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5.3 Medicare provider taxation programs
Publication date: 31 Mar 2023
us Health care guide
As discussed in HC 2.2.2.1, most states will augment the base payment rates for services provided to Medicaid-enrolled patients with additional supplemental payments. Often, supplemental payments are made through one or more provider taxation programs established by the state. Under these programs, states impose a fee or tax on a class of providers and redistribute all or a large portion of those taxes back to Medicaid providers in the form of increased rates for fee-for-service care. The supplemental payments will be funded through a combination of the taxes collected from providers and federal matching funds.
These supplemental payments enter into the determination of patient service revenue under ASC 606 and are a form of variable consideration associated with services to Medicaid patients, as discussed in HC 3.3.2. The unique structures of the programs that generate these payment streams and the ongoing regulatory approvals required to operate them must be considered when estimating and constraining estimates of variable consideration under ASC 606. Specific considerations related to these payment streams discussed in this section are:
- accounting considerations for reporting periods in which regulatory approval is received,
- revenue recognition when regulatory approvals have not been received as of a reporting date,
- income statement presentation of supplemental payment revenues, and
- income statement presentation of expenses (e.g., taxes) associated with the program assessments
An HFMA Principles & Practices Board Issue Analysis, Revenue Recognition Under Topic 606 for Provider Tax Programs and Similar Arrangements, provides regulatory background information on these programs along with nonauthoritative commentary on the accounting and reporting matters discussed in this section.
5.3.1 Mechanics of a provider tax program
As discussed in HC 2.2.2, Medicaid is a government-sponsored health insurance program that is jointly funded by each respective state and the federal government. The federal Centers for Medicare & Medicaid Services (CMS) provides matching funds in a specified percentage for every dollar spent by a state Medicaid program on health care services.
A provider tax program can be used to obtain additional federal matching funds from CMS in order to increase payments to providers. The process is depicted in Figure HC 5-3.
Figure HC 5-3
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Provider tax programs are generally implemented through state legislation that imposes a tax or similar fee on a certain class of providers. The programs operate for a specified period (usually three years). Taxes assessed are collected from providers, and the state Medicaid program will then use that pool of tax revenues to increase the payments made to providers for services to Medicaid patients.
Each dollar of additional expenditure by a state (e.g., payments by the state to providers for services to a Medicaid patients) will automatically trigger an additional inflow of federal funding arising from the statutory federal financial participation matching percentage (FFP). For example, if the FFP is 65%, every $100 of taxes collected from providers and used to increase Medicaid payments will result in $65 of federal matching funds flowing into the state’s program. Thus, the state will have a total of $165 to compensate health care providers for treatment of Medicaid patients, funded in part from taxes collected from the providers and in part from federal matching funds.
A fundamental tenet of these programs is that there can be no guarantee that individual providers will recoup the amount that they pay into the program in the form of taxes. Since the taxes remitted by providers are not directly correlated with supplemental payments received from the state, they should be presented as operating expenses. The revenue (i.e., supplemental payments) and expense (i.e., provider tax) amounts should not be netted. For additional information, see the HFMA Principles & Practices Board Issue Analysis, Revenue Recognition Under Topic 606 for Provider Tax Programs and Similar Arrangements.
5.3.2 CMS approval of provider taxation programs
As described in HC 2.2.2, each state has a formal agreement with CMS (referred to as the Medicaid “state plan”) detailing how that state’s program is administered and entitling the plan to receive the federal matching funds. To make significant changes in benefits or how they pay providers, state agencies must submit and receive CMS approval of a “state plan amendment” (SPA). While it is possible for a provider tax program to be designed in a manner that does not require amendment of the state plan, in most cases states will need to request a waiver of certain federal requirements (through submitting and obtaining CMS approval of a SPA) in order to establish or renew a provider tax program.
Before approving the waiver, CMS will perform various analyses to determine whether the program is broad-based and generally redistributive among the “taxpayers” (i.e., the providers) who will take part in it. In addition, states are prohibited from a direct or indirect guarantee that providers receive their money back. The focus is on the funds flowing into the program from the tax assessments and their redistribution among providers in the form of increased Medicaid payments. If a proposed program is structured in a manner that directly or indirectly guarantees that taxpayers will receive their money back, CMS will not approve it.
Typically, the legislation establishing a provider tax program will state that if CMS does not approve the program, it will be unwound. In that case, any increased payments made provisionally to providers while awaiting approval would be recouped and used to refund the taxes paid by the providers.
