Revenue Recognition for Mid-Market Healthcare Entities
Mitigating the Risk of Material Misstatements
September 22, 2022
Revenue Recognition for Mid-Market Healthcare EntitiesDownloadsDownload Brochure
An organization’s ability to create value and achieve targeted revenue growth depends on the reliability of and ability to consistently predict and validate revenue while avoiding unforeseen material adjustments. FTI Consulting’s team of tenured senior finance operators has created a standardized revenue recognition methodology and tool that can be customized to your business.
FTI Consulting’s tool will help you accurately forecast future revenue while ensuring a sound revenue recognition policy that will stand up to independent audits and external diligence. Once the model is operational, FTI Consulting’s team transfers knowledge and ownership of the tool to the client through training and practical user manuals. FTI Consulting’s clients are then prepared to independently administer and carry the process forward.
Healthcare organizations turn to FTI Consulting’s professionals to evaluate, build, implement and improve processes and tools to power critical revenue recognition practices. FTI Consulting’s team helps clients avoid forecasting surprises and enables them to make quick decisions using accurate and transparent information.
Our approach harnesses clients’ data to provide the visibility needed to measure performance at levels optimized for their business.
Our models are highly adaptable to reporting at consolidated levels or detailed levels broken down by regions, business lines, payors and more.
No analytics tool is enough on its own. We transfer user knowledge and help create the processes and structures for leveraging the tool and acting on its results.
Working closely with Big Four audit firms to validate our methodology has helped ensure successful compliance audits for our clients.
Our tools are 80% pre-built, allowing us to focus our time on quickly tailoring models to clients’ specific data inputs and analytical needs.
Access to Experts
Clients have access to a “one-stop shop” of industry experts and past operators to support operational implementation, clinical documentation and coding compliance, and when necessary interim and bridge management. Because of the depth and breadth of FTI Consulting’s experience, our experts are able to assist with virtually any challenge faced by a Healthcare CFO and their Finance and Accounting team.
About the Model
Modeling the Income Statement
Our tools measure gross and net revenue against actual and expected cash collections over time.
- Driven by detailed cash collection “waterfall” analyses conveying timing trends in collections performance
- Subsequent cash receipts estimates based on historical performance
- Intuitive insight into contractual allowances, and bad debt expense provisions booked against revenue
- Captured at customizable levels of detail and on consolidated basis
- Tracks net effect of payments, refunds, credits, and other adjustments
- Uses analysis that covers, as available, monthly, quarterly, and multiyear periods
Modeling the Balance Sheet
Our tools assess the accounts receivable (A/R) reserve based on collections history.
- Measures collections against historical A/R balances on a regular periodic basis to inform potential changes in the valuation of balance sheet A/R
- Leverages collections waterfalls to estimate A/R reserve percentages using payer, age, service line, or other groupings that contain similar reimbursement and collectability characteristics
- Validates the overall health and collectability of A/R under various dimensions and scenarios
Key Features of Model
- Based on industry standard methodologies, views revenue recognition performance through both the lens of the income statement and balance sheet
- Aligns cash collections analyses by the healthcare industry best practice of payer classification, bringing the model in line with ASC 606 requirements and generating insights of payer dynamics and performance
ASC 606 is the new revenue recognition standard that affects all businesses that enter into contracts with customers to transfer goods or services – public, private and non-profit entities. Both public and privately held companies should be ASC 606 compliant now based on the 2017 and 2018 deadlines.
- Accompanied by detailed process and functionality documentation outlining the key personnel and steps involved in generating and interpreting insights
- Systematic, replicable, and scalable, with minimal input touchpoints
Our team’s expertise is applicable for any healthcare service provider. In particular, we have recent experience in
- Behavioral health
Clients move from their current state to a crisply defined future state using an approach customized to their needs
|Light Approach||Medium Approach||Comprehensive Approach|
|Review existing revenue recognition data, tools and processes.||X||X||X|
|Compare current state to industry standard, ASC 606 compliant methods.||X||X||X|
|Income Statement: Analyze cash collections performance using detailed cash collection “waterfalls.”||X||X|
|Income Statement: Model estimates future remaining collections based on historical performance.||X||X|
|Income Statement: Measures accuracy of contractual allowances and bad debt expense provisions booked against revenue.||X||X|
|Balance Sheet: Assesses A/R reserve balances and overall health and collectability of A/R.||X||X|
|Balance Sheet: Calculates A/R reserve percentages by aging buckets.||X||X|
|Scales output to granular levels customized to client needs by payor, business line, regions, and more.||X|
|Provides detailed model functionality documentation.||X|
|Implements processes for reviewing and acting on revenue recognition modeling improvements.||X|
8 Common A/R Pitfalls
Subsequent receipts analysis
- A/R is not regularly and periodically validated using subsequent cash receipts analyses
- Unfavorable restatement of revenue
Insufficient tracking of actual bad debt write-offs
- Inability to accurately calculate expected monthly collectability due to absence of, or poor use of, bad debt write-off dispositioning
- Unfavorable restatement of revenue
Financial class mis-groupings
