“This provides much-needed clarification for hospitals unsure of how to account for these new payments.” — Josh Wilks, Health Care Partner
Hospitals Get Clarity on How to Account for EHR Incentive Payments
The Principals and Practices Board of the Healthcare Financial Management Association (HFMA) recently released reporting guidance for acute care hospitals receiving Medicare and Medicaid incentive payments for meaningful use of electronic health records (EHR).
HFMA’s issue analysis, Medicare Incentive Payments for Meaningful Use of Electronic Health Records: Accounting and Reporting Developments, provides details on two accounting models, the gain contingency and grant accounting, and how each can be applied to prospective payment system hospitals.
“This provides much-needed clarification for hospitals unsure of how to account for these new payments,” says Josh Wilks, a health care partner with CliftonLarsonAllen. “Most SEC-registered or publicly-traded hospitals are using the gain contingency model, while most other hospitals are using the grant accounting model.”
Although different reimbursement methods exist for critical access hospitals and eligible physicians, Wilks says the concepts in the issue analysis can also be applied them.
Grant accounting model
According to the International Accounting Standard 20 (IAS 20), hospitals should recognize revenue when there is “reasonable assurance” it complied with the requirements during the applicable reporting period, and accurate estimates of the incentive revenue can be made. IAS 20 has two methods of revenue recognition:
- Cliff recognition. A hospital recognizes income after the EHR reporting period has ended, and it has complied with the “meaningful use” measurements.
- Ratable recognition. A hospital recognizes income ratably over the reporting period once it has “reasonable assurance” that it will successfully comply with the minimum number of meaningful use objectives over the EHR reporting period.
According to the issue analysis, “reasonable assurance is a matter of judgment that will depend on an individual hospital’s particular facts and circumstances.” Management needs to determine at which point it is reasonably assured the hospital has complied with the EHR meaningful use requirements. The issue analysis suggests hospitals use numerous factors to help make this decision, including:
- How long it has used EHR technology
- Whether it is going beyond the basic requirements to qualify for minimum use
- How far along it is in implementing a computerized physician order entry
Gain contingency model
This model requires all significant contingencies be resolved prior to recognizing any revenue. It does not take into consideration the likelihood of hospitals achieving meaningful use of EHR during the reporting period. When the gain contingency model is used, hospitals may not recognize revenue for incentive payments until after it has successfully complied with meaningful use criteria during the entire EHR reporting period.
In addition, in some circumstances an entity’s fiscal year end may not coincide with the federal fiscal year end. Given that the incentive is based on discharges for the applicable fiscal year end, hospitals may have to defer revenue until after their fiscal year end.
Reporting income and disclosures
Incentive payments are not intended to reimburse providers for the cost of acquiring EHR assets, but instead provide incentive payments for being meaningful users of EHR technology. As a result, incentive payments should be reported as a component of “Other Operating Revenue” on the statement of operations. In addition, disclosures regarding the accounting methodologies selected and certain contingencies and estimates will be required in an organization’s financial statements. Hospitals should consider if a reserve for potential changes in payments is necessary, given the initial incentive payment is tentative. Payments will be based on the previous fiscal year’s cost report information, and will be updated when the fiscal year cost report for the year the incentive is received is final.
The issue analysis was made in response to the Health Information Technology for Economic and Clinical Health (HITECH) Act, which set aside $19 billion for investing in healthcare information technology in the form of incentive payments to providers for implementing and using EHR technology in a meaningful way.
Hospitals have already started receiving incentives after implementing EHR systems, but were without final guidance on how to include these funds in their financial statements. HFMA issues analyses provide short-term practical assistance for emerging heath care issues, but are for guidance only and not a binding regulation.
How we can help
Although the issue analysis offers useful guidance, hospitals that are receiving incentive dollars should discuss the accounting options with their independent auditors before choosing an accounting method.
Josh Wilks, Health Care Partner
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