5.3.3 Provider tax programs – general revenue recognition considerations
As discussed in HC 5.3, supplemental payments arising from provider tax programs function as adjustments to Medicaid base rates and enter into the determination of a provider’s transaction price for patient service revenue under ASC 606. Such payments represent variable consideration for services provided to Medicaid patients and, therefore, an estimate of that consideration will need to be made at the time revenue for the services is recognized. In the context of provider tax program supplemental payments, the variability may arise from two sources: (1) the status of regulatory approval of the program and (2) the provider’s ability to estimate the amount of the reimbursement to which it is entitled (for an approved program) or to which it will be entitled (assuming the program is approved). See HC 5.3.4 for additional considerations when regulatory approval is pending).
As discussed in HC 3.2.5, step 5 of the ASC 606 model requires that revenue be recognized when (or as) the entity satisfies the performance obligation by transferring services to the patient. All payment streams included in the transaction price should be recognized according to the identified measure of progress, regardless of the timing of payment. Even though providers typically receive the supplemental payments in quarterly or annual lump sum amounts, this consideration should be recognized in the same pattern as the other components of the transaction price. Thus, providers will need to estimate (see HC 3.3) their supplemental payments and, in concept, allocate a portion of those anticipated payments to the transaction price for each service provided to a Medicaid patient. A portfolio approach is likely to be an appropriate technique to apply in these circumstances.
5.3.4 Revenue recognition considerations in periods when program approval is pending
When a state applies to CMS for approval of a new provider tax program (or renewal of an existing program in a significantly different form), it might take several years for CMS to grant the approval.
If a provider participates in a program that is awaiting CMS approval at the provider’s reporting date, additional uncertainty exists with respect to the amount of consideration that should be included in the transaction price for services provided to Medicaid patients during periods covered by that program. The uncertainty regarding approval is binary—that is, the provider will be entitled to receive all of the expected supplemental payments if the program is approved and will receive none if CMS fails to approve the program. In some instances, there may also be uncertainty related to the determination of the amounts that will be received under the program.
HC 3.3 describes the approach required by ASC 606 for estimating consideration that is variable. That approach involves selecting an appropriate estimation methodology (either the “expected value” method or the “most likely amount” method) and considering the need to constrain the resulting estimate to avoid recognizing a significant amount of revenue that could be reversed if the ultimate outcome is different than the estimate.
When the uncertainty regarding the supplemental payments has only two possible outcomes (that is, either CMS approves or fails to approve the program), the “most likely amount” approach should be used because it would produce a better estimate of the consideration the provider expects to receive. Using the expected value approach in a situation involving only two outcomes would produce an estimate of transaction price that is significantly different than either of the two possible outcomes.
In these instances, a key consideration is whether the pending approval pertains to a new program or to renewal of an existing program.
If the pending approval relates either to a new program or to renewal of an existing program for which substantial changes have been proposed (in other words, the existing program would take on a substantially different form in the future), the provider would likely conclude that they should not record an estimate for amounts expected to be received under the program because the regulatory approval process is subjective and outside the entity’s control. Experience with previous programs would unlikely be predictive with respect to a program with different features. In that situation, the estimated transaction price for services provided to Medicaid patients would exclude any estimated but unapproved supplemental payments, and recognition of revenue associated with the supplemental payments would be deferred until the approval is obtained.
Conversely, if the approval relates to renewal of an existing program with similar or identical attributes, a provider might be able to conclude, based on its historical experience with approvals of the earlier program, that the most likely outcome is that the program will be approved. In that case, the provider would include in the transaction price any provisional payments received from the state related to that period and accrue any additional amounts due to it under the program (including amounts to which the provider expects to be entitled from the federal match).
In addition to uncertainty over program approval, there may also be uncertainty over the ultimate amount a provider will receive under these programs. The “expected value” approach may be more appropriate in estimating the amount of the pending supplemental payments if they are unknown, which could be the case with a new program or if a health care organization does not have access to other participant data.
