies are resolved on 30 June 2013.
Therefore, Hospital B will recognize the estimated final incentive payment of
$850,000 as income on that date. The $50,000 difference between the
preliminary payment received and management’s best estimate of the final
incentive payment (including consideration for the potential effect of any
intermediary or governmental adjustments to the cost report data) will be recorded
as an amount due to or from Medicare.
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Recognition of Medicare EHR incentive payments using a grant
accounting model
Hospital B received its first preliminary incentive payment of $650,000 on
12 September 2011. Hospital B also implemented its EHR technology in 2008,
but did not begin to use it in a meaningful way until after the initial meaningful
use objectives were released by CMS. Hospital B first attempted to achieve a
90-day meaningful use period in January, but discovered several issues that
needed resolution. Management has no assurance that the hospital will achieve
meaningful use for 90 consecutive days and does not record income from the
program until 17 July 2011, the day the 90-day compliance period ends. On
17 July 2011, Hospital B records income of $675,000 (its best estimate of the
estimated final payment).
At 1 October 2011 (the first day of the second payment year), Hospital B was not
reasonably assured that it would meet the 365-day compliance requirement.
However, after six months of continuous compliance, management determined that
it was reasonably assured that the hospital would achieve compliance for the
second payment year. On 31 March 2012, Hospital B recorded $425,000 of the
estimated income from the second payment year. At 30 June 2012, the hospital
had recognized a total of $637,500 ($850,000 x 9/12) of the estimated income
from the second payment year. The remainder of the payment would be recognized
ratably over the first three months of fiscal year 2013.
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