Accounting for Memberships in Longevity Clinics: How to do Deferred Revenue Right!
Longevity clinics are unique in the clinical world as they operate on a different financial wavelength. Most rely on memberships, prepaid packages, and subscriptions as their primary income.
It’s a smart business model that generates predictable, stable cash flow for the business while also delivering significant value to patients by aligning incentives with long-term outcomes rather than reactive, episodic care.
So, all good there, right? But there is a challenging aspect to this.
On the back end, it creates a lot of accounting complexity because revenue is deferred. Getting this wrong can result in skewed performance metrics, revenue misstatements, and compliance issues down the line.
Getting it right will provide a crystal-clear picture of the clinic’s financial health, from which you can build a strong foundation to grow on.
Why Does Deferred Revenue Matter in Longevity Care?
When you collect money before providing a service, it’s called deferred revenue.
Some clinics operate on a fee-for-service basis, and in that case, it’s not an issue. Revenue is recognized immediately when the service is provided.
Clinics that prioritize a membership model look a bit different. Adding to the complexity, payments and services are not always consistent.
For example, some patients might pay $3,000 for a one-year subscription that provides them with X treatments. Others may purchase a package for 10 treatment sessions or subscribe to monthly add-on services.
In any of these scenarios, you’ve collected the money but haven’t yet provided a service.
From an accounting standpoint, the cash is recorded as a liability, not as revenue. It only becomes revenue when you deliver the services.
Typically, longevity clinics rely on various deferred revenue models, each with its own accounting structure. Let’s break it down.
Memberships
Memberships typically bundle several services that can be accessed over a set period. They might include quarterly diagnostics, regular physician visits, wellness planning, and preferred member discounts on add-on treatments.
Membership services are hardly ever delivered at regular intervals. Some are access-based (as opposed to service-based), others may happen monthly, and still others less frequently or as needed.
Accounting best practice: Divide the fee evenly over the membership period, if possible.
Prepaid packages
Whether you offer one package or several, they typically include two or more types of treatments or services, or multiples of a single service. In this case, it’s a bit easier to recognize the revenue. Each item has a pre-defined value, and revenue is recognized upon delivery of the service.
What can complicate things is when your packages represent a discount, when patients don’t use up all their sessions, or if package expiry dates are not enforced.
Accounting best practice: If you offer package discounts, you’ll need to recalculate the cost of each service in the package. Unused sessions should be counted as breakage. Set clear expiry dates and ensure you apprise the patient accordingly.
Subscriptions
Subscriptions provide recurring monthly revenue in exchange for ongoing services at the subscription level. As long as service delivery is fairly consistent, you’ll recognize the revenue monthly and carry on.
Complications can arise if additional fees are bundled in (such as onboarding or initial diagnostics), if service delivery varies from month to month, or if the patient cancels mid-cycle.
How to Get Deferred Revenue Right
Despite the differences among types of deferred revenue, the experts at Growise recommend recognizing revenue only when the service is delivered and not when you receive payment.
Here are a few tips to help you put this into practice:
Clearly define what the patient gets
Detail everything. Treat it as a performance obligation. Each defined treatment or service is a value to be delivered, which is when you will recognize the revenue. If you don’t define these things upfront, your downstream accounting becomes a gray area.
Allocate income appropriately
Once you’ve defined your obligations, the next step is to assign a value to each one. So, for example, of your $3,000 annual membership, you might allocate $1,200 for quarterly diagnostics, $1,000 for physician visits, and $800 for ad hoc support services.
Even if your membership represents a discount on a la carte pricing, it should be relative to standalone fees.
Recognizing revenue
You can choose to recognize revenue at the point of service or over time.
If the latter, you would divide the cost evenly over the period covered in the package. You may also choose to recognize when service is delivered, which means you may have to reprice services according to the discounted package.
Some clinics recognize revenue monthly only when memberships are paid, which can distort revenue and margins.
Tracking revenue as a deferred liability
A deferred revenue account on the balance sheet should include payments received minus recognized revenue. The resulting number represents the value of the services you still owe to patients, which can be very helpful. Knowing this number will give you a fairly accurate representation of what to expect in the coming months.
Handling breakage
Unused prepaid services should be treated as breakage. This can happen for various reasons: patients may skip appointments, let their packages expire, or drop out of the program before completing.
Recognize breakage as revenue only when you are certain that the services won’t be used. It’s common for clinics to recognize breakage too early, but this can be risky as it sends false signals.
Ensure you have a consistent method for estimating breakage to reflect costs accurately.
Have a system
Deferred revenue accounting only works if you have sustainable, consistent systems to support it.
In best practice:
Ensure you have accurate records of what services have been delivered and what are outstanding.
Track all service delivery at a granular level to ensure accuracy.
Integrate electronic health records, scheduling, and accounting systems to align the data.
Integration is critical, as if you haven’t tracked session usage, your numbers will never be accurate.
Getting Deferred Revenue Right: The Bottom Line
If you don’t have a system for tracking deferred revenue, you’ll struggle with forecasting, cash flow visibility, and operational planning. You’ll also have issues with your investors if that is part of your business structure.
So, while memberships and other forms of deferred revenue are excellent ways to grow your clinic, your accounting can’t be an afterthought. By allocating deferred revenue accurately, you’ll always have a clear picture of your clinic’s financial health.
Need help with this? It’s worth a quick call with a Growise expert. Get in touch today!