Perform the annual journal entries for eHealth under the old and new (606) standards for one Medicare Advantage policy using the information given in the exhibit below

 

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Exhibit 7 eHealth Revenue Recognition Steps - Medicare Advantage Policy [FY2019 Example] USS, unless otherwise stated 1. Once the carrier approves a member's application, recognize future expected commission revenue (ie, the "constrained" LTV per approved member) 2. To estimate the "constrained" LTV per approved member. A. Forecast the commission rate for the initial policy placement (per carrier agreement) B. Forecast the commission rates for future policy renewals (per carrier agreement) C. Estimate expected policy duration or "lifetime" using statistical models based on historical experience D. Calculate estimated future renewal commissions, by multiplying B) with, (C) minus 1] E. Add D) to A) to forecast the "unconstrained" LTV of an approved member F. Estimate a "constraint" to the current "unconstrained" LTV estimate so as to ensure no probable significant reversal G. Discount the "unconstrained" LTV by the "constraint" to arrive at a "constrained" LTV Estimate $531 $266 3.1 $558 $1,089 7,0% $1,013 Unit Dollars Dollars Years Dollars Dollars Percent Dollars 3. Debit the commission receivable account by the amount of constrained LTV per approved member and credit revenues Source: eHealth Inc. FY2019 10-K, eHealth earnings call transcripts Note: Assumes that renewal commission rates are 50% of initial placement commission rate Note: The forecast of the commission rate for the initial policy placement (A) and the forecast of the commission rates for future policy renewals (B) were adjusted for an "approved- to-paid" ratio. Similar to industry peers, eHealth generally recognized revenue when the carrier approved a customer's application (at which point its performance obligation was fulfilled). A certain percentage of approved customers (5-15%) typically decided to seek alternative policies before the coverage started (eg, because of a new medical situation, or because of financial circumstances), and thus eHealth ultimately would not collect commission cash for these customers, 130 Hence, at the point of initial policy approval, eHealth needed to estimate what percentage of approved policyholders would ultimately pay their initial premium. As of the end of FY2019 Q3, eHealth's Medicare Advantage policies had a trailing twelve month approved-to-paid ratio of 92%, 131 Hence, eHealth's constrained LTV per approved member was adjusted by that ratio. Before adopting ASC 606, eHealth applied that ratio only to the initial year's commission (A) Exhibit 7 eHealth Revenue Recognition Steps - Medicare Advantage Policy [FY2019 Example] USS, unless otherwise stated 1. Once the carrier approves a member's application, recognize future expected commission revenue (ie, the "constrained" LTV per approved member) 2. To estimate the "constrained" LTV per approved member. A. Forecast the commission rate for the initial policy placement (per carrier agreement) B. Forecast the commission rates for future policy renewals (per carrier agreement) C. Estimate expected policy duration or "lifetime" using statistical models based on historical experience D. Calculate estimated future renewal commissions, by multiplying B) with, (C) minus 1] E. Add D) to A) to forecast the "unconstrained" LTV of an approved member F. Estimate a "constraint" to the current "unconstrained" LTV estimate so as to ensure no probable significant reversal G. Discount the "unconstrained" LTV by the "constraint" to arrive at a "constrained" LTV Estimate $531 $266 3.1 $558 $1,089 7,0% $1,013 Unit Dollars Dollars Years Dollars Dollars Percent Dollars 3. Debit the commission receivable account by the amount of constrained LTV per approved member and credit revenues Source: eHealth Inc. FY2019 10-K, eHealth earnings call transcripts Note: Assumes that renewal commission rates are 50% of initial placement commission rate Note: The forecast of the commission rate for the initial policy placement (A) and the forecast of the commission rates for future policy renewals (B) were adjusted for an "approved- to-paid" ratio. Similar to industry peers, eHealth generally recognized revenue when the carrier approved a customer's application (at which point its performance obligation was fulfilled). A certain percentage of approved customers (5-15%) typically decided to seek alternative policies before the coverage started (eg, because of a new medical situation, or because of financial circumstances), and thus eHealth ultimately would not collect commission cash for these customers, 130 Hence, at the point of initial policy approval, eHealth needed to estimate what percentage of approved policyholders would ultimately pay their initial premium. As of the end of FY2019 Q3, eHealth's Medicare Advantage policies had a trailing twelve month approved-to-paid ratio of 92%, 131 Hence, eHealth's constrained LTV per approved member was adjusted by that ratio. Before adopting ASC 606, eHealth applied that ratio only to the initial year's commission (A)

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