ASC 606 Considerations for Value-Based Models in Healthcare

Risk-bearing arrangements – that is, arrangements that might involve sharing in both savings and losses associated with the cost of healthcare – increasingly are central to value-based care. By tying consideration to patient outcomes and cost savings, risk-bearing arrangements align the interests of payers, providers, and the entities that coordinate care. That alignment is appealing, but it also introduces real accounting and financial reporting complexity.

While risk-bearing arrangements take many forms, a common structure involves three parties: an insurance provider (the payer), the payer’s beneficiaries (the patients), and a third party that contracts with the payer to provide care coordination or other ancillary services for those beneficiaries (the risk-bearing entity). The goal is better patient outcomes and lower long-term cost of care. In exchange, the risk-bearing entity typically shares in any cost savings it helps generate.

Because terms can vary widely from contract to contract, those responsible for financial reporting might need to read and analyze each arrangement individually, focusing on the practical revenue recognition considerations seen most often in such contracts when applying the five-step model in Accounting Standards Codification (ASC) 606, “Revenue From Contracts With Customers”:

1. Identify the contract(s) with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Step 1: Identifying the contract with the customer

Who is the customer?

A deceptively simple question is, who is the customer? ASC 606 defines a customer as “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.” In most risk-bearing arrangements, the beneficiaries receive the care; however, they are not a party to the contract. The contract is between the risk-bearing entity and the insurance provider, and it is the insurance provider that pays consideration to the risk-bearing entity.

This is why the beneficiaries usually aren’t the customer for accounting purposes; they neither contract with nor pay the risk-bearing entity. The insurance provider, by contrast, contracts directly with the risk-bearing entity and obtains the benefit from the services it pays for, such as care coordination and a lower total cost of care for its member population. Under ASC 606, the customer is the party that has contracted to obtain the entity’s output, and here, that often is the insurance provider.

That said, the conclusion is not automatic. Entities need to understand who contracts and pays for the entity’s services. Important facts include:

• Contract structure. Does the risk-bearing entity contract only with the payer, or does it also enter into direct arrangements with providers or beneficiaries? A single arrangement can have more than one customer.
• Who directs and pays for the service. The party that specifies the scope of services and funds them is often the customer, even if it is not the ultimate care recipient.
• Nature of the promised output. The payer might be the customer in instances where the core promise is population-level care coordination, cost management, and reporting delivered to the payer, as opposed to a situation where the promise is direct clinical care to patients.

Step 2: Identifying the performance obligations

Understanding the performance obligations in the contract, and whether the risk-bearing entity acts as principal or agent in satisfying those performance obligations, is critical to understanding when and how much revenue is recognized.

Defining the performance obligation

A promised good or service is a performance obligation when it is distinct, which requires it to be both of the following:

• Capable of being distinct. The customer can benefit from the good or service on its own or with other readily available resources.
• Distinct within the context of the contract. The promise to transfer the good or service is separately identifiable from the other promises in the contract.

While a single contract might list a long menu of promises (for example, care management, care coordination, health promotion, transitional care, patient and family support, and referrals to community or social services), each individual activity often does not constitute a separate performance obligation.

In practice, many of these activities are inputs to a single, combined promise (that is, the integrated delivery of complex care services to the payer’s population rather than separate obligations the customer would value individually). Additionally, some activities such as providing quality reports typically exist to administer and support a broader promise, not to transfer a stand-alone benefit.

In determining the nature and number of performance obligations, common errors include:

• Identifying promises as distinct performance obligations when they simply support an overarching care-coordination promise
• Assuming everything is one performance obligation without testing the “distinct” criteria against the specific contract language

A performance obligation may be a series

When complex care services are delivered on a recurring basis over the contract term, the risk-bearing entity should analyze whether they represent a series of distinct services that are substantially the same and have the same pattern of transfer. If each increment (for example, a month of care coordination) is distinct, would be satisfied over time, and would use the same measure of progress, the recurring services are accounted for as a single performance obligation under the series guidance.

Treating recurring services as a series simplifies the application of the revenue recognition model and, importantly, allows variable consideration (such as shared savings or per-member fees) to be allocated to the specific periods to which it relates rather than being spread across the entire contract. See Step 4 for additional considerations on this allocation.

Principal versus agent – gross or net?

Because risk-bearing arrangements involve two or more parties delivering services to patients, the entity also must determine whether it acts as the principal or the agent for each performance obligation.