In addition to the selection of the appropriate estimation methodology, under the ASC 606 variable consideration framework, uncertainties related to regulatory approval or the amounts of supplemental payments require the evaluation of whether those estimates need to be constrained to an amount such that a significant reversal of cumulative revenue is not probable in the future. When assessing the need for a constraint, both the likelihood and magnitude of a future revenue reversal if the approval is not received would be considered. An estimate of variable consideration is not constrained if the potential reversal of cumulative revenue recognized would not be significant, or if a potentially significant reversal is not probable of occurring. ASC 606-10-32-12 identifies factors that could increase the risks of a reversal; these are discussed in RR 4.3.2. The “Estimates of variable consideration” section of the HFMA Principles & Practices Board Issue Analysis, Revenue Recognition Under Topic 606 for Provider Tax Programs and Similar Arrangements also provides relevant commentary when evaluating the need for a constraint in these situations.
In assessing whether an estimate of revenue from an unapproved provider tax program should be constrained, providers should consider the method utilized to record the estimated supplemental payments. If the estimate is determined using the most likely amount method, typically it would not need to be constrained as the provider either determined it likely that the program will be approved (i.e., not probable of significant reversal) or they did not record an amount due to uncertainty. However, if the provider utilized the expected value method, they should consider if the estimate should be constrained.
In some cases, a state program may make provisional supplemental payments to providers while awaiting CMS approval. If the provider has concluded that the that program approval is not likely or if the variable consideration should be constrained, any such payments that are subject to clawback or recoupment if CMS does not ultimately approve the program would represent a refund liability (e.g., refundable advances) until the program is approved and the constraint is no longer necessary.
5.3.4.1 Accounting for CMS approvals that are retroactive to a prior reporting period
When CMS approval is delayed beyond a provider tax program’s scheduled start date, the approval granted typically is retroactive to the start date. For example, a program that was scheduled to begin on October 1 that is not approved until the following March will often mean that providers will receive a lump-sum payment in March or April that includes amounts retroactive to October 1. If the start date and the approval date fall within different financial reporting periods, questions can arise regarding the accounting for supplemental payments approved that are attributable to a prior reporting period.
This section discusses situations when the approval is received after financial statements for the prior period have been issued (or became available to be issued). If the approval is received during a reporting period’s subsequent events period, special considerations apply that are discussed in HC 5.3.4.2
When CMS approval for a program is retroactive to a date in a prior reporting period, the accounting differs depending on whether the estimate of the transaction price for services provided to Medicaid patients in the prior reporting period was constrained due to uncertainty regarding the CMS approval, as discussed in HC 5.3.2.
If that estimate was constrained, the supplemental payments retroactively approved that are attributable to the prior period(s) would be accounted for as revenue of the period in which the constraint was removed, as required by ASC 606-10-32-14 and ASC 606-10-32-43 (i.e., as a change in the transaction price for the services provided in the prior period).
At the end of each reporting period, an entity shall update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. The entity shall account for changes in the transaction price in accordance with paragraphs 606-10-32-42 through 32-45.
Excerpt from ASC 606-10-32-43
An entity shall allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception.… Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
Conversely, if that estimate was not constrained, an estimate of revenue associated with the portion of the supplemental payments attributable to the prior period would have been included in revenue of the prior period (through provisional payments received and/or accruals made). Any difference between the amount estimated for the prior period and the amount actually received for the prior period in connection with the approval is reflected in the period the approval is received as a change in the transaction price associated with the prior period services. Example HC 5-2 illustrates the application of this model.
EXAMPLE HC 5-2
Accounting for retroactive CMS approval received in a subsequent reporting period
Accounting for retroactive CMS approval received in a subsequent reporting period
Hospital is located in a state that applied to CMS for approval of a new provider tax program that was scheduled to begin on October 1, 20x0. Hospital expects to be entitled to lump sum supplemental payments of $250,000 in each of its quarters ending December 31, 20x0, March 31, 20x1, June 30, 20x1, and September 30, 20x1, based on modeling done by the state. Historically, Hospital’s Medicaid patient base has stayed relatively consistent through the reporting year. During November 20x0, while it awaited CMS approval, the state made provisional payments to Hospital of $100,000 with the condition that if the program is not approved by CMS, the funds must be returned to the state. As of December 31, 20x0 (the close of Hospital’s fiscal year), CMS approval had not been received.
Due to the uncertainty regarding the program’s approval, Hospital constrained its estimate of revenue associated with services provided to Medicaid patients in the year ending December 31, 20x0 to exclude any amounts expected to be received from the provider tax program attributable to services rendered in that quarter. Thus, its financial statements for the fiscal year did not include any revenue from the provider tax program for services rendered to Medicaid patients during the first three months of that program. As a result, the $100,000 provisional payment received was reported as a refundable advance (a liability).
