Revenue Recognition and Accounts Receivable

6 Months Ended

Jun. 30, 2018

Revenue Recognition and Accounts Receivable [Abstract]

Revenue Recognition and Accounts Receivable

Note 2. Revenue Recognition and Accounts Receivable

Revenue from Contracts with Customers

Overview

The Company recognizes revenues in the period in which performance obligations are satisfied. Generally, the Company bills patients and third-party payers several days after the services are performed or the patient is discharged. Accounts receivable primarily consist of amounts due from third-party payers and patients. The Company’s ability to collect outstanding accounts receivable is critical to its results of operations and cash flows. Amounts the Company receives for treatment of patients covered by governmental programs and third-party payers such as Medicare, Medicaid, health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”) and private insurers as well as directly from patients are subject to contractual adjustments, discounts and implicit price concessions. Accordingly, the revenue and accounts receivable reported in the Company’s condensed consolidated financial statements are recorded at the net consideration to which the Company expects to be entitled to in exchange for providing patient care.

The majority of the Company’s performance obligations are satisfied over time for the delivery of patient care in both outpatient and inpatient settings. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected charges for services anticipated to be provided. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. Generally, unsatisfied or partially unsatisfied performance obligations at the end of the reporting period are related to patients admitted to the Company’s hospitals that have not yet been discharged. The performance obligations for these patients are typically satisfied when the patients are discharged, which generally occurs within a matter of days of admission. Patients are generally billed when discharged, though they may be billed on an interim basis for longer stays. Accordingly, because all of the Company’s performance obligations are part of a contract that is expected to have a duration of one year or less, the Company has elected to apply the exemption provided by ASC 606-10 to not disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of period end.

Subsequent adjustments that are determined to be the result of an adverse change in the patient’s or the payer’s ability to pay are recognized as bad debt expense. With the adoption of ASC 606-10, bad debt expense is included under the caption “Other operating expenses, net” in the accompanying condensed consolidated statements of income, instead of separately as a deduction to arrive at revenue. Bad debt expense for the three and six months ended June 30, 2018 and 2017 was not material for the Company.

Contractual Discounts

The Company derives a significant portion of its revenues from Medicare, Medicaid and other payers that receive discounts from the Company’s established billing rates. The Company must estimate the total amount of these discounts to prepare its condensed consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates contractual discounts on a payer-specific basis given its interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management. Subsequent changes in estimates for contractual discounts are reflected as an adjustment to revenues in the period of the change. Medicare, Medicaid and other discounted payer accounts receivables are written off after they have been final settled with the payer.

Cost Report Settlements

Cost report settlements under reimbursement agreements with Medicare, Medicaid and certain other payers for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the payment terms of the reimbursement agreement with the payer, correspondence from the payer, and the Company’s historical experience. Estimated settlements are adjusted in future periods as final settlements are determined. There is a reasonable possibility that recorded estimates will change by a material amount in the near term. Net adjustments arising from a change in the transaction price for estimated settlements under reimbursement agreements resulted in increases to revenues of $1.4 million and $14.3 million during the three months ended June 30, 2018 and 2017, respectively, and $9.9 million and $21.1 million for the six months ended June 30, 2018 and 2017, respectively.

The net cost report settlements due from the Company at June 30, 2018 were $3.2 million and are included under the caption “Other current liabilities” in the accompanying unaudited condensed consolidated balance sheet. The net cost report settlements due to the Company at December 31, 2017 were $2.7 million and are included under the caption “Accounts receivable” in the accompanying unaudited condensed consolidated balance sheet. The Company’s management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs consistent with the constraints that are required by ASC 606-10.

Self-Pay Revenues

Self-pay revenues are derived from patients who do not have any form of healthcare coverage as well as from patients with third party healthcare coverage related to the patient responsibility portion, including deductibles and co-payments. The Company evaluates these patients, after the patient’s medical condition is determined to be stable, for their ability to pay based upon federal and state poverty guidelines, qualifications for Medicaid or other governmental assistance programs. The Company estimates the transaction price for self-pay patients and the patient responsibility portion using a number of analytical tools, benchmarks and market conditions. No single statistic or measurement determines the transaction price for these patients. Some of the analytical tools that the Company utilizes include, but are not limited to, historical cash collection experience, revenue trends by payer classification and revenue days in accounts receivable.

The revenues associated with self-pay patients are reported at the net amount that the Company expects to collect. Because the Company provides care to patients regardless of their ability to pay, the Company has determined that the differences between the amounts it bills based on gross or discounted charges and the amounts the Company expects to collect represent implicit price concessions. The final amount that will be received from the patient is not known at the date of service, and the Company accounts for this variable consideration in accordance with the provisions of ASC 606-10. Self-pay accounts receivable are written off after collection efforts have been followed in accordance with the Company’s policies.

Charity Care

The Company provides care without charge to certain patients that qualify under the local charity care policy of each of its hospitals. The Company estimates that its costs of care provided under its charity care programs approximated $5.5 million and $6.7 million for the three months ended June 30, 2018 and 2017, respectively, and $10.8 million and $13.6 million for the six months ended June 30, 2018 and 2017, respectively. The Company does not report a charity care patient’s charges in revenues as it is the Company’s policy not to pursue collection of amounts related to these patients, and therefore contracts with these patients do not exist.

