EXECUTIVE SUMMARY

A new financial rule puts hospitals at risk for charges of fraud. The rule, known as ASC 606, addresses revenue recognition by healthcare organizations.

• The rule will be enforced as part of the federal government’s ongoing crackdown on healthcare fraud.

• Poor compliance may inadvertently suggest fraud where none exists.

• Fraud and noncompliance may be found in reviewing mergers and acquisitions.


The Department of Justice’s (DOJ’s) campaign against healthcare fraud puts hospitals and health systems at risk in many ways, and they could find themselves subject to even greater fraud risk as the 2018 compliance deadline for a new standard of revenue reporting fast approaches.

The standard, “ASC 606, Revenue From Contracts With Customers,” is aimed at providing investors a more streamlined and accurate picture of revenues and requires entities to determine revenue recognition based on five steps, says Venson Wallin, CPA, managing director with the Richmond, VA, office of the BDO consulting firm.

The new standard will become part of the DOJ’s continued focus on healthcare fraud, Wallin says.

“For every dollar they spend on fraud detection and enforcement activities, they get $6 back in the form of fines and penalties,” Wallin says. “That is all the incentive they need to continue expanding their investigations for fraud, whether it is intentional or unintentional.”

The intense DOJ scrutiny comes at a time when the industry is moving toward more value-based reimbursement, particularly with Medicare, Wallin notes. Diverse revenue streams can be difficult to portray in financial statements, setting up the possibility that information can be inadvertently misleading.

The rules are complex enough that healthcare organizations can be noncompliant without meaning to, or even give the impression of fraud when none exists, Wallin says. Investigators are making heavy use of data analytics, so healthcare organizations should expect special scrutiny in any outlier areas, he says.

“Understand if you are an outlier in any area, you should understand why you are,” he says. “Chances are you’re going to get some inquiries from the government about those outlier areas, and being able to explain why can make a real difference in what happens. If you have an acuity level for claims that is higher than average because other hospitals send you their sickest patients, it is extremely important that you know that is in your data and why that is so. You need to be prepared when investigators show up and say your data is way out of line and they think there may be some fraud here.”

Because the ASC 606 rule is new, there are unanswered questions about compliance, says Steven Shill, CPA, partner and national leader with the BDO Center for Healthcare Excellence and Innovation in Orange County, CA.

“We will have to wait and see how revenue and revenue accounting will be interpreted, so I think there will be a great number of outliers until that is settled,” Shill says. “It’s going to take a couple of years for that to settle down.”

The third step in complying with ASC 606 is determining the transaction price — and that presents significant challenges for healthcare, particularly provider CFOs, in the value-based reimbursement environment, Shill says. The previous methodology for determining a transaction price was more forgiving, he explains.

“Previously, if you made an estimation based on the best available information, then you couldn’t be held responsible necessarily for making a bad estimate,” he says. “The new accounting literature says you have to estimate to a level of precision that revenue isn’t going to reverse out to any extent in the near future. That raises the bar to a much higher level, which will initially result in a lot of judgments being made and a lot of finger-pointing.”

In addition, fraud and abuse can be discovered by chance when auditors examine contracts or plans for mergers and acquisitions, he says. For example, referral kickbacks or inappropriate payments to vendors can be hidden with misleading revenue recognition, Shill says.

“Some of the complexities of this rule could be used by less-than-honorable providers or operators in the healthcare industry to essentially hide or conceal aspects of Medicare fraud and abuse. We have a rapidly changing reimbursement environment and a relatively unknown new piece of accounting literature that is raising a lot of questions and creating a stir in the industry,” Shill says. “It creates the opportunity for the perfect storm. The industry needs to take heed that there is a confluence of events that is likely to create issues in the next few years.”

SOURCES

• Steven Shill, CPA, Partner and National Leader, BDO Center for Healthcare Excellence and Innovation, Orange County, CA. Phone: (714) 957-3200. Email: sshill@bdo.com.

• Venson Wallin, CPA, Managing Director, BDO, Richmond, VA. Phone: (804) 614-1188. Email: vwallin@bdo.com.