Most of the revenue for patient care services received by providers is based on the quantity of services provided, which is the traditional “fee-for-service” model (see HC 3.1). However, payers (including individuals, the government, and traditional health insurance entities), in an effort to control healthcare costs, are increasingly moving away from the traditional fee-for-service model. In many cases, contracts with providers have incentives aimed at improving patient care quality while also reducing costs. Those types of arrangements, sometimes called value-based care arrangements or alternative payment models, can result in providers assuming additional economic risk as the transaction price for their services is not based solely on the volume of services provided. In those cases, the provider is compensated for “standing ready” to provide services that may be needed during a specified time period, regardless of the nature or volume of services that will ultimately be provided. Broadly, any arrangement under which the transaction price is not solely based on fixed fees for services would be considered a risk arrangement. Risk contracting can encompass many different types of arrangements, from an arrangement in which the compensation is primarily based on fee-for-service but with additional compensation or bonuses based on the achievement of certain quality benchmarks, to an arrangement in which the provider assumes full responsibility for and 100% of the risk of managing the health care services for a defined population of patients. The latter contract, for which a provider is paid a fixed fee for standing ready to provide defined services to a population of patients, is known as a capitated contract.

In addition to changes in the fee structures, the systemic focus on controlling health care costs and population health management has led to an increase in strategic alliances between providers, payers, and other parties. These alliances can take the form of traditional managed care organizations, accountable care organizations, joint ventures, or other contractual risk-sharing arrangements. In many cases, these strategic alliances or value-based care arrangements can blur the lines between traditional providers of health care services and payer organizations.

This chapter outlines some of the accounting considerations that are unique to these risk-sharing contracts and integrated delivery models. This chapter focuses on the accounting under ASC 606, Revenue from Contracts with Customers, although as outlined in ASC 606-10-15-2, entities must first evaluate whether other guidance would apply. Because some of the arrangements covered in this chapter involve multiple parties working together to provide health care to patients, it is imperative for entities to carefully determine the nature of the services they are providing and to whom (i.e., their customer under the risk contract). See HC 4.3 for further discussion of these considerations. Those determinations will drive the accounting model to be applied. Some risk arrangements may be, in whole or in part, within the scope of ASC 815, Derivatives and Hedging, or ASC 460, Guarantees. When considering the applicability of ASC 815, entities should consider whether the contract meets any of the scope exceptions in ASC 815. For example, ASC 815-10-15-52 scopes out certain insurance contracts that compensate the holder only as a result of an identifiable insurable event. See DH 2 for information regarding the accounting definition of a derivative and DH 3 for information on scope exceptions to derivative accounting. Certain risk contracts may also meet the definition of a guarantee (see ASC 460-10-15-4). However, ASC 460-10-15-7(i) excludes transactions that constitute a guarantee of an entity’s own future performance. See FG 2 for further information on accounting for guarantees.

This chapter focuses on the application of the ASC 606 revenue model to risk contracts as well as the timing of recognition of expenses and losses arising from the risk-sharing mechanisms.