- Collection rates used for revenue recognition do not represent underlying contracts due to misunderstood or incorrect amalgamation of payers
- Under- or over-recognition of revenue
Unaccounted Unbilled A/R
- Revenue recognition fails to include earned revenue for charges that have yet to be billed
- Revenue is under-recognized
Lack of a structured, periodic cash realization percentage update process
- The process for cash realization calculation is irregular, prone to material adjustments when it is done, and not easily accessible or transparent to CFO
- CFO loses credibility, must report bad news; an unfavorable restatement of revenue occurs
Lack of clarity of the impact of payer rate increase percentage and timing
- Inadequate collaboration between managed care contracting and revenue recognition team leads to understating revenue at contract renewal escalation dates
- Revenue is under-recognized
Unreconciled balance sheet and A/R subsystems
- The billing and accounts receivable sub-systems are not regularly reconciled to the balance sheet, leading to both mis-statement and unreliable financial results
- Auditors may issue an unfavorable opinion
Lack of a credit balance workplan and financial treatment
- Inadequate management of credit balances can lead to under-recognizing revenue reserves and set the stage for unfavorable adjustments
- Patient refunds are incorrect and reserves are understated
Client 1: Nationwide Home Medical Equipment & Supplies Leader
Situation: Our client was a nationwide leader in the home medical equipment and supplies market, with $2 billion in annual revenue and operations spanning 47 states. The company had grown through significant, rapid acquisition, and its revenue recognition reporting tools and processes no longer provided adequate visibility into how well the company was recognizing revenue across its various regions and product lines.
Our Role: FTI Consulting was engaged to review the client’s existing revenue recognition tools and processes, as well as build and implement new tools and processes that provided accurate, timely, customizable and scalable insights into cash collections performance.
Our Impact: FTI Consulting implemented a sophisticated, best-practice model that leveraged data from across the client’s 30+ legacy revenue databases to track cash collections with precision, predict future cash collections on remaining accounts receivable, and inform bad-debt expense provisions booked against revenue.
Our team created a process for using the model to drive financial decisions at month-end close and in support of quarterly reporting.
The team ensured that new tools and processes were easily adaptable to future acquisitions and product lines.
Client 2: A Network of Eye Care and Ophthalmology Practices
FTI Consulting conducted a thorough review of existing accounting, finance, and revenue cycle practices in order to identify opportunities to adopt industry best practices.
Situation: Our client was a network of eye care and ophthalmology practices with 20+ affiliates nationwide and over $300 million in annual revenue. The company was owned by a private equity sponsor and had grown rapidly via acquisition over several years. The PE sponsor desired to divest, but the effort failed due to issues revealed in the buyer’s quality-of-earnings analysis.
Our Role: FTI Consulting was engaged to perform a current-state assessment of the finance organization, including a detailed review of core processes such as month-end close and existing reporting, policies and procedures, organizational design, revenue recognition.
Our team provided observations and recommendations to improve the timeliness and accuracy of financial reporting and eliminate control deficiencies.
FTI Consulting was also tasked with developing a new tool and process for recognizing revenue and valuing accounts receivable.
Our Impact: FTI Consulting provided multiple recommendations that will accelerate the timing of Accounting’s month-end close process and prevent future audit or quality-of-earnings adjustments.
Our team delivered an Excel-based tool that will estimate contractual revenue, produce journal entries for month-end close and test accounts receivable value using best-practice industry analyses.
We provided a roadmap toward a future state in which all practice management data would be available within a single database, allowing for increased automation and reporting capabilities.
Client 3: Private Equity Acquisition
Situation: FTI Consulting was engaged to provide interim CFO services to a large ophthalmology practice recently acquired by a private equity group. The Tuck-In acquisition required a transition from cash to accrual (GAAP) accounting with emphasis on its revenue recognition processes.
Our Role: Within two days of starting, FTI Consulting’s team produced a comprehensive workplan that spanned major workstreams of accounting, banking, budgeting and forecasting, financial reporting, human resources, lender financial and covenant reporting, payroll and benefits, revenue cycle, technology and systems, and post-close transaction compliance. For this client’s specific revenue recognition needs, FTI worked with them to identify a Revenue Recognition workplan that included:
- validating usability of data and databases
- validating financial classes
- estimating future collections
- estimating future refunds
- ensuring that credits are treated properly
- determining bad debt treatment
- ensuring unbilled is treated properly
- adding a usable balance sheet test component
- delivering a usable, scalable, and replicable tool
- generating CFO and Controller level analytics and journal entries
- providing documentation of the process
Our Impact: FTI Consulting’s expert knowledge allows our team to proactively plan and execute required tactics to avoid risk and achieve the expected (or predicated) profitability of an established business, acquisition, or sale. FTI Consulting leverages structured regular weekly check-ins that report on the status of each workstream, actions taken and next steps to ensure that our clients are aware and part of decisions that impact their business.
September 22, 2022
Senior Managing Director
Senior Managing Director