The Company’s management estimates its costs of care provided under its charity care programs utilizing a calculated ratio of costs to gross charges multiplied by the Company’s gross charity care charges provided. The Company’s gross charity care charges include only services provided to patients who are unable to pay and qualify under the Company’s local charity care policies. To the extent the Company receives reimbursement through the various governmental assistance programs in which it participates to subsidize its care of indigent patients, the Company does not include these patients’ charges in its cost of care provided under its charity care program.

Financing Component

The Company has elected to apply the practical expedient permitted under ASC 606-10 and does not adjust the estimated amount of consideration from patients and third-party payers for the effects of a significant financing component because the Company expects that the period between the time the service is provided to a patient and the time that the patient or a third-party payer pays for that service will be one year or less.

Rental Income

The Company leases certain real estate assets it owns to unrelated third parties, primarily medical office buildings to non-employed physicians. The Company recognizes rental income for these operating lease arrangements in which the Company is the lessor on a straight-line basis over the lease term in accordance with ASC 840-10, “Leases”.

Concentration of Revenues

The Company’s revenues by source, as well as approximate percentages of revenues, were as follows for the three and six months ended June 30, 2018 and 2017 (in millions):


	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
			% of				% of				% of				% of
	Amount		Revenues		Amount		Revenues		Amount		Revenues		Amount		Revenues
Medicare	$	577.3	36.8	%	$	594.8	37.3	%	$	1,185.2	37.4	%	$	1,225.2	38.0	%
Medicaid		219.7	14.0			229.9	14.4			439.4	13.8			472.7	14.6
HMOs, PPOs and other private insurers		736.5	46.9			736.1	46.1			1,475.1	46.5			1,454.4	45.1
Self-pay		6.6	0.4			6.0	0.4			12.8	0.4			12.0	0.4
Other		26.3	1.7			23.6	1.5			53.3	1.7			51.6	1.6
Revenue from contracts with customers		1,566.4	99.8			1,590.4	99.7			3,165.8	99.8			3,215.9	99.7
Rental income		3.4	0.2			4.4	0.3			6.8	0.2			9.1	0.3
Revenues	$	1,569.8	100.0	%	$	1,594.8	100.0	%	$	3,172.6	100.0	%	$	3,225.0	100.0	%

During the three months ended June 30, 2018 and 2017, approximately 50.8% and 51.7%, respectively, of the Company’s revenues related to patients participating in the Medicare and Medicaid programs, collectively. During the six months ended June 30, 2018 and 2017, approximately 51.2% and 52.6%, respectively, of the Company’s revenues related to patients participating in the Medicare and Medicaid programs, collectively. The Company’s management recognizes that revenues and receivables from government agencies are significant to the Company’s operations, but it does not believe that there are significant credit risks associated with these government agencies. The Company’s management does not believe that there are any other significant concentrations of revenues from any particular payer that would subject the Company to any significant credit risks in the collection of its accounts receivable.

The Company’s revenues by primary service type and approximate percentages of revenues were as follows for the three and six months ended June 30, 2018 and 2017 (in millions):


	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
			% of				% of				% of				% of
	Amount		Revenues		Amount		Revenues		Amount		Revenues		Amount		Revenues
Outpatient services	$	938.7	59.8	%	$	933.7	58.5	%	$	1,872.2	59.0	%	$	1,853.9	57.5	%
Inpatient services		601.4	38.3			633.1	39.7			1,240.3	39.1			1,310.4	40.6
Non-patient (ancillary goods,
services and rental income)		29.7	1.9			28.0	1.8			60.1	1.9			60.7	1.9
Revenues	$	1,569.8	100.0	%	$	1,594.8	100.0	%	$	3,172.6	100.0	%	$	3,225.0	100.0	%

The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company generates significant revenues. The following is an analysis by state of revenues as a percentage of the Company’s total revenues for those states in which the Company generated significant revenues for the three and six months ended June 30, 2018 and 2017:


		Three Months Ended June 30,								Six Months Ended June 30,
	Hospital Campuses	2018				2017				2018				2017
	in State as of			% of				% of				% of				% of
	June 30, 2018	Amount		Revenues		Amount		Revenues		Amount		Revenues		Amount		Revenues
North Carolina	9	$	237.9	15.2	%	$	240.0	15.1	%	$	476.4	15.0	%	$	477.1	14.8	%
Kentucky	10		181.6	11.6			170.7	10.7			364.2	11.5			349.8	10.8
Virginia	6		164.7	10.5			158.7	10.0			335.0	10.6			325.2	10.1
Pennsylvania	4		133.4	8.5			140.9	8.8			266.4	8.4			281.7	8.7
Tennessee	10		120.4	7.7			114.9	7.2			238.0	7.5			232.2	7.2
Michigan	3		112.3	7.2			113.5	7.1			224.8	7.1			225.9	7.0
New Mexico	2		94.1	6.0			87.8	5.5			188.7	5.9			172.7	5.4

Any changes in the current demographic, economic, competitive or regulatory conditions, or to Medicaid programs, in the above-mentioned states could have an adverse effect on the Company’s revenues or results of operations.

Certain changes have been made to the Company’s classification of historical sources of revenues and revenue concentration by state to reflect the Company’s adoption of ASC 606-10.

LIFEPOINT HEALTH, INC. 10-Q