Accounting and Auditing Update

1. west virginia chapter Accounting and Auditing Update Winter Education Conference January 23, 2014

2. Presenter: Norman Mosrie, CPA, CHFP, FHFMAPartner, Dixon Hughes Goodman LLP, Charleston, WV A certified healthcare financial professional, Norman serves as Partner-in-Charge of Assurance for the West Virginia region. With his involvement with the American Institute of Certified Public Accountants Healthcare Expert Panel and FASB not-for-profit financial statement project resource group, Norman is actively involved in accounting, financial reporting, and other matters impacting the healthcare and not-for-profit industries. His significant healthcare experience includes financial reporting, acquisition due diligence, corporate compliance, and third party reimbursement for various types of healthcare entities including academic medical centers, community hospitals, nursing homes, home health agencies, physician practices, and research organizations. Norman has developed and led healthcare training programs at the local, area, and national levels. He is a member of various professional and civic organizations that includes being a past Council Member and Healthcare Conference Committee Chairman with the AICPA, Special Review Committee Member with the GFOA, and Past Board Member of the HFMA. Norman graduated summa cum laude from Marshall University where he earned his BBA in Accounting. He is actively involved with his alma mater, including currently serving as the College of Business Advisory Board President. 707 Virginia Street, East Suite 1700 Charleston, WV 25301 304.414.3913 direct Norman.Mosrie@dhgllp.com

3. Discuss recent accounting and auditing standards as well as emerging issues and the expected impact on health care entities

4. Health Care Accounting & Auditing Update • ASU 2011-07: “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” • ASU 2012-01: “Continuing Care Retirement Communities-Refundable Advance Fees” • ASU 2013-04: “Liabilities: Obligation Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date” • ASU 2013-06: “Services Received from Personnel of an Affiliate” • FASB Project: Discontinued Operations • Accounting For Premier Transaction • Accounting Developments Impacting Health Care • New Revenue Recognition Standards • Impact of New Revenue Recognition Standards • Impact of Other Accounting Proposals • Common Practice Issues – RAC Audits • Accounting for EHR Incentive Payments • Accounting for ICD-10 Costs

5. ASU 2011-07:“Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” Recap and Implementation Matters

6. ASU 2011-07: Background • Provided relief for entities that “treat first” and then assess a patient’s ability to pay • Requested by hospitals with unusually high bad debt expense associated with indigent patients that do not qualify for charity care • Bad debt expense was significantly distorting operating metrics • Misapplication noted in practice by HCOs that assess ability prior to providing services • Stay tuned - FASB revenue recognition project proposed rules would change presentation

7. ASU 2011-07: Highlights • Primarily applies to acute-care hospitals that operate emergency rooms • ASU focuses on primary payor status (i.e., uninsured indigent patients that do not qualify for charity), not deductibles & coinsurance • If HCO has ability to “gate keep” on which patients it accepts for treatment, ASU likely wouldn’t apply • “Significance” language was included to eliminate any notion of a “trip wire” (i.e., if you have a single uninsured indigent patient, then you are in the scope and must apply the guidance)

8. AICPA TPA 6400.47: “Application of ASU 2011-07 in Consolidated Financial Statements” • Facts • Multi-entity HCO issues both consolidated and subsidiary financial statements • Question • Should assessments of “significance” performed for individual subsidiary statements be retained in consolidation? Or should a separate assessment of “significance” be made at the consolidated financial reporting entity level? • Response • Determination is an accounting policy that should be disclosed and consistently applied from period to period

9. AICPA TPA 6400.47: “Application of ASU 2011-07 in Consolidated Financial Statements” Retain subsidiary-level assessment in consolidation Make a separate assessment at consolidated level

10. ASU 2012-01:“Continuing Care Retirement Communities-Refundable Advance Fees”

11. ASU 2012-01: Implications for CCRCs

12. CCRC Technical Corrections ASU • Background • SOP 90-8 was the original guidance for refundable fees • Amortization of fees refundable through reoccupancy was intended to be a narrow exception • “In effect, the CCRC acts as if it were an agent for present and future residents” (“risk” is with the resident) • Diversity in practice developed due to misunderstanding of the intent of the original SOP • Contract terms changed as a result of changing economic conditions and marketing approaches • “Dangling Debit” Issue

