Guest Columns

Why ASC 606 elevates risk for LTC providers

Share this content:
Steven Shill
Steven Shill

The Department of Justice's largest-ever healthcare fraud enforcement action, announced in mid-July, sends a clear signal about the federal government's escalating efforts to eradicate and penalize fraud in healthcare: They're here to stay. Attorney General Jeff Sessions said the investigation was spurred by “computer programs that identify outliers” as well as tips from affected communities, underscoring the impact of new data analytics technologies and algorithms in detecting fraud faster and more efficiently.

The long-term care sector has been no stranger to fraud risk, whether tied to Medicaid enrollment or liability under the False Claims Act for reimbursement under Medicare or Medicaid. With many long-term care settings where providers are paid a daily rate for care, there is added risk that a provider will skimp on care to try to boost profits. Programs like New York's managed long-term care plans for dual-eligible individuals and PACE (Program for All-Inclusive Care for the Elderly) can also be exploited through fraudulent activity like incorrect enrollment, falsified enrollment information, billing for services that were provided but not medically appropriate and misreporting patients as nursing home-eligible.

Regardless of your organization's unique exposure to potential fraud, it's worth noting that the new revenue recognition standard introduced by ASC 606, Revenue from Contracts with Customers, adds another significant layer of complexity to the equation.

Because ASC 606 is taking effect at the same time as value-based reimbursement initiatives under Medicaid and Medicare take hold, compliance with the new revenue recognition standard can pose particular challenges to LTC providers receiving bundled payments and reimbursements tied to specific quality metrics.

One of the most significant changes between the old standard and the new is the treatment of variable consideration. Revenues under value-based arrangements are considered a variable consideration because these reimbursements may be subject to retroactive adjustment after the fact. 

The new guidance stipulates that an entity should recognize revenue only to the extent that it is probable the amount of variable consideration would not result in a significant reversal of cumulative revenue recognized when the uncertainty is subsequently resolved — a concept known as the constraint. Accurately estimating variable amounts is likely to be difficult for LTC providers as value-based reimbursement initiatives under Medicaid and Medicare take hold, as it requires visibility into the costs and quality of other providers to make a reasonable assessment. The complexity of these new considerations opens the door to unintentional accounting errors and material misstatements as well as outright fraud.

Digging into ASC 606 and financial reporting

The complexity of ASC 606 increases the risk of inadvertently presenting misleading financial information, and inappropriate reporting can conceal other, both intentional and unintentional, fraud and abuse situations. Healthcare organizations as a whole already struggle to use comparable revenue measures across a variety of provider types and structures, a challenge that is particularly felt by LTC providers. When trying to represent such diverse revenue streams in financial statements, long-term care providers will need to be careful to include appropriate supplemental disclosures and discussions to avoid inadvertently presenting misleading information in their financial reporting.

Inappropriate reporting could result in retroactivity, which in turn results in recovery of funds from Medicare or Medicaid programs that the LTC provider was not entitled to receive. It could, in fact, hide situations where retroactive reconciliation could call for the repayment of funds to federal or state programs. The underlying complexity of ASC 606 may make fraud and abuse or pure financial fraudulent reporting situations more difficult to detect, or even cover them up entirely.

Revealing fraudulent financial reporting may, in some cases, reveal fraud and abuse situations in turn. In many cases, fraud and abuse situations are discovered by chance by external auditors examining a contract who discover inappropriate financial reporting. 

For example, inappropriate revenue recognition or deferral can sometimes be used to cover up the existence of kickbacks for referrals or pressure on nursing homes to certify permanent placement. Such situations only become evident when auditors break apart the revenue streams and evaluate the contacts under financial accounting rules in accordance with Generally Accepted Accounting Principles (GAAP). This sometimes goes down to the granular level of tracing debits and credits through the general ledger.  

Added due diligence needed during M&A

With consolidation in the sector predicted to accelerate during the Trump presidency, LTC providers should note fraud discoveries can also be made during mergers and acquisitions during the due diligence and adjustment phase. 

For example, consider a scenario in which an acquirer discovers financial algorithms written by the acquired company that excluded certain transactions, resulting in overpayment from the federal government under Medicare. In addition to fraudulent reporting, there's also a question of liability for the acquirer, in accordance with existing reps and warranties pursuant to the purchase agreement.

It's key for any potential acquirer to examine contracts and quality metrics their potential target has generated during the due diligence phase, both from a data integrity as well as a clinical standpoint. Value-based reimbursement is a sea change, so buyers should prioritize ensuring the seller has the ability to effectively capture quality metrics after the deal closes. From an investment point of view, if the seller is projecting revenues or quality metrics solely based on their historical data, there's no guarantee the organization can replicate that as reimbursement continues to evolve. Under value-based reimbursement, ensuring the accuracy of quality metrics is one of the first lines of defense against inadvertent improper financial reporting as well as fraud and abuse.

The increased scrutiny of financial measurement brought on by changing revenue recognition standards coupled with a doubling-down on fraud enforcement by the Department of Justice aided by increasingly sophisticated data analytics tools, necessitate extreme caution for LTC providers.

Steven Shill is the assurance partner and national co-leader at the The BDO Center for Healthcare Excellence & Innovation. Venson Wallin is the managing director at The BDO Center for Healthcare Excellence & Innovation.

close

Next Article in Guest columns

Guest Columns

Guest columns are written by long-term care industry experts, ranging from academics and thought leaders to administrators and CEOs.

ALL MCKNIGHT'S BLOGS