Accounting for Electronic Health Record Payments

1. Accounting for Electronic Health Record Payments July 25, 2012 Draffin & Tucker, LLP 229-883-7878

2. Accounting for EHR Payments • American Recovery and Reinvestment Act of 2009 • Established incentive payments to eligible Hospitals and Professionals to implement “Meaningful Use” by 2014 • Incentives paid through Medicare and Medicaid programs • Payments differ by program • Payments differ by provider type • Inventive payments generally based on services or costs related to meeting “Meaningful Use” measures (through 3 stages) • Requires significant capital investment

3. Accounting for EHR Payments • HFMA Issue Analysis Paper released in December 2011 • Focus is accounting for Medicare EHR incentive payments to acute-care inpatient hospitals that are paid under the IPPS • Provisions of the incentive program are different for CAHs and EPs

4. Accounting for EHR Payments • Gain Contingency Model • vs. • Grant Accounting Model • Registrants – Gain Contingency Model • Non-registrants – choose a model as a matter of accounting policy

5. Accounting for EHR Payments • Gain Contingency Model • Identify the contingencies that must be satisfied prior to recognizing revenue. • Receipt of the payment occurs only if the hospital is successful in complying with the “Meaningful Use” criteria during the entire reporting period. • 90 consecutive days in 1st payment year • 365 consecutive days in each of 2nd through 4th payment years • Don’t recognize income until the hospital has complied with the “Meaningful Use” criteria for the full EHR reporting period.

6. Accounting for EHR Payments • Gain Contingency Model – Discharge Condition • Formula utilizes discharges occurring during cost report year that begins in EHR reporting period. • Reporting period is based on federal fiscal year (FFY) which ends September 30th . • Unless the entity’s fiscal year is the same as the FFY, a portion of the discharges used will occur after the EHR reporting period ends. • Those discharges would be considered an uncertainty that must be resolved prior to recognition of income.

7. Accounting for EHR Payments • Illustration of application of gain contingency model

8. Accounting for EHR Payments • Grant Accounting Model • Primary condition is to be meaningfully using EHR technology • Income not recognized until there is reasonable assurance the entity will • Comply with the payment conditions • Receive the payment • Cliff Recognition – not reasonably assured • After EHR reporting period has ended • Recognized all at once • Ratable Recognition – reasonably assured • Recognized ratably over the EHR reporting period

9. Accounting for EHR Payments • Illustration of application of grant accounting model

10. Accounting for EHR Payments • Reasonable Assurance • Matter of Judgment • Is the hospital’s EHR system new? • Has the hospital implemented CPOE? • How reliable is data entry? • Is the hospital doing the bare minimum? • Management must adequately support, through appropriate documentation, the point at which reasonable assurance was obtained that the hospital met or will meet the meaningful use requirements.

11. Accounting for EHR Payments • Cost Reports Utilized for FFY 2011 Medicare Incentive Payments

12. Accounting for EHR Payments • Statement of Operations Presentation • Nongovernmental • Identified as other revenue(separately from patient service revenue) • Typically reported as operating revenue • Governmental • Identified as other revenue in operating revenue section (separately from patient service revenue)

13. Accounting for EHR Payments • Required Disclosures • The recognition policy applied to the incentive payment • Method of recognition (cliff or ratable) • Location of income in the statement of operations • General description of the incentive program • Nature of payments • How payments are calculated • Attestation process • Income recognized is an estimate • Material changes in payment estimates • Subject to audit by federal government or its designee

14. Accounting for EHR Payments • Example Financial Statement Disclosure: • The Health Information Technology for Economic and Clinical Health Act (the HITECH Act) was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The HITECH Act includes provisions designed to increase the use of Electronic Health Records (EHR) by both physicians and hospitals. Beginning with federal fiscal year 2011 and extending through federal fiscal year 2016, eligible hospitals participating in the Medicare and Medicaid programs are eligible for reimbursement incentives based on successfully demonstrating meaningful use of its certified EHR technology. Conversely, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in Medicare reimbursements beginning in FY 2015. On July 13, 2010 the Department of Health and Human Services (DHHS) released final meaningful use regulations. Meaningful use criteria are divided into three distinct stages: I, II and III. The final rules specify the initial criteria for physicians and eligible hospitals necessary to qualify for incentive payments; calculation of the incentive payment amounts; payment adjustments under Medicare for covered professional services and inpatient hospital services; eligible hospitals failing to demonstrate meaningful use of certified EHR technology; and other program participation requirements.

