Here’s a more detailed look at each of the accounting trends in the hospital and healthcare services sector, with examples:
- SEC Comment Letter Trends: The SEC’s focus includes R&D costs, non-GAAP measures, and MD&A. Companies are frequently asked to break down R&D expenses by product candidate or project. For example, a health industry company might be required to disclose its R&D expenses specifically allocated to a new cancer drug research project.
- Cybersecurity Risk Governance and Incident Reporting: New SEC rules require disclosures related to cybersecurity incidents and risk management. For example, if a hospital experiences a data breach, it must report the incident within four business days after determining its materiality.
- Executive Incentive Compensation Clawback: Under new SEC rules, listed issuers must have policies to recover erroneously awarded incentive-based compensation in the event of an accounting restatement. An example would be a hospital system CEO required to return a part of their bonus following a restatement of financial results due to accounting errors.
- Share Repurchase Disclosures: The SEC has expanded disclosure requirements for share repurchases. For instance, a healthcare company must disclose detailed information about its share repurchase program, including the number of shares purchased and the average price paid.
- Reassessment of Filer Status: Companies must annually reassess their filer status, which affects their reporting obligations and filing deadlines. For example, a medium-sized biotech firm might shift from a smaller reporting company to a large accelerated filer based on its increased market capitalization.
- OECD Pillar Two Global Minimum Tax: This international tax change requires companies to pay a minimum tax based on adjusted financial reporting income in each jurisdiction. For example, a multinational pharmaceutical company must calculate and pay the minimum tax in each country where it operates.
- Disaggregation of Income Statement Expenses: A proposed FASB standard may require entities to disaggregate expenses into specific categories. A hospital, for example, might need to separately report its employee compensation expenses and depreciation of fixed assets.
- Revenue Recognition for Health Care Contracts: Focuses on how health care providers recognize revenue from various contracts. A hospital might need to adjust how it recognizes revenue from its risk-sharing agreements with insurance companies.
- Current Expected Credit Losses (CECL) Model: The CECL standard requires entities to estimate expected credit losses. A not-for-profit health clinic, for instance, will need to adjust its accounting for expected losses on its patient receivables.
- Remedy for 340B Underpayments: In response to a Supreme Court decision, CMS proposed a remedy for underpayments in the 340B program. For example, a hospital that was underpaid for 340B-acquired drugs between 2018-2022 might receive a lump-sum payment from CMS as compensation.
- Drug Supply Chain Security Act (DSCSA): Requires electronic traceability of drug products. A pharmaceutical company will need to ensure its supply chain can electronically track and trace drugs at the unit level.
- Patient Financing Demand: As healthcare costs rise, patients seek more financing options. A hospital could introduce patient financing plans to help patients manage the costs of care, especially for those with high-deductible health plans.
- Mergers and Acquisitions (M&A): The pharmaceutical and life sciences sectors continue to use M&A as a strategic tool to drive growth, despite challenges like higher interest rates, regulatory scrutiny, and market volatility. For example, a pharmaceutical company might acquire a biotech firm specializing in oncology to enhance its product pipeline and focus on innovation.
- Electronic Drug Tracing Compliance: The Drug Supply Chain Security Act (DSCSA) requires electronic traceability of drug products to combat counterfeit and harmful drugs. Starting November 27, 2023, entities must be able to electronically trace each prescription drug package. For instance, a drug manufacturer will need to implement systems to track when and where each drug package is handled.
These trends indicate a dynamic regulatory environment and the increasing complexity of financial reporting and compliance in the healthcare sector.