Page 0 November 9, 2012 Prepared for HFMA Fall Institute HFMA Fall Institute A&A Update for...

November 9, 2012

Prepared for HFMA Fall Institute

HFMA Fall InstituteA&A Update for Meaningful Useof EHR and Lease Accounting

November 9, 2012

Mike Shamblin, CPA – PYA PrincipalJohn Long, CPA – PYA Senior Manager

November 9, 2012


Incentive Payments for Meaningful Use of Electronic

Health Records

November 9, 2012


Summary

• Background

• Overview

• Payment amount

• Accounting Treatment – Revenue Recognition

• Accounting Treatment – Financial Statement Presentation

• Accounting Treatment – Financial Statement Disclosures

November 9, 2012


Background

• American Recovery and Reinvestment Act of 2009

• Health Information Technology for Economic and Clinical Health (HITECH Act)

• Promote more effective and efficient healthcare delivery through the use of technology

• Offer incentive payments to hospitals and physicians that implement and “meaningfully use” Electronic Health Record (EHR) technology

November 9, 2012


Overview• Hospitals may receive incentive payments for up

to 4 years, beginning in fiscal year 2011

• A payment year is based on the federal fiscal year which ends on September 30

• To receive payments, eligible providers must– Register with CMS for EHR incentive program

– Attest to use of certified EHR technology and meaningful use of it

• Last year to begin receiving payments is 2015

November 9, 2012


Overview• Payments will decrease for hospitals that begin receiving

payments in 2014 or later

• Hospitals that do not demonstrate meaningful use (MU) by 2015 will be subject to payment adjustments

• Phased approach using 3 stages to define MU• Stage 1

– Use EHR technology to meet 14 required core objectives and 5 out of 10 “menu set objectives”

– Operate certified EHR, ensure its workflow captures information properly and report achievement of key metrics defined by CMS

– Must demonstrate MU for 90 consecutive days in first payment year and 365 consecutive days subsequently

November 9, 2012


Overview• Stage 2

– Final ruling on Stage 2 released by CMS in August 2012– Expands scope of Stage 1 and focuses on continuous

quality improvement at point of care, use of computerized physician order entry (CPOE) and more exchange of information

– Final ruling delays the start of Stage 2 from 2013 to 2014 (see timeline table on next slide)

– Also reduced the time span over which eligible providers must demonstrate MU in 2014 from 365 days to 90 days

November 9, 2012


Overview

1st

Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20212011 1 1 1 2 2 3 3 TBD TBD TBD TBD2012 - 1 1 2 2 3 3 TBD TBD TBD TBD2013 - - 1 1 2 2 3 3 TBD TBD TBD2014 - - - 1 1 2 2 3 3 TBD TBD2015 - - - - 1 1 2 2 3 3 TBD2016 - - - - - 1 1 2 2 3 32017 - - - - - - 1 1 2 2 3

Source > CMS's EHR Incentive Program: Stage 2 Final Rule Fact Sheet (http://www.cms.gov)

Stage of Meaningful Use

November 9, 2012


Overview

• Stage 3

– Final ruling on Stage 3 expected in 2013

– Will expand on previous stages and most likely focus on improving quality, safety and efficiency, patient access to self-management tools, access to comprehensive patient data, and improving population health

November 9, 2012


Payment Amount

• Base amount of $2 million with an additional $200 per discharge for discharges between 1,150 and 23,000

• Above amount is multiplied by a Medicare utilization factor based on patient days and adjusted for charity care

• That product is then multiplied by a transition factor:

– Payment year 1 – 100% – Payment year 3 – 50%

– Payment year 2 – 75% – Payment year 4 – 25%

November 9, 2012


Accounting Treatment – Revenue Recognition

• No authoritative guidance issued by FASB on how the industry should uniformly account for EHR incentive payments

• HFMA Practice and Principles Board released an Issue Analysis that provides clarity

• Two reasonable models to choose from

– Contingency Model

– Grant Accounting Model

November 9, 2012



• Securities and Exchange Commission (SEC) has recommended SEC registrants to apply the Contingency Model

• Privately-held, not-for-profit or governmental hospitals should choose between the two models as a matter of accounting policy