15. Accounting for EHR Payments • Example Financial Statement Disclosure (continued): • The final rule set the earliest interim payment date for the incentive payment at May 2011. The first year of the Medicare portion of the program is defined as the federal government fiscal year October 1, 2010 to September 30, 2011. • The Hospital successfully demonstrated meeting meaningful use of its certified EHR technology prior to June 30, 2011. The Hospital applied and received approval from Medicare and Medicaid notifying the Hospital qualified for approximately $2.5 million from the two programs. The portion of these funds related to the Hospital’s fiscal year end were accrued and are reported in other current assets on the balance sheet and other revenues on the income statement.

16. Accounting for EHR Payments • HFMA Issue Paper: Appendix A • Grant Accounting Model Example Assumptions • Grant income recognition for a Year 2 incentive payment • Second payment year (or EHR reporting period) of the EHR incentive program, which is the federal fiscal year ended September 30, 2012 • Hospital has a June 30 fiscal and cost reporting year end • Hospital’s fiscal year ending within the EHR reporting period is June 30, 2012 • Hospital has met the Stage 1 meaningful use criteria in the first EHR incentive payment year (the federal fiscal year ended September 30, 2011) • Hospital is reasonably assured that it will comply with the meaningful use criteria for the entire EHR reporting period

17. Accounting for EHR Payments • Original Estimate Entry at October 31, 2011 • The Hospital’s original estimate of its Year 2 EHR incentive payment determined on October 1, 2011 is $618,000. • October 1, 2011 is the start of the second fiscal quarter of the Hospital’s 2012 fiscal year. • The Hospital records the following entry for the month ending October 31, 2011:

18. Accounting for EHR Payments • Revised Estimate Catch-up Entry • The Hospital revised its estimate of its Year 2 EHR incentive payment as of June 30, 2012 based on analysis of year end discharge, charity care, and other input data. The analysis resulted in a revised Year 2 EHR incentive payment estimate of $650,000. • The Hospital records the following cumulative catch-up entry in its fourth fiscal quarter to account for this change in estimate.

19. Accounting for EHR Payments • Entry to Record Receipt of Incentive Payment • The Hospital received a preliminary Year 2 EHR incentive payment of $620,000 in November 2012. • The Hospital records the following entry in the second fiscal quarter of fiscal year 2013 related to receipt of the EHR incentive payment:

20. Accounting for EHR Payments • Entry to Record Revised Estimate • In August 2013, the Hospital files the cost report for its fiscal year ended June 30, 2013 and revises its estimated Year 2 EHR incentive payment to $660,000 based on settlement information included in the filed cost report (i.e., the c/r period beg. during the 2nd payment year). • The Hospital records the following entry in its first fiscal quarter of 2014 to record the revised estimated EHR incentive payment to be received from CMS:

21. Accounting for EHR Payments • Entry to Record Final Settlement • During fiscal 2015, the fiscal intermediary completes its audit of the Hospital’s fiscal 2013 Medicare cost report. • As a result of the audit, CMS determines a final EHR incentive payment of $ 655,000 was earned by the Hospital. • The Hospital records the following entry in fiscal 2015, to record the effects of the settlement of the 2013 audited cost report related to the Year 2 EHR incentive payment:

22. Accounting for EHR Payments • Summary of EHR Estimate Activity • Subsequent to fiscal year 2012, the Hospital recognized an additional $167,500 of the Year 2 EHR incentive payment due to the amount prorated into fiscal 2013 and the changes in estimate relating to prior years.

23. Questions? Wes Sternenberg, CPA wsternenberg@draffin-tucker.com • Lisa Gilmore, CPA • lgilmore@draffin-tucker.com