ASC

ASC 405-954

Health Care Entities

405 Liabilities

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In brief

IntermediateRecognitionDisclosureIndustry-specificContingencies and guarantees

This Subtopic governs recognition and disclosure of liabilities unique to health care entities, principally accrued health care costs under capitation and other risk-bearing payor contracts. Providers that bear risk for referrals and outside services must accrue a liability for unpaid claims, including incurred but not reported (IBNR) claims, and must accrue health care costs as services are rendered, including services required beyond the premium period and post-termination costs. It also clarifies that entering into a Medicare fraud settlement that requires five years of future compliance audits is not itself the obligating event, so no liability is recognized for those future audits.

Key points (7)
  • A capitation contract that obligates the provider to assume the risk of physician referrals and other outside services requires establishing a liability for unpaid claims, including incurred but not reported claims; a lag analysis may help estimate it (405-954-25-1).
  • Health care costs are accrued as services are rendered, including estimates of the cost of services rendered but not yet reported (405-954-25-2).
  • If a prepaid health care provider must render services to specific members beyond the premium period (by contract or regulation), the costs of those services are accrued currently (405-954-25-2).
  • Costs to be incurred after contract termination—such as guaranteed salaries, rent, and depreciation, net of anticipated revenues—are accrued when it is determined a contract with a sponsoring employer or group will be terminated (405-954-25-2).
  • Amounts payable to hospitals, physicians, or other providers under risk-retention, bonus, or similar programs are accrued during the contract period based on relevant factors such as experience to date (405-954-25-2).
  • No liability is recognized on the settlement date for future Medicare compliance audits required by a fraud settlement agreement, because entering into the agreement is not the obligating event (405-954-25-4 through 25-5).
  • Disclosure is required of estimated amounts payable for contractual adjustments and third-party settlements, and, for prepaid health care providers, the basis for accruing health care costs and significant business/contractual arrangements with hospitals, physicians, or associated entities (405-954-50-1; 405-954-50-2).

For students. The recurring exam trap is timing: costs are accrued when services are rendered (including IBNR and obligations extending past the premium period), but a promise to perform future compliance audits under a Medicare settlement creates no liability because the obligating event hasn't occurred. Distinguish "we already received/owe the service" from "we promised to do something in the future."

capitation contractincurred but not reported claimsunpaid claims liabilityprepaid health care serviceslag analysisobligating eventthird-party settlementsrisk-retention and bonus programs

Machine-generated study aid for ASC 405-954. Check the source paragraphs below.

405-954-00Status

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405-954-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
954-405-25-1 Amended Accounting Standards Update No. 2014-09 05/28/2014
954-405-25-3 Superseded Accounting Standards Update No. 2014-09 05/28/2014
954-405-25-5 Amended Accounting Standards Update No. 2024-02 03/29/2024

405-954-05Overview and Background

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405-954-05-1
This Subtopic provides guidance on liabilities for health care entities within the scope of this Topic.
405-954-05-2
Contracts between a health care provider and a payor based on anything other than full charges require the provider to accept some financial risk. The nature and degree of risk for the provider varies depending on the contract terms (for example, the definition of the unit of service or the basis for payment).

405-954-15Scope and Scope Exceptions

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Overall Guidance

405-954-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 954-10-15.

405-954-25Recognition

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Health Care Contracting

405-954-25-1
If a capitation contract obligates the provider to assume the risk of physician referrals and other outside services, a liability for unpaid claims, including incurred but not reported claims, shall be established. A lag analysis may be helpful in estimating the liability.

Prepaid Health Care Services

405-954-25-2
Health care costs shall be accrued as services are rendered, including estimates of the costs of services rendered but not yet reported. Furthermore, if a provider of prepaid health care services is obligated to render services to specific members beyond the premium period due to provisions in the contract or regulatory requirements, the costs of such services to be incurred also shall be accrued currently. Costs that will be incurred after a contract is terminated, such as guaranteed salaries, rent, and depreciation, net of any anticipated revenues, shall be accrued when it is determined that a contract with a sponsoring employer or other group will be terminated. Amounts payable to hospitals, physicians, or other health care providers under risk-retention, bonus, or similar programs shall be accrued during the contract period based on relevant factors, such as experience to date.

Medicare Settlement Agreements

405-954-25-4
A number of health care entities have entered into settlement agreements with the U.S. government regarding allegations of Medicare fraud. In addition to the promise to pay specified penalties to the U.S. government, the settlement agreements impose an obligation on the health care entity to engage an independent review entity to test and report on compliance with Medicare requirements each year for the following five years.
405-954-25-5
The settlement agreement represents a promise by a health care entity to perform future compliance audits and a duty or responsibility on which others are justified in relying is created by that promise. However, that promise creates a present duty or responsibility only if an obligating event has already occurred (the third characteristic of a liability; see paragraph 6 of FASB Concepts Statement No. 6, Elements of Financial Statements) that leaves the health care entity with little or no discretion to avoid the future transfer or use of assets. The obligating event for the costs of the future compliance audits is not entering into the agreement. Therefore, the entity shall not recognize a liability for the future Medicare compliance audits on the date the settlement is agreed to.
Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance:
105-10-65-9The settlement agreement represents a promise by a health care entity to perform future compliance audits and a duty or responsibility on which others are justified in relying is created by that promise. However, that promise creates a present duty or responsibility only if an obligating event has already occurred that leaves the health care entity with little or no discretion to avoid the future transfer or use of assets. The obligating event for the costs of the future compliance audits is not entering into the agreement. Therefore, the entity shall not recognize a liability for the future Medicare compliance audits on the date the settlement is agreed to.

405-954-30Initial Measurement

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405-954-50Disclosure

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405-954-50-1
With regard to contractual adjustments and third-party settlements, identification and explanation of the estimated amounts that are payable by the entity shall be disclosed.
405-954-50-2
For providers of prepaid health care services, the basis for accruing health care costs and significant business and contractual arrangements with hospitals, physicians, or other associated entities shall be disclosed in the notes to financial statements.

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