November 9, 2012



• Contingency Model

– Identify contingencies that must be fulfilled prior to recognition of the revenue

– Successfully comply with MU criteria during the entire reporting period

• 90 consecutive days in the first payment year and in 2014 if Stage 2 begins in 2014 for the organization

• 365 consecutive days during second through fourth payment years

November 9, 2012



• Contingency Model – Continued

– Actual discharges on which final payment is based

• Incentive payment formula utilizes discharges occurring during a hospital’s cost report/fiscal year that begins in the EHR payment year

• Unless cost report/fiscal year coincides with federal fiscal year, a portion of the discharges used in the final payment calculation will occur after the EHR payment year

November 9, 2012




– Actual discharges on which final payment is based

• Since the actual number of discharges will be unknown until the cost report/fiscal year has ended, these amounts represent an uncertainty that must be resolved prior to revenue recognition

• Income from incentive payments would be recognized entirely in the last quarter of the cost report/fiscal year that is used in the payment calculation

November 9, 2012



9/ 2011 12/ 2011 3/ 2012 6/ 2012 9/ 2012 12/ 2012 3/ 2013 6/ 2013 9/ 2013 12/ 2013 3/ 2014 6/ 2014 9/ 2014

FFY - payment year 2 FFY - payment year 3

90 days MU 365 days MU

Hospital cost report/fiscal year 2013 Hospital cost report/fiscal year 2014

FFY - payment year 1

Compliance contingency for payment year #2 met Actual discharges contingency

for payment year #2 met

Compliance contingency for payment year #1 met

Actual discharges contingency for payment year #1 met

November 9, 2012




– Submission of cost report and subsequent desk review or audits by CMS would not be viewed as contingent events precluding recognition of income

November 9, 2012



• Grant Accounting Model

– International Accounting Standard 20, Accounting for Government Grants and Disclosures of Government Assistance

– Widely used by U.S. companies where a government provides resources in return for compliance with certain conditions

November 9, 2012



• Grant Accounting Model - Continued

– Recognition of income appropriate when there is reasonable assurance that

• The grants will be received

• The organization will comply with the specified requirements

– Reasonable to assume receipt given minimal credit risk of federal government

November 9, 2012




– Reasonable determination of compliance• Recognize all at once if compliance over specified time

period cannot be reasonably assured

• In this case, recognition is appropriate when specified time period for compliance ends and it is determined that MU was demonstrated

• If hospital fiscal year coincides with federal fiscal year and determination of successful compliance is made before the financial statements are issued, recognition in that fiscal year is appropriate

November 9, 2012




– Reasonable determination of compliance• It is possible that a hospital could be reasonably assured at

the beginning of the payment year that it will demonstrate MU over the specified time period for compliance

• In this case, ratable recognition of income over the applicable payment year would be appropriate

• Cumulative catch-up adjustment followed by ratable recognition is appropriate if reasonable assurance of demonstrating MU is attained during the payment year

November 9, 2012




– Reasonable determination of compliance• Matter of judgment as to determination of whether MU will

be achieved

• Management should consider items such as

– How long the hospital has been operating an EHR system

– How long has it been working on meeting MU requirements

– How far along is it in implementing CPOE

– Reliability and effectiveness of internal controls around data entry

November 9, 2012




– Estimates are necessary and appropriate since incentive payments are based on inputs that will not be known, but can be reasonably estimated, when determining the amount to be recognized

– As actual discharges and other inputs to the incentive payment calculation become known, revisions to original estimates should be made and accounted for as a change in accounting estimate resulting from new information

– Any recoupments of previously recognized incentive payments would be accounted for similarly

November 9, 2012


Accounting Treatment – Financial Statement Presentation

• MU incentive payments are clearly distinct from patient revenues and should be reported separately

• Offset of expense is also not appropriate since the payments are not a reimbursement of specific expenses but rather an incentive to take a certain course of action

• Present as separate line item or as component of other revenue

• Classification as operating or non-operating is a matter of accounting policy as determined by management

November 9, 2012


Accounting Treatment – Financial Statement Disclosures

• Recognition policy applied to MU incentive payments

• Location of the applicable income in the financial statements

• General description of the program

• If applicable, discussion on the fact that amounts recognized are based on estimates and subject to change

• Disclosure that the hospital’s attestation is subject to audit by CMS

November 9, 2012


Change is Coming - Lease Accounting

November 9, 2012


• Overview of Key Points– Why are FASB and IASB concerned with changing the accounting

for leases?

