In the absence of authoritative GAAP on the subject, a diversity in practice has been observed with respect to how critical access hospitals (CAHs) recognize revenue from meaningful-use incentive payments.
Various viewpoints exist on how to account for the economic substance of these arrangements. This article describes three of them—although other approaches also may exist—and provides a decision-making approach to help practitioners decide which viewpoint may be the most appropriate in their circumstances.
CAHs have 25 or fewer beds and primarily operate in rural areas. Unlike hospitals that are paid under prospective payment systems, Medicare pays CAHs for patient services based on each hospital’s costs of providing care. This is in recognition of the unique fiscal challenges facing these hospitals due to their small size, limited workforce, and dependency on government programs such as Medicare and Medicaid.
Medicare payments to CAHs are based on the reasonable costs of furnishing Medicare-covered services to beneficiaries (i.e., cost reimbursement). Reasonable costs include “all necessary and proper costs associated with furnishing the services,” including costs associated with property, plant, and equipment used in providing the services. In general, the portion of a depreciable asset’s costs that are allocated to the period of operation is determined by distributing the cost of the depreciable asset over the estimated useful life of the asset (i.e., representing depreciation expense for the period).
Under cost reimbursement, revenue is considered to be earned when services are provided. (This is based on the general rule in FASB Statement of Financial Accounting Concepts No. 5 (CON 5), Recognition and Measurement in Financial Statements of Business Enterprises, that revenue is earned when an entity has performed what is required to be entitled to the revenue.) Therefore, revenue recognition related to exhausting an organization’s capital assets historically has been based on the pattern over which the assets are used up (i.e., ratably over time).
The American Recovery and Reinvestment Act of 2009, P.L. 111-5,
established incentive payments under the Medicare and Medicaid
programs for certain professionals and hospitals that “meaningfully
use” certified electronic health record (EHR) technology.
Because CAHs are otherwise reimbursed on a reasonable
cost basis and not pursuant to a prospective payment system (PPS), the
incentive payment methodology for CAHs is different than it is for PPS
hospitals. It provides for increased reimbursement, as well as
acceleration of amounts that would normally be received in future
periods under existing regulations, both of which are based on actual
costs incurred associated with qualified EHR technology.
For CAHs, the incentive payment simply modifies the existing method through which the hospital is paid for the services it provides to Medicare beneficiaries (both in terms of the timing of the payment and the amount). This is unlike PPS hospitals, for which the meaningful-use incentive payments are earned independently of the diagnosis-related group payments (see chart below). A simple example showing how the CAH EHR incentive is calculated follows:
Illustration: ABC Hospital
ABC Hospital is a CAH with a June 30 fiscal year end. Forty-five
percent of its overall patient service-related cost (including
inpatient and outpatient services) is associated with services
provided to Medicare patients. Fifty-five percent of its inpatient
days are related to Medicare patients.
On Oct. 1, 2011,
ABC Hospital purchased certified EHR technology with an estimated
useful life of seven years at a cost of $1,400,000. Based on this,
depreciation expense related to the technology would be $200,000 per
year ($1,400,000 ÷ 7 years) or $16,667 per month ($1,400,000 ÷ 84
months). ABC Hospital had the certified EHR technology installed and
in use for operational purposes as of March 31, 2012. ABC Hospital
successfully met the criteria for “meaningfully using” the EHR
technology during the 90-day period from April 1, 2012, to June 29,
2012, thus earning an incentive payment.
Had the incentive program not been enacted, any depreciable costs associated with EHR technology would have been reported ratably over the life of the associated asset, and ABC Hospital would have been reimbursed for the Medicare share of the cost reported in each year. Assuming that its Medicare share remained constant, ABC Hospital’s net patient service revenue in each of fiscal years 2012–2019 would have included the following, associated with the “reasonable costs” of the technology:
- 2012 = $22,500 (3 months depreciation for a total of $50,000 × 45% overall Medicare share)
- 2013–2018 = $90,000 each year ($200,000 depreciation per year × 45% overall Medicare share)
- 2019 = $67,500 (9 months depreciation for a total of $150,000 × 45% overall Medicare share)
As a result of enactment of the incentive program, ABC Hospital
is permitted to include the entire cost of the technology in its June
30, 2012, Medicare cost report, and is reimbursed for those costs
based on its inpatient Medicare share plus an additional 20% (not to
exceed the total reasonable cost). Based on this, the Medicare share
for purposes of calculating the EHR incentive payment is ABC
Hospital’s inpatient Medicare share of 55% plus 20%, which equals 75%.
Therefore, ABC Hospital receives a Medicare payment of $1,050,000 associated with the technology for fiscal year 2012 ($1,400,000 × 75% Medicare share). The difference of 30% between the higher 75% EHR incentive Medicare share and the normal 45% overall Medicare share results in $420,000 ($1,400,000 × 30%) of additional reimbursement to which ABC Hospital otherwise would not have been entitled absent the enactment of the incentive program. In addition, the remaining $630,000 ($1,050,000 ‒ $420,000) is an acceleration of the reimbursement it would have received during years 2012–2019.
