Revenue Recognition and Accounts Receivable

9 Months Ended

Sep. 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 nine months ended September 30, 2022 and 2021 are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022			2021	2022		2021
Insurance	$	465,625	$	399,748	$	1,322,694	$	1,061,627
Government		198,841		180,511		576,829		491,564
Patient pay		92,029		73,034		290,789		199,238
Net revenue	$	756,495	$	653,293	$	2,190,312	$	1,752,429

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022			2021	2022		2021
Net sales revenue:
Sleep	$	198,206	$	173,359	$	585,234	$	465,372
Diabetes		169,075		134,228		482,693		352,559
Supplies to the home		47,793		42,441		131,539		126,479
Respiratory		9,734		6,228		25,770		25,003
HME		29,463		29,919		89,828		82,588
Other		58,252		45,996		166,068		98,032
Total net sales revenue	$	512,523	$	432,171	$	1,481,132	$	1,150,033
Net revenue from fixed monthly equipment reimbursements:
Sleep	$	72,423	$	62,755	$	196,022	$	177,199
Diabetes		4,211		3,722		12,191		9,791
Respiratory		130,618		117,918		392,063		312,900
HME		25,482		26,043		76,754		70,854
Other		11,238		10,684		32,150		31,652
Total net revenue from fixed monthly equipment reimbursements	$	243,972	$	221,122	$	709,180	$	602,396
Total net revenue:
Sleep	$	270,629	$	236,114	$	781,256	$	642,571
Diabetes		173,286		137,950		494,884		362,350
Supplies to the home		47,793		42,441		131,539		126,479
Respiratory		140,352		124,146		417,833		337,903
HME		54,945		55,962		166,582		153,442
Other		69,490		56,680		198,218		129,684
Total net revenue	$	756,495	$	653,293	$	2,190,312	$	1,752,429

Certain prior period amounts in the table above have been reclassified to conform to the current period presentation. These reclassifications are considered immaterial to all periods presented.

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 were applied to services provided and revenue recognized during the period in which the recoupment occurred, which impacted the Company’s cash receipts for services provided during the period in which amounts were recouped. As of September 30, 2022 the recoupment period has ended, and any remaining amounts not recouped will be repaid by the Company to CMS. During the three and nine months ended September 30, 2022, CMS recouped $0.5 million and $9.6 million, respectively, of the advance payments. During the three and nine months ended September 30, 2021, CMS recouped $11.1 million and $27.0 million, respectively, of the advance payments. As of September 30, 2022, the remaining amount of the CMS advance payments that had not yet been recouped was $3.2 million, which is included in other current liabilities in the consolidated balance sheets.

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 September 30, 2022 and December 31, 2021, the Company’s unbilled accounts receivable was $22.9 million and $23.8 million, respectively.