13. ASU 2012-01: Refundable Advance Fees • Requires specific language in contract limiting refunds to proceeds of reoccupancy • Reported as cumulative effect adjustment to beginning net assets or retained earnings of the earliest year presented • HOWEVER: FASB Revenue Recognition Exposure Draft • Expected to allow NO amortization of refundable fees

14. ASU 2012-01: Refundable Advance Fees • Effective Dates • For public entities, fiscal periods beginning after December 15, 2012 • If your organization has publicly traded debt or conduit debt, you would be considered a public entity for reporting purposes • (For example, tax exempt bonds issued through an issuing authority would be conduit debt) • For non-public entities, fiscal periods beginning after December 15, 2013 • Early adoption permitted • If not early adopted, disclosure consideration if material • For many, will likely need to do the work to calculate whether material or not for disclosure purposes

15. ASU 2012-01: Refundable Advance Fees:FSO Calculation • Current guidance requires deferred revenue from entrance fees to be off-set against the Future Service Obligation (FSO) • No new specific guidance has been issued • Adoption of ASU 2012-01 may result in recording FSO • Should record as component of cumulative effect adjustment • Impact needs to be considered • Consult with Actuaries and Auditors

16. ASU 2013-04:“Liabilities: Obligation Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”

17. ASU 2013-04: Joint & Several Liability • Effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public companies and for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter for nonpublic entities • Guidance should be applied retrospectively for all periods presented • Applies to separately issued financial statements of entities that have joint & several liability for a fixed obligation (e.g., debt) • Addresses question of reporting debt of Obligated Group

18. ASU 2013-04: Joint & Several Liability • Obligations should be measured as the sum of the following: • The amount the reporting entity agreed to pay under the arrangement with its co-obligors • Any additional amount the reporting entity expects to pay on behalf of the co-obligors • Disclosures should include: • The nature of the arrangement and relationship with other co-obligors • Total amount outstanding under the arrangement • The reporting entities recorded liability and any receivable recognized • The nature of any recourse provisions with other entities

19. ASU 2013-06:“Services Received from Personnel of an Affiliate”

20. Main Provisions • Recipient NFP entity recognizes services received from personnel of an affiliate that directly benefits the recipient NFP entity • Services measured at the cost recognized by the affiliate for the personnel providing services • If it will significantly overstate or understate the value of the service received, the recipient NFP entity may elect to recognize that services received at either • The cost recognized by the affiliate for the personnel providing that service, or • The fair value of that service • Does not apply when the affiliate charges at least the approximate amount of direct personnel costs or the approximate fair value of services provided

21. Main Provisions: Presentation & Disclosure • Recipient NFP Health Care Entities should report as an equity transfer the increase in net assets associated with services received • Other recipient NFP entities: • Update does not prescribe presentation guidance other than prohibits reporting as a contra-expense or contra-asset • Corresponding decrease in net assets or creation or enhancement of an asset resulting from the use of services received from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP shall be presented similar to how other such expenses or assets are presented • Subtopic 850-10, Related Party Disclosures, applies to services received from personnel of an affiliate

22. Effective Date • Prospectively for fiscal years beginning after June 15, 2014 • Early adoption is permitted • Use a modified retrospective approach under which all prior periods presented upon the date of adoption should be adjusted, but no adjustment should be made to the beginning balance of net assets of the earliest period presented

23. Initial Measurement • Cost varies from entity to entity • Cost should include direct personnel costs incurred • Compensation • Payroll-related fringe benefits

24. FASB Project:Reporting Discontinued Operations

25. Definition of “Discontinued Operation”

26. Illustration #1 • Assume ABC Health System operates a nursing home. ABC agrees to sell the nursing home in a transaction that will close subsequent to year-end. After the sale, ABC will continue to be involved in managing some of the nursing home’s administrative functions • May ABC present the nursing home as a discontinued operation in its current year financial statements?

