Revenue recognition is difficult at the best of times — if the number of resources on the topic across the Internet is any indication. However, when it comes to telehealth, revenue recognition can seem downright impossible. After all, you are performing a healthcare visit, potentially across thousands of miles. You do not only have to try to measure patient outcomes, potentially without ever physically interacting with your patient, but also have to understand the telehealth limitations and regulations for each state where you have patients. When it comes to revenue recognition for these visits, you cannot afford to sit back and hope for the best.

Below are the challenges facing those providers who must recognize revenue for telehealth visits. We illustrate common pitfalls and dangers and the questions you should ask yourself to avoid them.

Related Read: Get Ready for Your Closeup: Embrace Telehealth

Before You Start

There are five stages to recognizing revenue, as determined by the Financial Accounting Standards Board (FASB) rules. Note that these stages only apply if you are recognizing revenue on the accrual basis, in accordance with Generally Accepted Accounting Principles (GAAP). If you recognize revenue on a cash basis, you do not need to go through this analysis.

Step One: Identify the Contract

The first step in recognizing revenue is determining and understanding what contract(s) exist for your organization. Part of what makes telehealth challenging is determining not only if there is a contract, but also whether you are able to enter into the contract in the first place. Telehealth visits frequently take place across state lines. Your ability to perform cross-border visits will depend on a variety of state regulations and federal policies. The regulatory landscape is complex — there are different rules, contracts and agreements for different clinicians (physicians, nurses, psychologists, physical therapists, etc.). These complications can lead to problems in identifying the validity of interstate medical services.

Questions to consider at this stage:

• Do I know where all my organization’s telehealth visits have taken place this year?
• Do I have the proper documentary support in place for all of these visits?
• What states are my physicians and other clinicians licensed to practice in?
• What are the different regulations around telehealth for each of the states in which we have performed telehealth visits?

Related Read: COVID-19 and the Impact on Telehealth Services

Step Two: Identify the Performance Obligation

Assuming you can conclude that you have a valid contract, the next step is to understand what your performance obligations are to your customer. Essentially, what services do you need to provide in order to fulfill the terms of the contract? For telehealth, it starts out simple: Your obligation is caring for the patient. The complicated part is understanding when that obligation is fulfilled. Have you provided this distinct care once you have responded to the call and provided the consultation? Or, has the obligation been fulfilled after a series of consultations over a period of time? Understanding what actions result in fulfilling your obligations under the contract is critical at this stage of the process and also in Step Five.

Questions to consider at this stage:

• What is the key outcome I am driving toward for each telehealth visit?
• What does it mean to fulfill my obligation to care for a patient?
• Do you have an obligation for multiple telehealth visits or is the patient interaction a one-time event?
• What activities are set up activities that do not give rise to revenue?
• Do we have a stand-ready obligation?
• Is the consultation bundled with other services provided by other clinical specialties?

Step Three: Determine the Transaction Price

Being able to properly determine the transaction price for a telehealth service requires you to face down a number of considerations, including whether or not your estimation of the cost is accurate and whether you are likely to collect the consideration to which you are entitled. If you end up billing something that is likely to be reversed in the future, then you should not recognize revenue. This is a significant change from old revenue recognition rules, under which you would recognize revenue for your full-price and an allowance for uncollectible amounts for any expected discounts. All these considerations add up to complexity, making this the stage where things tend to go wrong. An additional challenge is using correct billing codes. Sometimes, physicians mistakenly bill for a code that does not correspond to the service that was provided — that is a big problem when it comes time to recognize revenue. You have to proceed carefully, making sure you are using a solid, consistent methodology for pricing and are billing accurately.

Questions to consider at this stage:

• What is the nature, timing and amount of the consideration?
• For each telehealth visit, does it count as a fixed consideration or is there a variable component or financing component?
• Am I confident that all billing codes are being used correctly and consistently?
• What estimation methodology do I use? Is this methodology being used consistently across my organization?
• Do we have an implicit price concession?

Step Four: Allocate the Transaction Price to Each Performance Obligation

This step requires you to allocate the transaction price in Step Three to the performance obligations in Step Two based on the stand-alone selling price — this is why completing Step Two and Step Three correctly is so vital. If you misidentify your performance obligations or incorrectly estimate the transaction price of a telehealth visit, you may inaccurately allocate the transaction price of the telehealth service.

Questions to consider at this stage:

• Is the stand-alone transaction price of the telehealth visit observable or estimable?
• If it is not observable, what acceptable approach should I use?
• Do I allocate the transaction price specifically to satisfying the performance of the telehealth visit?
• Is the allocation consistent with what I expect to receive for satisfying the performance obligation?

Step Five: Recognize Revenue as Each Performance Obligation is Satisfied

One challenge with telehealth is determining what satisfaction of a performance obligation looks like. In a remote environment, where testing and physical examination are limited or entirely non-existent, it can be difficult to know when the services you are performing result in a satisfied obligation, and thus, determining when revenue has been recognized.

Questions to consider at this stage:

• What tools are available for me to measure patient outcomes in a remote environment?
• Are the services that I am providing aligning with my performance obligations?
• What are the signs that I have satisfied my obligation to my patient?
• Do I recognize revenue at a point in time or over time?
• How do I address any nonrefundable upfront fees and contract costs?

Tying it all together

The very features of telehealth that make it an attractive alternative to in-person care — like its ability to enable patient care anywhere in the U.S. for any patient with access to a computer and the Internet — are what make it so difficult to manage from a revenue recognition perspective. Every healthcare provider reporting on the accrual basis needs to not only be aware of these challenges, but also take immediate action to make it easier to recognize revenue for telehealth in the future by collecting the appropriate patient data to understand contracts and obligations, finding ways to measure patient outcomes remotely, using billing codes accurately and more. Finally, note that while some of the issues discussed above, such as multi-state considerations, would not apply to in-person care. The general rules for how to recognize revenue will apply to in-person treatment as well.

For more information, contact Larry Sophian at 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.