Sample viewpoints on revenue recognition
As can be seen from the example above, a qualifying CAH could receive a significant incentive payment in the period it meets the “meaningful-use” criteria. Determining an appropriate accounting treatment for that payment, however—i.e., the period(s) in which it is recognized and how it is classified in the income statement—is complicated for two reasons. First, no authoritative GAAP exists that explicitly addresses the accounting for meaningful-use incentive payments. Second, in providing incentive payments, the Centers for Medicare & Medicaid Services (CMS) is acting as both a major customer of the entity and a public policymaker. This can blur the distinction between whether the payments are attributable to a contract with a customer, a grant from a government, or a combination of the two.
As a result, a diversity in practice appears to exist with respect to how CAHs are accounting for the economic substance of these arrangements. Three interpretations noted in practice are described below; others may exist as well.
This article does not express a preference for a particular viewpoint and also does not intend to endorse any of these viewpoints as being “GAAP treatments.” Only FASB can establish GAAP, and FASB has not weighed in on this issue. This article is intended only to summarize various existing viewpoints and describe the underlying basis for each. In the absence of authoritative guidance from FASB, it is up to accountants and their auditors to determine whether a particular viewpoint is supportable under GAAP and be prepared to justify it.
Viewpoint A: Payment for patient services provided during period in which “meaningful use” is achieved. Some CAHs view the incentive program as a revision of how “reasonable costs” of furnishing services to Medicare beneficiaries are determined.
There are multiple references in the laws and regulations governing CAH EHR payments that indicate that the payments are determined using the existing CAH payment calculations with certain revisions. For example, the Federal Register, Vol. 75, No. 144, dated Wednesday, July 28, 2010, on page 44461, states that “the following rules shall apply in determining payment and reasonable costs for a critical access hospital that would be a meaningful EHR user” and further notes that “the Secretary shall compute reasonable costs by expensing such costs in a single payment year and not depreciating these costs over a period of years.”
The amount of EHR expenditures made during the period in which the “meaningful-use” criteria are met (or the remaining undepreciated cost of previously acquired EHR technology) is included in the cost report of that period as part of the “reasonable costs” of the services provided to beneficiaries during the period covered by that cost report.
These CAHs view the revenue as directly attributable to patient services provided during that single cost reporting period. In addition, after qualifying for an EHR payment, the CAH does not have to refund or repay any portion if the hospital subsequently is unable to continue to meet “meaningful use.” The CAHs view the earnings process as having been completed in the period in which the meaningful-use criteria are met and therefore recognize the entire payment as revenue at that time. Because the incentive payments are directly linked to the payments they receive for providing care to Medicare beneficiaries, CAHs consider incentive payments to be part of net patient service revenue.
Viewpoint B: An acceleration of capital reimbursement payments made. Some CAHs believe that CMS is merely prepaying all of the reimbursement to which the CAH would otherwise be entitled, plus an incremental reimbursement amount. They believe that CMS is not simply giving the CAH money to buy EHR technology; rather, there is an implicit expectation that the technology be used to provide improved patient services over its estimated useful life (or remaining estimated useful life).
These entities defer the payment upon receipt and amortize it into income during the periods over which the technology is depreciated, consistent with the pattern over which they otherwise would have received reimbursement for depreciation costs associated with that capital asset. Because it is part of the reasonable costs they are paid for providing care to Medicare beneficiaries over that period, the income is reported as part of net patient service revenue.
Viewpoint C: A payment to induce the purchase of capital asset. Some entities’ reporting reflects a viewpoint that the incentive payment is a grant from CMS to specifically purchase an asset that will be used to provide services to all patients (including Medicare beneficiaries). There is an expectation that the equipment will be used to provide services to all patients (including the patients whose care is being paid for by CMS).
Thus, there is a link between the incentive payments and the amounts
routinely paid by CMS (as a customer). Because GAAP does not address
accounting for government grants received in connection with services
provided (which are not viewed as being within the scope of the
“Contribution Received” subsections of FASB ASC Subtopic 958-605, as
noted in the HFMA Issue Analysis: Medicare Incentive Payments for
Meaningful Use of Electronic Health Records: Accounting and
Reporting Developments (December 2011)), CAHs look to the
guidance of International Accounting Standard (IAS) No. 20,
Accounting for Government Grants and Disclosure of Government
Assistance. The CAHs point to the fact that IAS 20 is widely used
within the United States for these situations, and is consistent with
conclusions reached in the issue analysis.
However, there
is a key difference between CAHs and PPS hospitals that affects how
IAS 20 is applied. For PPS hospitals, the CMS regulations explicitly
state that the incentives are for meaningfully using technology in
providing care to patients; they are not grants provided for the
purchase of the technology itself (and therefore are not considered
grants related to assets under IAS 20).
For CAHs, the CMS regulations state that the payments are intended to offset the cost of acquiring the technology. As a result, they believe that the incentive payments received by CAHs represent “government grants related to assets” as defined in IAS 20. Under IAS 20, a grant for assets is either (a) initially recognized as deferred income that is amortized into future income over the useful life of the asset acquired; or (b) deducted in calculating the carrying amount of the asset, thus recognizing the grant in profit or loss over the life of a depreciable asset as a reduced depreciation expense (IAS 20, ¶¶ 24–27).
These entities appear to have different views related to the income statement classification of the incentive payments. Some believe that if IAS 20 guidance is applied, the income must be classified in its entirety as other income (i.e., grant income). Others believe that the portion of the income associated with the incentive payment that would have been recognized regardless (i.e., the portion that would have been reimbursed as normal depreciation) be classified as net patient service revenue, while the portion of the payment that represents income that would have not been otherwise recognized be classified as other income (grant income).
A decision-making approach
If the guidance for a transaction or event is not specified within authoritative GAAP, ASC Paragraph 105-10-05-2 states that a preparer “shall first consider accounting principles for similar transactions or events within a source of authoritative GAAP.” As indicated previously, GAAP contains no explicit guidance related to accounting for meaningful-use incentive payments. Furthermore, there does not appear to be guidance in GAAP for similar transactions.
ASC Paragraph 105-10-05-2 goes on to state that if there doesn’t appear to be guidance that is similar, an entity “shall … then consider nonauthoritative guidance from other sources.” ASC Paragraph 105-10-05-3 provides the following as examples of sources of nonauthoritative accounting guidance and literature:
a. Practices that are widely recognized and prevalent either generally or in the industry;
b. FASB concepts statements (e.g., CON 5);
c. AICPA issue papers;
d. IFRS issued by the International Accounting Standards Board;
e. Pronouncements of professional associations or regulatory agencies;
f. Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids; and
g. Accounting textbooks, handbooks, and articles.
The ASC also states that the appropriateness of other sources of accounting guidance depends on its relevance to particular circumstances, the specificity of the guidance, the general recognition of the issuer or author as an authority, and the extent of its use in practice.
For example, in applying the HFMA issue analysis, accountants will
note that the “paper focuses on accounting for the Medicare EHR
incentive payments to acute-care inpatient hospitals that are paid
under the IPPS [inpatient prospective payment system]. The provisions
of the incentive program are applied differently to critical access
hospitals and eligible professionals; however, read in conjunction
with the rules applicable to those types of providers, the concepts
discussed in this position paper may be useful in determining the
appropriate accounting in those situations as well.” Therefore, an
entity applying the concepts outlined in the HFMA issue analysis may
wish to consider the significant differences in program
characteristics of CAHs and IPPS hospitals, as described
above.
In making a final decision, health systems
consisting of both CAHs and PPS hospitals may also consider whether a
single policy election is appropriate for reporting purposes. For
example, if the PPS hospitals are using IAS 20 for recognition
purposes, then the health system may decide that it is most
appropriate to use IAS 20 as the basis for recognition for the CAH
hospitals included within the reporting entity.
Finally, ASC Subtopic 235-10 provides general guidance with regard to disclosure of certain accounting policies followed by an entity. ASC Paragraph 235-10-50-3 states that “the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods.” The ASC then states that an entity should specifically disclose any accounting principles and methods involving “a selection from existing acceptable alternatives” or “unusual or innovative applications of GAAP.” As a result, a CAH that receives EHR incentive payments considered material to its overall financial statements may determine that it is necessary to disclose the principles and method used in recognizing and reporting the payments.
EHR differences: CAHs and PPS hospitals
The following table summarizes some key differences between the EHR incentive payment methdologies for CAHs and PPS hospitals:
| Attribute | CAHs | PPS Hospitals |
| Qualification for incentive payment | Demonstrate that it “meaningfully used” EHR system in ordering and documenting patient care | Demonstrate that it “meaningfully used” EHR system in ordering and documenting patient care |
| How incentive payment is determined | Reimbursed based on costs of acquiring EHR system, as long as costs have not already been claimed in a previous period for reimbursement purposes. Qualified costs can include undepreciated values of existing EHR technology. Medicare reimbursement cannot exceed actual cost of EHR system. If no depreciable cost is incurred, then the incentive payment is zero even if “meaningful use” is demonstrated. | Formula consisting of a base amount plus a per-discharge amount. None of the incentive payment is based on actual cost incurred. |
—Brent Beaulieu (
brent.beaulieu@baptist-health.org
) is vice president of financial services for Baptist Health in
Little Rock, Ark., and is a member of the AICPA Health Care Expert
Panel and the HFMA Principles and Practices Board.
