Dental and Physician Practice Audits: PBC List and Red Flags

Dental and physician groups ask for audited statements because of bank debt, a private equity or management services organization (MSO) transaction, or a partner buy-in. The audit is built on one number: collectible revenue per patient visit. Gross charges are not revenue, insurers pay contracted rates, and patients pay less than they owe.

This guide covers the revenue accounting, the compliance risks that affect the financial statements, the red flags, and the PBC items to request at planning.

Patient service revenue under ASC 606

A practice has a contract with each patient when the visit begins, even when payment is uncertain. The transaction price is not the chargemaster amount. It is the amount the practice expects to collect, which makes much of the difference between gross charges and cash a form of variable consideration.

Two kinds of reductions apply:

• Contractual adjustments for insured patients. The practice bills its fee schedule and the payer allows a lower contracted rate. Revenue is recorded at the allowed amount, with the adjustment taken at the time of service.
• Implicit price concessions under ASC 606-10-32. If the practice intended at inception to accept less than the stated price, consideration is variable and revenue reflects expected collections. The concession arises on the self-pay portion: deductibles, coinsurance, and uninsured patients. A practice that keeps treating patients even though history shows it will not collect substantially all of the billed amount has a concession, not a credit loss.

The distinction between a concession and bad debt is the intent at inception. A concession reduces revenue. If the practice accepted the patient's credit risk and the patient later fails to pay a valid receivable, the loss is a credit loss. See implicit price concessions.

Worked example (illustrative numbers). A dental practice posts $1,200,000 of gross production for the year. Insurance fee schedule write-offs total $380,000, leaving $820,000 of expected billings. Of that, $140,000 is patient-owed. Historical collection on patient balances is 60%, so the practice records a $56,000 implicit price concession. Net patient service revenue is $764,000. The auditor tests the 60% against 12 to 24 months of collections by balance age, tests the write-offs to the fee schedules and explanation of benefits, and compares the total to cash received plus ending accounts receivable.

Dental-specific revenue issues

• Prepaid treatment plans and orthodontic contracts. Cash collected ahead of treatment is a contract liability. Revenue follows delivery of treatment, so the deferral schedule should tie to the treatment plan and months completed.
• Membership plans sold directly to uninsured patients, with fees recognized over the plan period.
• Lab and supply costs matched to the procedure, with the lab invoices tested for cutoff.
• Production versus collection reporting. Practice management software reports both, and owners manage to production. Reconcile software reports to the general ledger.

Physician practice revenue issues

• Payer mix. Medicare, Medicaid, commercial, and self-pay each have a different collection pattern. Analyze net revenue per visit by payer and by physician.
• Accounts receivable. Test the aging by payer and tie it to the billing system. Subsequent cash receipts are the best evidence, supported by remittance advice.
• Capitation and value-based contracts. Determine whether revenue is recognized as the covered period passes and whether settlements or risk-pool amounts are variable consideration. See variable consideration and the constraint.
• Ancillary services. In-office imaging, laboratory, and drug administration carry their own coding and referral rules.

Compliance risks that reach the financial statements

The OIG's compliance guidance for individual and small group physician practices names four risk areas: proper coding and billing, ensuring services are reasonable and necessary, proper documentation, and avoiding improper inducements, kickbacks, and self-referrals. It also lists internal monitoring and auditing as the first of seven compliance program elements.

For the auditor, the question is whether the practice has liabilities or unrecorded refunds from those risks. Under 42 CFR 401.305, a person who has received an overpayment must report and return it by the later of 60 days after identification or the due date of any corresponding cost report. The rule reaches overpayments identified within 6 years of when they were received. A person identifies an overpayment when it knowingly receives or retains it, using the False Claims Act definition of knowingly, and an overpayment kept past the deadline becomes an obligation under 31 U.S.C. 3729.

That makes these audit procedures relevant:

1. Inquire of management and the compliance contact about internal billing audits, payer audits, and refund requests, and read the results.
2. Obtain the log of credit balances and payer refund requests and test the unrecorded liability for refunds due.
3. Read payer correspondence, subpoenas, and civil investigative demands. Assess disclosure and accrual under ASC 450 loss contingencies.
4. Obtain the legal letter and ask about qui tam or whistleblower matters.

Owner compensation and related parties

Practices owned by physicians or dentists have discretionary compensation, personal expenses paid by the practice, and related party leases of the building or equipment. Test owner compensation against the employment agreements, and test real estate rent to the lease. In an MSO structure, test the management fee, the intercompany eliminations, and the entities in the consolidation. See related party transactions.

Red flags

• Collection rates on self-pay balances that rise only at year end.
• Revenue per visit that climbs for one provider with no change in mix.
• A heavy share of high-level evaluation and management codes, or frequent modifier use, compared with peers in the same specialty.
• Credit balances that age without refunds.
• Cash receipts posted to patient accounts after year end and backdated.
• Controls where the same person posts charges, posts payments, and writes off balances.
• Payments to referral sources or medical directors with no written agreement.
• Large owner distributions funded by line of credit draws.

PBC items to request

• Practice management system reports: production, collections, adjustments, and aging by payer, for the full year
• Fee schedules and payer contracts
• Explanation of benefits and remittance advice for sampled claims
• Credit balance and refund log
• Deferred revenue schedule for prepaid and orthodontic plans
• Implicit price concession or bad debt analysis and collection history
• Internal or external coding audits and payer audit correspondence
• Compliance plan and training records
• Owner compensation agreements and related party leases
• Bank statements and merchant processor reports
• Legal letter, representation letter

For how to structure and track the request, see the PBC list guide.

Sources

• FASB ASC 606-10-32, Revenue from Contracts with Customers (variable consideration and implicit price concessions)
• HHS Office of Inspector General, Compliance Guidance for Individual and Small Group Physician Practices (final guidance published October 5, 2000)
• 42 CFR 401.305, Requirements for reporting and returning of overpayments, via Cornell Legal Information Institute

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error