Key Takeaways
- Audits support financial accuracy in value-based care.
- Revenue recognition is more complex in VBC contracts.
- Coding and incentive structures create compliance risks.
- Principal vs. agent classification affects revenue reporting.
The Role of Audits in Value-Based Care
As the healthcare industry continues its shift from fee-for-service to value-based care (“VBC”), the role of audits has become increasingly vital. In VBC models, providers are rewarded for delivering high-quality, cost-effective care rather than the pure volume of services rendered. This transformation demands oversight to ensure compliance, accuracy in documentation and coding, and alignment with performance metrics. As organizations benefit from value-based programs, the need for accurate reporting, clear performance measures, and reliable audit processes becomes even more important.
The Center for Medicare and Medicaid Innovation has a goal for 100% of Medicare beneficiaries to participate in accountable-care relationships by 2030. The worldwide VBC market was valued at $12.2 billion in 2023 and is projected to reach $43.4 billion by 2031. The growth in this space has been and will continue to be significant.
Financial statement audits, along with broader healthcare audits for VBC organizations, play a fundamental role in validating financial integrity in risk-based models and enhance stakeholder confidence.
Key Audit Areas
1. Accounts Receivable and Revenue Recognition
2. Understanding whether to record contracts at gross vs. net is a core consideration.
3. Estimated Liability for Unpaid Claims (Including IBNR)
This liability represents the expected ultimate cost of settling all claims that have occurred by a given valuation date, regardless of whether they have been reported yet.
Revenue Recognition in VBC Organizations
Revenue recognition can be challenging in risk-based and shared-savings arrangements. Standard steps include:
1. Identify the Contract
These contracts can involve multiple parties (payers, providers and patients). The customer is typically the party that controls payment (often the payer).
2. Performance Obligations
Identify services promised in the contract. These must be distinct and measurable. A lot of providers consider the holistic support of the member’s overall health and care coordination within one combined performance obligation.
3. Determine the Transaction Price
VBC arrangements often include variable consideration. Providers must estimate the amount expected to be received.
4. Allocate the Transaction Price to the Performance Obligation
If multiple performance obligations exist, the transaction price must be allocated based on stand-alone selling prices. In practice, many VBC arrangements use a single performance obligation.
5. Recognize Revenue
Revenue is recognized when or as performance obligations are met (over time for ongoing care management and at a point in time for an office visit).
For more information about this process, see Understanding Healthcare Audits in Senior Care.
Gross vs. Net Revenue Classification
In VBC contract arrangements, the classification between gross vs. net can be complex.
Principal (Gross)
If a provider arranges, provides, and controls the managed healthcare services, they are acting as a principal. In these cases, revenues are generally recorded at gross, as the provider controls the services before transfer.
Agent (Net)
If the provider’s risk of loss and level of control over arranging and providing services are not substantial, they are acting as an agent. In these cases, revenues are generally recorded at net, as the provider does not control the services before transfer.
This assessment can be complex and highly dependent on the specific facts and circumstances of each arrangement. If you have questions or need guidance on how to handle these determinations, please reach out to a healthcare consulting expert for assistance.
Potential Compliance Issues in VBC
Common Risk Areas
- Use of inaccurate or unsupported ICD-10 codes can result in False Claims Act exposure.
- Bonus structures and provider incentives can lead to fraud and abuse if not structured carefully.
Stark and Anti-Kickback Statute Updates
Background on the 2021 Exceptions
In January 2021, new exceptions for VBC arrangement under the Stark Law (Physician self-referral) and Anti-Kickback Statue (AKS) took effect.
Before these updates, many health care providers believed that the AKS and the Stark Law hindered the establishment of value-based arrangements.
The reasoning was as follows. If value-based arrangements provide a financial or other incentive to health care professionals in exchange for taking measures designed to promote better quality health care while achieving measurable savings targets, then there can be a prohibited financial relationship between the health care entity paying the incentive and the entity receiving it.
Example of Previous Compliance Concerns
For example, a hospital and a physician group may seek to enter into a financial arrangement that compensates physicians based on compliance with the hospital’s health screening protocol.
The goal of this protocol is to detect more cancer in patients and reduce overall patient care costs.
Exceptions Allowing Value-Based Arrangements
The three exceptions are as follows:
1. Full Financial Risk (Acting as Principal)
2. Meaningful Downside Risk
Covers arrangements where substantial financial risk is assumed ≥10% of total compensation.
3. General VBC Arrangements
Must be structured in a commercially sound manner with a clear focus on improving care coordination or healthcare quality.
In many cases, providers turn to healthcare consulting experts to help address these operational hurdles and ensure compliance strategies are both effective and sustainable.
Ensuring Accuracy and Compliance in Value-Based Care Models
As VBC arrangements continue to become more common, a well-planned audit with experienced team members can provide considerable value for ensuring financial integrity, regulatory compliance, and operational efficiency. When providers leverage specialized knowledge with experienced auditors, they mitigate risk while positioning themselves for success in a healthcare environment that prioritizes quality and sustainability.
LBMC’s healthcare audit and advisory professionals support organizations as they navigate these requirements. The team assists with VBC audit readiness, financial reporting questions, compliance considerations, and the technical challenges that come with revenue, risk-sharing, and documentation requirements in value-based models.
Content provided by Kurt Zollner, Senior Manager, Healthcare Audit. He can be reached at Kurt.Zollner@lbmc.com.