27. Illustration #2 • Same facts, but assume ABC operated five nursing homes and was planning to sell only one • May ABC present the sold nursing home as a discontinued operation?

28. Discontinued Operations: Proposed Disclosures

29. Discontinued Operations: Proposed Disclosures

30. Accounting for Premier Transaction

31. Accounting for Premier Transaction • Premier is a supplier of surgical and medical supplies to healthcare providers and was owned by approximately 181 U.S. hospitals, health systems and other health-care organizations. • On August 23, 2013, Premier filed a registration statement with the SEC for an initial public offering of its common stock. • On September 25, 2013, the Pricing Committee for Premier approved the final terms of the initial public offering and the newly issued Class A common shares of Premier, Inc. began trading on September 26, 2013.

32. Accounting for Premier Transaction • The public offering will change the investment structure for the holdings of its owners • Prior to the restructuring, the owners held equity ownership in two legal entities: a services company and an operating company • As part of the transaction, the owners exchanged their ownership interest in these two entities for class B shares in newly formed Premier Inc (which also provides class B unit ownership in a newly established LLP that is wholly owned by Premier, Inc) • The class B shares become convertible, at the option of the holder, into cash or class A shares, in various tranches, over a period of 7 years • In connection with the reorganization, Premier entered into a tax receivable agreement with the member owners to pay certain tax receivable benefits over a 15 year period.

33. Accounting for Premier Transaction • Accounting issue considerations: • Does the exchange of equity ownership in the old entities for class B shares in Premier Inc. require any new accounting for the holders of these shares? • As the class B shares become convertible into class A shares, is there any accounting prior to the conversion options being exercised (i.e. equity method)? • What is the amount of gain that should be recognized for the shares that were sold in October 2013? • Should the transaction be evaluated under the nonmonetary exchange guidance in ASC 845, the vendor relationship guidance in ASC 605 or some other guidance? • Should a value be assigned to the tax receivable agreement?

34. Accounting for Premier Transaction • Due to the focused attention regarding the accounting treatment for this transaction, it is suggested that entities consult with their auditors regarding the appropriateness of the accounting treatment based on their own facts and circumstances • Stay tuned for accounting guidance on this matter

35. Accounting Developments Impacting Health Care

36. New Revenue Recognition Standards • Background - The FASB and IASB are in the final stages of issuing revenue recognition that will supersede all existing guidance • The core principles of revenue recognition are: • Identify the contract • Identify separate performance obligations • Determine the transaction price • Allocate the transaction price to the separate performance obligations • Recognize revenue when (or as) the entity satisfies a performance obligation

37. Impact of New Revenue Recognition Standards • Revenue recognition for indigent and self-pay patients • The exposure draft was not clear whether or how health care entities should recognize revenue associated with indigent and self-pay patients • Recently, the boards tentatively decided to include a “collectability” threshold for recognition • Contracts with Medicare/Medicaid: • Can use either “most likely amount” or “expected value” in estimating variable consideration, whichever is best predictor

38. Impact of New Revenue Recognition Standards • Revenue transactions involving multiple contractual relationships • As many as four different parties may be associated with a revenue transaction involving a hospital • Under the proposal, the “customer” is the patient • Third-party payor makes payment on the patient’s behalf; it is not a separate “contract with a customer”

39. Impact of New Revenue Recognition Standards • Scope of prepaid health service contracts • Currently, these contracts are within the scope of ASC 954 – Health Care Entities • Uncertainty exists with respect to whether these contracts are within the scope of the new exposure draft related to Insurance contracts • Prepaid health services contracts – contract acquisition costs • Under ASC 954 acquisition costs related to prepaid health services contracts are expensed • Under the new exposure draft incremental costs are capitalized if the entity expects to recover those costs • As a practical expedient, these costs can be expensed if the amortization period is less than one year

