Whether hospitals are ready for it or not, ICD-10 is coming. In August, HHS issued a final rule that officially changed the compliance date of ICD-10 from Oct. 1, 2013, to Oct. 1, 2014, giving hospitals and other providers roughly two years to make the transition.
Hospital CFOs have been following ICD-10 for two main reasons: to monitor how much the implementation will cost and how the ICD-10 transition will affect revenue flow in the future, among others. The American Institute of Certified Public Accountants recently issued guidance in July that impacts the first reason.
"The AICPA healthcare expert panel recognized that many hospitals and providers are incurring expenses related to ICD-10 costs," says Jim Grigg, CPA, partner and national healthcare assurance practice leader at Crowe Horwath LLP. "Questions have started to come up as to which costs to capitalize and which to expense."
Mr. Grigg shares five things from the AICPA's guidance on how hospital CFOs should approach accounting for ICD-10 related costs.
1. Understand what costs are expected to be incurred in the ICD-10 conversion. Mr. Grigg says costs associated with the conversion to ICD-10 fall into four main categories: modifying or replacing existing computer systems to become ICD-10 compliant, enhancing electronic health records, training clinical coders to use ICD-10 and training clinicians to improve documentation to support the specificity needed for ICD-10.
Once hospital CFOs know what costs can legitimately be associated with ICD-10, they can begin to determine if the costs should be expensed (taken out of that year's bottom line) or capitalized (recorded as an asset and depreciated over time).
2. Categorize incurred costs into three groups. The AICPA's guidance says once a hospital knows its ICD-10 incurred costs, they should be placed into three groups.
• Process re-engineering activities. These types of ICD-10 costs include assessing the current state of business processes, process redesign and work force restructuring.
• Activities that develop or modify software. These costs will require an assessment of the specific facts and circumstances of a hospital, and professional judgment will be applied. For example, if a modification is added to system software and results in added functionality beyond the original software's capabilities — and qualifies as an upgrade — the associated costs would fall in this category. However, modifications that do not result in added functionality are expensed as maintenance costs, Mr. Grigg says.
• Costs associated with acquisition of fixed assets. "These costs are accounted for in accordance with your hospital's policy for capitalizing long-lived productive assets," Mr. Grigg says. For example, this could include the purchase of new computer equipment, office furniture or work stations to prepare for ICD-10.
Overall, most re-engineering activities will be expensed, while several application development and fixed asset activities will be capitalized. (A full chart on the accounting guidance can be found above.)
"CFOs need to identify all the various types of costs, put these in the various categories and then conclude — are they expensed, or are they capitalized?" Mr. Grigg says.
3. Collaborate with the IT department. Working with IT will give hospital CFOs an idea of exactly what type of incurred costs are expected with ICD-10 as well as the timing of implementation.
4. Know what's being modified to the hospital's IT systems. If hospital CFOs know what is being done to the IT systems in preparation of ICD-10 — for example, if the systems are being modified in a way that will result in "additional functionality" — it will make the accounting process a lot easier, Mr. Grigg says. Thus, there needs to be clear communication between the hospital's IT and finance/accounting departments.
5. Discuss with your auditors. It's always prudent for CFOs to meet with auditors early and have a review of the anticipated costs and associated accounting to avoid year-end surprises. ICD-10 costs should be part of that discussion.
"Don't rely on your year-end audit to figure this out," Mr. Grigg says. "There is good guidance out there now."
Hospital CFOs have been following ICD-10 for two main reasons: to monitor how much the implementation will cost and how the ICD-10 transition will affect revenue flow in the future, among others. The American Institute of Certified Public Accountants recently issued guidance in July that impacts the first reason.
"The AICPA healthcare expert panel recognized that many hospitals and providers are incurring expenses related to ICD-10 costs," says Jim Grigg, CPA, partner and national healthcare assurance practice leader at Crowe Horwath LLP. "Questions have started to come up as to which costs to capitalize and which to expense."
Mr. Grigg shares five things from the AICPA's guidance on how hospital CFOs should approach accounting for ICD-10 related costs.
1. Understand what costs are expected to be incurred in the ICD-10 conversion. Mr. Grigg says costs associated with the conversion to ICD-10 fall into four main categories: modifying or replacing existing computer systems to become ICD-10 compliant, enhancing electronic health records, training clinical coders to use ICD-10 and training clinicians to improve documentation to support the specificity needed for ICD-10.
Once hospital CFOs know what costs can legitimately be associated with ICD-10, they can begin to determine if the costs should be expensed (taken out of that year's bottom line) or capitalized (recorded as an asset and depreciated over time).
2. Categorize incurred costs into three groups. The AICPA's guidance says once a hospital knows its ICD-10 incurred costs, they should be placed into three groups.• Process re-engineering activities. These types of ICD-10 costs include assessing the current state of business processes, process redesign and work force restructuring.
• Activities that develop or modify software. These costs will require an assessment of the specific facts and circumstances of a hospital, and professional judgment will be applied. For example, if a modification is added to system software and results in added functionality beyond the original software's capabilities — and qualifies as an upgrade — the associated costs would fall in this category. However, modifications that do not result in added functionality are expensed as maintenance costs, Mr. Grigg says.
• Costs associated with acquisition of fixed assets. "These costs are accounted for in accordance with your hospital's policy for capitalizing long-lived productive assets," Mr. Grigg says. For example, this could include the purchase of new computer equipment, office furniture or work stations to prepare for ICD-10.
Overall, most re-engineering activities will be expensed, while several application development and fixed asset activities will be capitalized. (A full chart on the accounting guidance can be found above.)
"CFOs need to identify all the various types of costs, put these in the various categories and then conclude — are they expensed, or are they capitalized?" Mr. Grigg says.
3. Collaborate with the IT department. Working with IT will give hospital CFOs an idea of exactly what type of incurred costs are expected with ICD-10 as well as the timing of implementation.
4. Know what's being modified to the hospital's IT systems. If hospital CFOs know what is being done to the IT systems in preparation of ICD-10 — for example, if the systems are being modified in a way that will result in "additional functionality" — it will make the accounting process a lot easier, Mr. Grigg says. Thus, there needs to be clear communication between the hospital's IT and finance/accounting departments.
5. Discuss with your auditors. It's always prudent for CFOs to meet with auditors early and have a review of the anticipated costs and associated accounting to avoid year-end surprises. ICD-10 costs should be part of that discussion.
"Don't rely on your year-end audit to figure this out," Mr. Grigg says. "There is good guidance out there now."
More Articles on ICD-10:
5 Ways ICD-10 Will Dig Into Your Hospital's Budget
HHS Finalizes One-Year Delay of ICD-10 to 2014