Revenue recognition ensures your financial reporting accurately reflects the services you’ve delivered—not just when you get paid. In healthcare, where patient service revenues often involve insurance reimbursements or variable pricing, it’s crucial to get this right. The Financial Accounting Standards Board (FASB) provides clear guidance through what’s known as ASC 606, a five-step model used with all sorts of business types in varying industries, which has some unique implications for the healthcare field.
In this piece, we offer readers a few important principles related to the topic of “revenue recognition,” as well as point out key ideas such as identifying performance obligations, determining transaction prices, and highlighting common challenges facing businesses in this area. Whether you’re heading a small private practice, a mid-sized clinic, or even a larger healthcare organization, understanding revenue recognition well is important.
Knowing how revenue recognition can vary (depending on business type) is relevant. For instance, if you’re a family physician, you’ll recognize revenue at the time of a patient consultation. However, a long-term care facility (such as a hospice) will need to prorate revenue across the patient’s stay. Getting these nuances right means getting regulatory compliance right, being transparent, and maintaining sustainable financial integrity.
Identifying Contracts and Performance Obligations
Each business transaction must start somewhere, and with revenue recognition, it begins with a contract. In healthcare, a “contract” doesn’t always look like a formal legal agreement but is any agreement where both parties (your business and the patient/customer) understand the service provided, the cost, and how payment will work. This could cover many different types of services, from a detailed surgery plan to a routine check-up.
Once the contract is clear, the next step is identifying “performance obligations”—basically the services or distinct goods (or series of them) you’re promising to deliver. So, if we think about surgical procedures, these obligations may include things like pre-operative consultations, the surgery itself, or any post-operative care needed. Breaking these obligations into distinct parts is necessary for proper revenue allocation and, again, to be compliant with ASC 606.
Determining the Transaction Price
Here comes the math. The transaction price represents the total revenue your business expects to earn from fulfilling its obligations. In healthcare, this can, at times, get tricky because it often involves variable pricing. Think in terms of insurance reimbursements, payment plans, or discounts. For instance, consider a medical clinic. For this type of business, a fixed treatment package may seem straightforward, but adjustments based on insurance coverage or payment timing can complicate things. The goal is to estimate the total revenue as accurately as possible, considering these variables. Then, you can allocate that revenue across the performance obligations, ensuring everything aligns with all ASC 606 guidelines. By estimating variable considerations, businesses will adjust and include an understanding of a client’s ability to pay to determine total expected revenue. It does require careful analysis. Providers can often use historical data and statistical methods to refine these estimates to minimize the risk of revenue misstatements.
Recognizing Revenue
Revenue recognition happens when you deliver on your promises. For a family physician, this might mean recognizing revenue at the time of a patient’s visit. For a physical therapy clinic, it could mean recording revenue after each therapy session. In every case, the focus is on timing: revenue should be recognized when the service is provided, not when payment is received.
This step requires the ever-important process of quality record-keeping. We tend to harp on this point in our articles as it only makes things easier for healthcare businesses—particularly if they work with outside consultants such as accounting firms. This is especially true in situations where patients may fail to pay their bills. (We will address collectability in a moment.) Accounting for bad debt will ensure your financial reports are both accurate and transparent. We’d like to point out that it is not just for compliance purposes but also for keeping trust with patients and other stakeholders involved.
Addressing Common Challenges
Many businesses face challenges with complex service bundling and variable pricing, with healthcare businesses no exception. Identifying performance obligations can feel overwhelming, with estimating transaction prices requiring both good judgment and precision. But there is good news, as solutions do exist. First off, using historical data can help refine estimates. Also, implementing advanced patient accounting systems can help streamline revenue tracking. And, finally, working with outside financial professionals can reinforce your practices so they align with FASB standards.
Another challenge in revenue recognition is assessing whether a customer (e.g., a person employing a home health aide service) even has the ability and intent to pay for such services. Providers must consider collectability when recognizing revenue only when it is probable that the payment will be received. So, again, it helps to tap into and review historical data on similar customer groups to “categorize” them so a business can refine their evaluations.
As we often point out in our articles at Walters, make technology your friend. With software advances in the areas of financial management, accounting, and healthcare, there are more options to automate processes to make things more accurate and less cumbersome. For instance, one such software provider, Adonis, has developed a proprietary platform for healthcare revenue cycle management. Their solution integrates with a business’s existing electronic health records (EHR) and billing systems for insights into revenue management. As with many offerings today, they even include “AI-driven alerts” and predictive analytics to improve billing procedures, detect underpayments, and actively prevent insurance denials. This all leads to improved revenue outcomes and lower administrative burdens. Other tech options in the marketplace abound, including those by companies such as Waystar, Optum, and R1 RCM.
The Bottom Line on Revenue Recognition
Healthcare consumers expect healthcare providers to operate with accuracy and precision. Revenue recognition is a key part of this equation. While mastering revenue recognition can seem overwhelming, when done well, an organization can build a stronger foundation. By understanding the important principles and using the right tools and best practices, healthcare providers can navigate these complexities. The assistance of outside expertise, such as a qualified accounting firm with relevant experienc,e will also help to ensure success.
