Revenue Recognition and Accounts Receivable

6 Months Ended

Jun. 30, 2022

Revenue Recognition and Accounts Receivable

Revenue Recognition and Accounts Receivable

(2)         Revenue Recognition and Accounts Receivable

Revenue Recognition

The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, or over the fixed monthly service period for equipment.

Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and services.

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of sleep therapy equipment supplies (including CPAP resupply products), home medical equipment and related supplies (including wheelchairs, hospital beds and infusion pumps), diabetic medical devices and supplies (including continuous glucose monitors (CGM) and insulin pumps), and other HME products and supplies are recognized when control of the promised good or service is transferred to customers, which is generally upon shipment for direct to consumer medical devices and supplies and upon delivery to the home for home medical equipment.

The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or select the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue

ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability.

The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial insurance payors for each item of equipment or supply provided to a customer. Revenues are recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments.

The Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

Fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned.

The Company disaggregates net revenue from contracts with customers by payor type and by core service lines. The Company believes that disaggregation of net revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company’s revenue-generating contracts vary by payor type and payor source.

The composition of net revenue by payor type for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2022			2021	2022		2021
Insurance	$	436,179	$	371,869	$	857,069	$	661,879
Government		196,338		177,323		377,988		311,053
Patient pay		95,097		67,825		198,760		126,204
Net revenue	$	727,614	$	617,017	$	1,433,817	$	1,099,136

The composition of net revenue by core service lines for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2022			2021	2022		2021
Net sales revenue:
Sleep	$	194,693	$	163,331	$	387,028	$	292,013
Diabetes		162,259		123,314		313,618		218,331
Supplies to the home		43,881		42,675		83,746		84,038
Respiratory		7,891		13,154		16,036		18,775
HME		31,102		30,360		61,953		54,516
Other		52,828		27,763		106,228		50,189
Total net sales revenue	$	492,654	$	400,597	$	968,609	$	717,862
Net revenue from fixed monthly equipment reimbursements:
Sleep	$	65,661	$	66,335	$	123,599	$	114,444
Diabetes		4,034		3,216		7,980		6,069
Respiratory		128,865		111,528		261,445		194,982
HME		25,547		24,431		51,272		44,811
Other		10,853		10,910		20,912		20,968
Total net revenue from fixed monthly equipment reimbursements	$	234,960	$	216,420	$	465,208	$	381,274
Total net revenue:
Sleep	$	260,354	$	229,666	$	510,627	$	406,457
Diabetes		166,293		126,530		321,598		224,400
Supplies to the home		43,881		42,675		83,746		84,038
Respiratory		136,756		124,682		277,481		213,757
HME		56,649		54,791		113,225		99,327
Other		63,681		38,673		127,140		71,157
Total net revenue	$	727,614	$	617,017	$	1,433,817	$	1,099,136

In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, the Company increased its cash liquidity by, among other things, seeking recoupable advance payments of $45.8 million made available by the Centers for Medicare & Medicaid Services (CMS) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) legislation, which was received in April 2020. In addition, in connection with an acquisition completed in July 2020, the Company assumed a liability of $3.7 million relating to CMS recoupable advance payments received by the acquired company prior to the date of acquisition. The recoupment of the advance payments by CMS began in April 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impact the Company’s cash receipts for services provided until such time all amounts have been recouped. During the three and six months ended June 30, 2022, CMS recouped $3.9 million and $9.1 million, respectively, of the advance payments. During the three months ended June 30, 2021, CMS recouped $15.9 million of the advance payments. As of June 30, 2022, the remaining amount of the CMS advance payments that had not yet been recouped was $3.7 million, which is included in other current liabilities in the consolidated balance sheets. The Company expects this amount to be fully recouped or repaid to CMS during the remainder of 2022.

Accounts Receivable

Due to the continuing changes in the healthcare industry and third-party reimbursement environment, certain estimates are required to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. The complexity of third-party billing arrangements and laws and regulations governing Medicare and Medicaid may result in adjustments to amounts originally recorded.

The Company performs a periodic analysis to review the valuation of accounts receivable and collectability of outstanding balances. Management’s evaluation takes into consideration such factors as historical cash collections experience, business and economic conditions, trends in healthcare coverage, other collection indicators and information about specific receivables. The Company’s evaluation also considers the age and composition of the outstanding amounts in determining their estimated net realizable value.

Receivables are considered past due when not collected by established due dates. Specific patient balances are written off after collection efforts have been followed and the account has been determined to be uncollectible. Revisions in reserve estimates are recorded as an adjustment to net revenue in the period of revision.

Included in accounts receivable are earned but unbilled accounts receivables. Billing delays, ranging from several days to several weeks, can occur due to the Company’s policy of compiling required payor specific documentation prior to billing for its services rendered. As of June 30, 2022 and December 31, 2021, the Company’s unbilled accounts receivable was $22.4 million and $23.8 million, respectively.