A principal recognizes revenue and expense on a gross basis, while an agent recognizes revenue net of the related costs. A summary of the key implications follows:

Under ASC 606-10-55-37, an entity is the principal when it controls the specified service before the service is transferred to the customer.

When it is unclear which party controls the goods or service being delivered, ASC 606-10-55-39 provides three indicators that support (but do not replace) the control analysis. The following table provides relevant questions typically asked in a risk-bearing fact pattern.

No single indicator is determinative, and the indicators may point in different directions. They inform, rather than override, the underlying evaluation of control. An entity should document its principal versus agent analysis carefully and completely.

Step 3: Determining the transaction price

ASC 606-10-32-2 defines the transaction price as “the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer” and notes that this consideration “may include fixed amounts, variable amounts, or both.” In risk-bearing arrangements, the “both” is where the difficulty lives.

These arrangements often include fixed fees, performance-based payments, shared savings, advance or capitated payments, and potential true-ups or true-downs. Entities might struggle in estimating what the entity ultimately will be entitled to due to the following:

• The duration of claims. Medical claims can take many months to process, so the data needed to measure savings might be incomplete for extended periods.
• Hard-to-quantify shared savings. Savings depend on benchmarks, attribution, risk adjustment, and utilization that are, many times, outside the entity’s control and are subject to complex formulas and underlying data.
• Lookbacks, true-ups, and true-downs. Amounts can be revised, sometimes downward, over long settlement periods.

Because much of this consideration is variable, ASC 606 requires the estimate to be considered for constraint: Variable consideration is included in the transaction price only to the extent it is probable that a significant revenue reversal will not occur when the uncertainty is resolved. Practically, that means recognizing revenue the entity is confident will not later reverse and holding back amounts that remain genuinely uncertain.

Entities should understand that estimating variable consideration is not a one-time exercise; the transaction price is reassessed each reporting period as claims mature and better data arrives, with changes recognized as cumulative catch-up adjustments. In addition, risk-bearing entities commonly engage a third-party actuary to build and update a model that supports revenue recognition consistent with ASC 606. The goal should be a documented, repeatable estimation process, not a single-point estimate locked in at contract inception.

Step 4: Allocating the transaction price

In many risk-bearing arrangements, the recurring care-coordination services qualify as a single performance obligation satisfied over time under the series guidance (determined under Step 2). However, even within a series, the transaction price often includes variable consideration (such as shared savings or performance-based payments). ASC 606 requires an entity to allocate a variable amount entirely to a distinct service within the series (for example, the shared savings earned for a given performance year), rather than spreading it across the full contract term, when both of the following criteria are met:

• The variable payment relates specifically to the entity’s efforts to transfer that distinct service or to a specific outcome from doing so.
• Allocating the amount entirely to that period is consistent with the overall “allocation objective.”

When those two criteria are met, the entity recognizes each period’s variable consideration in the period it relates to, which might better reflect the economics of the contract.

Step 5: Recognizing revenue as performance obligations are satisfied

Point in time versus over time

Per ASC 606-10-25-27, an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following criteria is met:

• The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
• The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
• The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

If none of the criteria are met, revenue is recognized at a point in time. For recurring managed-care and care-coordination services, over-time revenue recognition usually is achieved by meeting the first criterion – that is, the customer simultaneously receives and consumes the benefits as the entity performs.

The practical challenge of choosing a measure of progress

Once over-time recognition is established, the entity must select a single measure of progress for each performance obligation and apply it consistently over the life of the contract. In risk-bearing arrangements, some possible measures include:

• Time-based measures. Progress is measured on a straight-line basis over the service period, often appropriate when the entity stands ready to provide a consistent level of care coordination each period.
• Member-month measures. Progress is tied to the number of members served each month, which tracks the actual population under management.
• Other output-based measures. Progress is tied to services actually delivered, where those outputs faithfully depict the transfer of value.

Work through revenue recognition considerations

Accounting for revenue under risk-bearing arrangements can be complex, in particular due to the judgments involved: identifying the customer, concluding on the performance obligations, applying the series guidance, constraining variable consideration through long settlement cycles, and choosing a measure of progress that best reflects the transfer of control of the services to the customer. Healthcare entities must work through all of these judgments while connecting the accounting to broader deal implications that are relevant for their business.

FASB materials reprinted with permission. Copyright 2026 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.