Hospital issued its financial statements for the year ended December 31, 20x0 on February 15, 20x1. Five days later (on February 20, 20x1), CMS approved the provider tax program retroactive to October 1, 20x0.
On March 1, 20x1, Hospital received a $150,000 lump sum payment from the state to catch up the supplemental payments to which Hospital was entitled for the fiscal ended December 31, 20x0.
How would Hospital account for the payment?
Analysis
The uncertainty associated with the CMS approval was resolved on February 20, 20x1 and thus, the constraint on the estimate of variable consideration attributable to the provider tax program was no longer needed. According to ASC 606-10-32-14, this is a change in transaction price associated with services provided to Medicaid patients in 20x0 that would be reported in the period in which the constraint was lifted (i.e., the quarter ended March 31, 20x1). Hospital would make the following accounting entries on February 20, 20x1:
Due from Medicaid |
$150,000 |
Refundable advances |
$100,000 |
Patient service revenue |
$250,000 |
To reflect approval of provider tax program and anticipated receipt of catch-up payment.
Hospital would then make the following entry on March 1, 20x1:
Cash |
$150,000 |
Due from Medicaid |
$150,000 |
To reflect catch-up payment received.
If Hospital had not constrained the estimate of variable consideration at December 31, 20x0 (for example, if the amount of revenue was deemed insignificant or if the pending approval pertained to renewal of an existing program, rather than approval of a new program), the accounting in March 20x1 would have been significantly different. In that scenario, Hospital would have included $250,000 of patient service revenue in its financial statements for the fiscal year ended December 31, 20x0. The $100,000 cash payment received in November would have reduced the corresponding receivable for services rendered and a remaining receivable from the Medicaid program of $150,000 would have been reflected on the December 31, 20x0 balance sheet. In that scenario, Hospital’s accounting entries upon receipt of the $150,000 payment on March 1, 20x1 would have been:
Cash |
$150,000 |
Due from Medicaid |
$150,000 |
To reflect receipt of catch-up payment.
5.3.4.2 CMS approval received during subsequent events period
In some cases, notification of CMS regulatory approval might be received after the end of the reporting period but before the date on which financial statements are issued or available to be issued. Guidance for those situations is provided in ASC 855, Subsequent Events. Generally, the determination of whether to recognize the subsequent event in the financial statements is based on whether that event provides additional evidence about conditions that existed at the balance sheet date. If so, it is recognized in the financial statements; if not, it is treated as an event of the period in which it occurs. FSP 28 discusses ASC 855’s framework for evaluating and categorizing subsequent events as recognized or nonrecognized.
ASC 855 does not directly address situations when information about regulatory approval is received during the subsequent events period (the period extending from the balance sheet date through the date when the statements are issued or are available to be issued – see FSP 28 and NP 1.6). When approval is received during the subsequent events period (for either quarterly or annual reporting), the evaluation of whether the approval is “pushed back” into the financial statements is affected by whether the estimate of the transaction price for services provided to Medicaid patients was constrained at period-end due to uncertainty regarding the CMS approval, as discussed in HC 5.3.4.
If the estimate of the transaction price at quarter-end or year-end was not constrained due to uncertainty regarding the CMS approval, we believe the approval notification simply provides validation of the expectation of approval. The financial statements would be adjusted for any difference between the actual amount to be received (if known) and the estimated amount accrued (a recognized subsequent event).
For providers that constrained their estimates based on the regulatory uncertainty, the determination of whether the approval should be recognized (i.e., pushed back to the unissued financial statements) or not recognized (i.e., recognized in the ensuing reporting period) will be based on facts and circumstances and may require significant judgment. Because the regulatory approval process is a subjective determination that is totally within the control of CMS (and outside of the provider’s influence), and the provider previously concluded that there was sufficient uncertainty that the estimate should be constrained, we believe that it may be difficult to assert that the subsequent approval relates to conditions that existed at the balance sheet date. In that case, the approval would be considered an event of the period in which it is received (i.e., it would be a nonrecognized subsequent event). Regardless of whether a provider determines that regulatory approval is recognized or nonrecognized in any particular circumstance, disclosure of the amount of variable consideration related to the program and the manner and period in which it has been, or will be, reported should be disclosed.
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