ASC 606 and Challenges to the Healthcare Industry

ASC 606 and Challenges to the Healthcare Industry

It’s no surprise that the healthcare industry is facing unique and disruptive challenges that are affecting areas such as productivity, revenue cycle, and supply chain on a major scale. Given the current market, healthcare entities may find themselves strapped for resources ranging from supplies to staff, grappling with changes to insured populations, or even struggling to manage new business models such as subscriptions. These challenges are made more difficult by the financial and accounting complexities posed by the revenue recognition standard, ASC 606, Revenue from Contracts with Customers.

CFOs in the healthcare industry are doubling down to ensure that operations are running efficiently and benchmarking well against competitors.

ASC 606 outlines a single, comprehensive model for accounting for revenue from contracts with customers, or for the healthcare vertical, with patients. Proper application of the standard is expected to be significantly difficult for healthcare entities and providers, who are most notably unique in the accounting world for the complexities surrounding the revenue cycle (billing and collecting for services provided).

Steps will need to be taken to mitigate the impacts of these complexities along with the additional challenges to topics including, revenue recognition contract combinations, variable consideration, transaction price calculations, and disclosure requirements. Browse the SOFTRAX Resources page for a library of webinars on-demand with more in-depth information on each of these topics and their challenges.

Many companies have discovered the secret to successfully navigating the complexities of ASC 606 is with back-office automation. Subscription billing automation, contract management automation, and revenue recognition automation for healthcare companies are necessary to better prepare for additional waves of the virus outbreak and to better reestablish full patient care services.

Major Changes to Revenue Recognition in the Healthcare Industry: How Should Healthcare Entities Now Report Revenue Recognition?

ASC 606 will require healthcare entities to carefully evaluate how, when, and in what amount they recognize revenue, specifically regarding contracts with third-party payers and self-pay revenue (and resulting bad debts).

Revenue recognition guidance under ASC 606 remains the same in a post-pandemic world. However, changes such as those to underlying current and forecasted insured populations may materially impact an organization’s historical collection experience, which is used in the estimate of the variable consideration.

The additional challenges the healthcare industry will face under ASC 606, involve:

  • Existence of a Contract – Under the new revenue recognition standard, healthcare companies may need to consider the customer’s ability and intention to pay the amount to which the companies are entitled in determining if a contract exists, and if revenue can be recognized.
  • Transaction price calculations – Total consideration that the entity expects to be entitled to from the customer over the contract term (i.e., transaction price) may need to be estimated at contract inception and throughout the contract term. Healthcare companies need methods to calculate or estimate the transaction price.
  • Contract combination requirements – Adjustments related to contract modifications may be required. These changes require some companies to enhance their contract management systems and tools.
  • Disclosures – The disclosure requirements under the standard are significant and typically require modification to financial management reporting processes and systems.

The Healthcare Industry and SEC Comment Letters

On December 21, 2020, a pharmaceutical company received the dreaded comment letter from the Security and Exchange Commission. Unfortunately for this company, their response was unsatisfactory to the SEC and on January 6th of 2021, the company received additional comments with requests that further information be provided on their original disclosures regarding revenue recognition and revenue from contracts with customers. Responses to comment letters are always requested to be given within 10 days, or within the time frame a company can quickly provide to the SEC.

Read the SEC’s comment letter to the company to learn the details of the company’s inaccurate disclosures.

With revenue recognition automated on an end-to-end basis, disclosures are system-generated, solid, and readily available, enabling direct questions from the SEC on ASC 606 and all disclosure requirements to be addressed within minutes, with minimal clicks. The amount of time, effort, and costs a company has the potential to save by avoiding a series of manual steps in spreadsheets, meetings, calls, and emails is monumental.

This pharmaceutical company was unfortunate to have received more than one SEC comment letter which begs the question: what tools did they have in place to attempt to prepare for such an occurrence?

Considering the 80-day average time it takes companies to resolve comments from the SEC, and the possibility of receiving more than one due to unsatisfactory information, a system needs to be in place to have this data readily available for quick and painless responses.

The SOFTRAX Revenue Management System (RMS) not only gives you the tools to address questions relating to ASC 606, revenue recognition, and contracts with customers but also offers a level of automation that heads off the need for such questions as the required data is readily available in the application for presentations/disclosures on financial statements.

Changing Business Models in the Healthcare Industry

3M Health Information Systems (3M HIS), a leader in clinician, revenue cycle, and performance management technology and services for the healthcare industry, adopted the SOFTRAX RMS software solution to support the significant changes to revenue recognition accounting policies through the ASC 606 accounting guidance and manage new subscription and consumption-based billing models.

“It drives our contract renewal process, which protects our revenue base and helps to manage all in-term contract adjustments and new business. SOFTRAX helps us maintain our controls at a system level, keep close times short and avoid a need to scale human resources as our business has grown.” John Mathison, VP of Operations, 3M HIS

Read 3M’s case study to learn more about their experience as they describe how the SOFTRAX suite of products offered them the flexibility they required to handle various forms of complex billing and revenue recognition.

Implement Revenue Recognition Automation, Revenue Management Solutions, and Billing Management Solutions

Learn more about SOFTRAX RMS – the software provided for businesses across all industries for over a decade to handle revenue recognition management and the requirements of ASC 606, contract renewal management, order management, and subscription and usage-based billing management.

Contact us to chat with a SOFTRAX representative about your company’s own challenges and find a solution. Or, schedule a demo with a representative to see, in real-time, why others trust SOFTRAX products and solutions.

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