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Last Modified: 11/24/2021 Location: FL, PR, USVI Business: Part A

Bad debts

Allowable Medicare bad debt defined

The Code of Federal Regulations (CFR) at 42 CFR 413.89(e) external pdf file defines the criteria for an allowable Medicare bad debt. It requires that the Medicare bad debt meet four basic criteria. The Provider Reimbursement Manual (PRM) 15-1 mimics these requirements in Chapter 3, Section 308 compressed file.
The debt must be related to covered services and derived from deductible and coinsurance amounts;
The provider must be able to establish that reasonable collection efforts were made;
The debt was actually uncollectible when claimed as worthless and;
Sound business judgment established that there was no likelihood of recovery at any time in the future.

When should bad debts be claimed?

42 CFR 413.89(f) external pdf file requires that the uncollectible Medicare deductible and coinsurance be charged off as bad debts in the accounting period when the bad debt is determined to be worthless. For example, a bad debt that is properly written off the providers’ books as a bad debt after the providers current Medicare fiscal year end cost report must be claimed on the next Medicare cost report even if the provider has not filed their most recent cost report because it is not yet due. Bad debts may only be claimed on a provider’s cost report after all collection effort has ceased, including efforts made by an external collection agency.

Reasonable collection efforts

To be considered a reasonable collection effort, Provider Reimbursement Manual, PRM 15-1, Chapter 3, Section 310 compressed file requires that a provider's effort to collect Medicare deductible and coinsurance amounts be similar to the effort the provider puts forth to collect comparable amounts from non-Medicare patients. Specifically, the collection effort must involve the issuance of a bill on or shortly after discharge or death of the beneficiary to the party responsible for the patient's personal financial obligations.
Additionally, the PRM indicates that the collection effort should include other actions such as subsequent billings, collection letters and telephone calls or personal contacts which constitute a genuine, rather than a token, collection effort. The provider's collection effort may include using or threatening to use court action to obtain payment.

Use of collection agencies

Chapter 3, Section 310(A) compressed file of PRM 15-1 permits the provider's collection effort to include the use of a collection agency in addition to or in lieu of subsequent billings, follow-up letters, telephone calls and personal contacts. Where a collection agency is used, Medicare expects the provider to refer all uncollected patient charges of like amount to the agency without regard to class of patient. The "like amount" requirement may include uncollected charges above a specified minimum amount. Therefore, if a provider refers to a collection agency its uncollected non-Medicare patient charges which in amount are comparable to the individual Medicare deductible and coinsurance amounts due the provider from its Medicare patient, Medicare requires the provider to also refer its uncollected Medicare deductible and coinsurance amounts to the collection agency. Where a collection agency is used, the agency's practices may include using or threatening to use court action to obtain payment.
According to PRM 15-1, Chapter 3, Section 310(B) compressed file, when a collection agency obtains payment of an account receivable, the full amount collected must be credited to the patient's account and the collection fee charged to administrative costs. For example, where an agency collects $40 from the beneficiary, and its fee is 50 percent, the agency keeps $20 as its fee for the collection services and remits $20 (the balance) to the provider. The provider records the full amount collected from the patient by the agency ($40) in the patient's account receivable and records the collection fee ($20) in administrative costs. The fee charged by the collection agency is merely a charge for providing the collection service, and, therefore, is not treated as a bad debt.

120 day rule

Chapter 3, Section 310.2 compressed file of PRM 15-1 is commonly referred to as the 120 day rule. It provides that if after reasonable and customary attempts to collect a bill, the debt remains unpaid more than 120 days from the date the first bill is mailed to the beneficiary, the debt may be deemed uncollectible. Any payments received from the beneficiary restarts the 120 day un-collectability timeframe.

Moratorium for bad debts sent to collection agencies

CMS issued a Moratorium for Bad Debts as part the Omnibus Budget Reconciliation Act of 1987 in section 4008(c). Otherwise, in accordance with PRM 15-1, Chapter 3,Section 310 compressed file, which allows the bad debt to be written off when claimed as worthless (when the debt has been returned from the collection agency as uncollectible) the bad debt would be unallowable if written off when sent to collection, and the provider cannot substantiate that this practice was allowed by the Intermediary prior to August 1, 1987.

Indigent patients

An additional and frequently used approach to determine if a debt is uncollectible by other means is to determine that the beneficiary is indigent or medically indigent. PRM 15-1, Chapter 3, Section 312 compressed file, provides that a provider may deem Medicare beneficiaries indigent or medically indigent when such individuals have also been determined eligible for Medicaid as either categorically needy individuals or medically needy individuals, respectively.
A less frequently utilized approach is for the provider to apply customary methods for determining the indigence of patients to the case of the Medicare beneficiary under the guidelines established in PRM 15-1, Chapter 3, Section 312 compressed file. This requires that
the patient's indigence must be determined by the provider, not by the patient (i.e., a patient's signed declaration of his inability to pay his medical bills cannot be considered proof of indigence),
the provider should take into account a patient's total resources which would include, but are not limited to, an analysis of assets (only those convertible to cash, and unnecessary for the patient's daily living), liabilities, and income and expenses. In making this analysis the provider should take into account any extenuating circumstances that would affect the determination of the patient's indigence,
the provider must determine that no source other than the patient would be legally responsible for the patient's medical bill; e.g.,Title XIX, local welfare agency and guardian and,
the patient's file should contain documentation of the method by which indigence was determined in addition to all backup information to substantiate the determination.
Once indigence is determined and the provider concludes that there had been no improvement in the beneficiary's financial condition, the debt may be deemed uncollectible, from the beneficiary, without applying the procedures outlined in PRM 15-1, Chapter 3, Section 310 compressed file.

Charity care

According to 42 CFR 413.89(b) (2) external pdf file charity allowances are reductions in charges made by the provider because of the indigence or medical indigence of the patient. Cost of free care (uncompensated services) furnished under a Hill-Burton obligation are considered charity allowances. Under Medicare, costs of covered services furnished to beneficiaries are not to be borne by individuals not covered by the Medicare program, and conversely, costs of services provided for other than beneficiaries are not to be borne by the Medicare program as indicated at 42 CFR 413.89(d) external pdf file PRM 15-1, Chapter 3, Section 328 compressed file clarifies that charity care, courtesy, and third-party payer allowances are not reimbursable Medicare costs and cannot be claimed as Medicare bad debts.

Fee schedule reimbursement

There is no payment for bad debts (unrecovered costs attributable to uncollectible deductible and coinsurance arising from covered services to beneficiaries considered in calculating payment to providers reimbursed on the basis of reasonable cost) with respect to services paid under the Medicare physician fee schedule. Under a fee schedule (i.e., fee based outpatient therapies after January 1, 1999, and ambulance services after April 1, 2002), payment is not based on incurred costs; rather payment is made based on a schedule for the specific service furnished. