New accounting standards issued by the Financial Accounting Standards Board will significantly alter how organizations recognize bad debt, though what that will mean for the revenue cycle is still uncertain.
The rules took effect after December 15, 2017, for public healthcare entities and are set to take effect after December 15, 2018, for all others.
Under Accounting Standards Update No. 2014-09, organizations can no longer recognize the full amount billed to a patient as accounts receivable if they do not expect to collect that amount. Thus, they can also no longer write off the difference between that amount and what the patient ultimately ends up paying to bad debt, since it is no longer considered collectible revenue in the first place.
Rather, organizations should now recognize as accounts receivable only what they predict the patient is likely to pay based on historical experience and current circumstances. The difference in this expected collection amount and the amount billed is now considered an “implicit price concession,” rather than bad debt. If the patient ends up paying less than the expected collection amount, the variance is considered part of the implicit price concession—unless the patient experienced an adverse event that prevented them from paying. Only then can it be written off as bad debt.
For example, organizations would previously have written off $900 to bad debt if a patient was billed $1,000 but only paid $100. Now, organizations must assess the collectability of that $1,000 bill, or calculate the implicit price concession. If the organization calculates based on historic experience that it will likely receive only $100 and it indeed receives $100, there is no revenue discrepancy. However, if the organization receives only $80, it can report the unpaid $20 as bad debt if the patient suddenly became unemployed, filed bankruptcy, or experienced another mitigating event. Otherwise, it counts the discrepancy as part of the implicit price concession and makes a direct adjustment to patient revenue.
In light of this example, it can be concluded that bad debt will significantly decrease under the standards, and industry leaders contend that it will ultimately be replaced as a measurable category by implicit price concessions. While this seems like merely a change in semantics, it may require more effort to adjust than organizations predict.
Some considerations cited by industry reports include:
- Organizations may no longer be able to use bad debt to justify nonprofit status to both the Internal Revenue Service and communities. Currently, tax-exempt organizations report bad debt provision to the IRS on their Form 990. Some may also be required to include it in community benefit reporting per state regulations. There has been no instruction on this matter as of the date of this post; however, leaders may want to be on the lookout for changes in reporting requirements going forward.
- Organizations may need to establish processes for estimating the collectability of accounts. Strategies such as propensity-to-pay scoring, which take into account credit scores and other factors, may be helpful in this regard; however, a new component for some organizations that is emphasized in the FASB’s new standards may be taking into account a patient’s history of payment at the organization.
- Organizations may need to alter self-pay balance collection performance expectations, which may impact how collection staff approach their work. Collection staff are accustomed to seeking the full amount of a self-pay balance. If organizations are required to recognize that they will likely not receive this amount for certain patients, they may need to adjust their collection goals, and staff may need to adjust their tactics.
While the full impact of the new FASB standards on healthcare entities has yet to reveal itself, non-public organizations especially may want to begin monitoring the experiences of their public counterparts and preparing for some of the considerations listed above.