40. Impact of Other Accounting Proposals • Not-for-profit financial reporting project – • Operating indicator • Should there be a defined operating indicator for non-health care NPOs? • If so, what are the implications of that decision on HCO “performance” indicator? • FASB has tentatively decided that net assets should be classified as either those with donor-imposed restrictions or those without donor-imposed restrictions • i.e., eliminate distinction between temporary and permanent restrictions on face of financial statements

41. Common Practice Issues: RAC Audits

42. Common Practice Issues: RAC Audits • Under the Tax Relief and Health Care Act of 2006, there is a permanent nationwide Recovery Audit Contractor (RAC) program • The objective of RAC audits is to detect and recoup improper payments in the Medicare fee for service program • RAC audits have resulted in significant payment reductions • However, audit activities in many states are still slow

43. Common Practice Issues: RAC Audits Question: Is it appropriate for an HCO to record a revenue reserve at the date the services are rendered for Medicare revenue that it believes CMS will “take back” as a result of future adjustments and/or findings? • HCOs should make a reasonable estimate of the amounts it expects to receive from third-party payers and such estimates shall be recorded in the period that the related services are rendered • ASC 954-605-25-6 states “Estimates of contractual adjustments, other adjustments, and the allowance for uncollectibles shall be reported in the period during which the services are provided even though the actual amounts may become known at a later date

44. Common Practice Issues: RAC Audits • There is significant diversity in practice on how health care entities are estimating and recording recoveries for claims under appeal • When an entity receives notification from CMS of the payment reduction it means that the revenue criteria has not been met – so the company must evaluate whether this is • a change in estimate, or • a correction of a prior period error

45. Common Practice Issues: RAC Audits • Error versus Changes to Estimates • Due to the complexities involved in billing medical services, such conclusions will likely require a significant amount of judgment • The audit findings should be carefully reviewed and management should assess whether the findings were: • Errors: Mathematical mistakes, systemic input errors, oversight or misuse of available information, misapplication of known contract terms, etc. • Changes in estimates: Changes due to variances in the interpretations of regulations and contracts, clarification provided through new information, and experience provided for improved judgment, etc. • Management should also review its accounting and reporting policies and processes to determine if such policies and processes did consider, or should have considered, the need for an allowance at the date of service for such audit findings

46. Common Practice Issues: RAC Audits • If this is considered to be a change in estimate then • an accrual for RAC adjustment should be recorded • this is generally a contra revenue adjustment along with the set up of a corresponding liability • There is a diversity of practice on when to record a receivable for recoveries on appealed claims • There are two alternate views on this topic

47. Common Practice Issues: RAC Audits • View 1: • This view is based on ASC 450-30, Contingencies • Since it not certain that the provider’s appeal will be successful, no receivable or related gain should be recorded until the appeals process is complete

48. Common Practice Issues: RAC Audits • View 2: • This view is based on SOP 00-1,“Auditing Health Care Third-Party Revenues and Related Receivables,” which states that “The fact that information related to the effects of future program audits, administrative reviews, regulatory investigations, or other actions does not exist does not lead to a conclusion that the evidence supporting management's assertions is not sufficient to support management's estimates” • Under this view, estimating recoveries for the successful appeal of denied RAC claims would be appropriate

49. Common Practice Issues: RAC Audits • However, this estimate should be based on provider specific facts and circumstances and the success rate of the organization during prior appeals process related to similar claims • While industry data can be used to corroborate company estimates, many believe that can’t be the sole support for recording claims recoveries • Some Firm’s have taken the position that View 1 is the only acceptable response in absence of provider specific data as described above so need to discuss with your auditor early in the estimation process

50. Common Practice Issues: RAC Audits • If an entity suspects that it may have billed for services that are potentially not reimbursable then they should: • implement changes to billing practices and/or clinical operations on a prospective basis and • evaluate whether revenue recognition criteria were met related to services previously billed and record adjustments based on whether it was a change in estimate or error correction • If the entity is concerned about potential RAC adjustments that have not yet been identified they should record estimated contractual adjustments based on specifically identified issues and a general reserve should not be recorded if it is not supported by entity-specific data