Definition
Under ASC 606-10-32-7, an entity can offer a price concession explicitly or the circumstances may indicate that it will accept less than the stated price. Health care providers apply this to patient charges: the transaction price is the amount expected to be collected after contractual adjustments for payers and implicit price concessions for patients who are not expected to pay in full. The result is reported as net patient service revenue. Credit losses that arise after revenue is recognized, for example from a deteriorated payer, are evaluated under ASC 326.
Why it matters in an audit or review
A practice or hospital may have large gross charges and a smaller amount collected. Auditors test the estimate by payer class using collection history, aging, and subsequent cash receipts, and confirm that revenue and receivables are shown net. They also test contractual adjustments against payer contracts.
Example
Illustrative: gross charges are $1,000,000, contractual adjustments are $400,000, and implicit price concessions are $60,000. Net patient service revenue is $540,000.
Common mistakes
- Recording the concession as bad debt expense.
- Using one estimate for all payer classes.
Sources
- FASB ASC 606-10-32-7 through 32-9, price concessions and variable consideration
- FASB ASC 954-605, Health Care Entities, Revenue Recognition
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error