– What were the concerns with the first exposure draft on new lease accounting rules?

– What can we expect to see in the next exposure draft?

– What can we do to prepare for the change that is coming?


November 9, 2012


• Why are FASB and IASB concerned with changing the accounting for leases?

“If it ain’t broke, don’t fix it”

• So, is the accounting for leases broken?


November 9, 2012


• Currently we have two lease model – Capital and Operating

• Capital lease is on-balance sheet

• Operating lease is off-balance sheet


GOOD

BAD

November 9, 2012


• What were the concerns with the first exposure draft on new lease accounting rules?

• Approximately 800 comment letters were received in response to first exposure draft.


800

November 9, 2012


• Most comment letters did not say…

“Great job FASB, keep up the good work!”


November 9, 2012


• What the comment letters did say…

“Not so fast my friend!”


November 9, 2012


• Original exposure draft (August 2010)– Established concept of “right-of-use” asset

– Essentially, capitalize operating leases (including real estate and equipment)

– Replaces rent expense with amortization expense and interest expense (expense may not equal cash outflow on lease)


November 9, 2012


• Original exposure draft (August 2010) - Continued

– Lessee must estimate the renewal period that is more likely than not (greater than 50% chance) to become reality. Determination is reassessed annually.

– Liability is recorded based on the estimated lease term (including projected renewals to occur).

– Liability must be adjusted based on changes in projected renewal period as of each financial reporting date.


November 9, 2012


• Numerous concerns expressed in comment letters– Complexity and cost of implementing new rules, specifically the

initial and subsequent measurement of lease assets and liabilities

– Introduces more subjectivity (i.e. determination of lease term) on balance sheet


November 9, 2012


• Numerous concerns expressed in comment letters - Continued

– Less comparability for financial decision making because of subjectivity

– Definition of lease (what’s in and what’s out???)


November 9, 2012


• Numerous concerns expressed in comment letters – Continued

– Concerns that new rules would result in higher lease expenses in earlier periods compared to later periods.

– Banks and other lenders may need to be educated on how lease expense will be impacted for debt covenants


November 9, 2012


• What can we expect to see in the next exposure draft?


November 9, 2012


• FASB and IASB Redeliberations – Lessee Model


Balance sheet Income statement

1 Measured at present value of lease payments 2 Initially measured at same amount as liability, plus initial direct costs

DR ROU asset 2 CR Lease liability1

Lessee consumes more than insignificant

portion of leased asset

Amortization expenseInterest expense

Lease expenseLessee does not

consume more than insignificant portion of

leased asset

November 9, 2012


• FASB and IASB Redeliberations – Lessor Model


Lessor accounting approach

November 9, 2012


• FASB and IASB Redeliberations – Classification of Leases*


*Both lessee and lessor

November 9, 2012


• FASB and IASB anticipate releasing the revised exposure draft in the fourth quarter of 2012


November 9, 2012


• What can we do to prepare for the change that is coming?


November 9, 2012


• Be Prepared…– Look for updates in industry publications and

websites (Journal of Accountancy, www.pyapc.com)

– Prepare an “inventory” of all operating leases under contract. Determine how many “right-to-use” assets would be added to balance sheet.

– Read debt covenants to determine whether they have the potential to be impacted by a change from rent expense to amortization and interest expense

– Consider writing a comment letter to FASB and IASB regarding the revised exposure draft once it is released


November 9, 2012


• In summary…– We know why FASB and IASB are concerned with changing

the accounting for leases.

– We know what the concerns were with the first exposure draft on new lease accounting rules.

– We know what we can expect to see in the next exposure draft.

– We know what we can do to prepare for the change that is coming.

Change is Coming


November 9, 2012


Questions?

Contact information for Mike Shamblin and John Long(800) 270-9629

[email protected]@pyapc.com

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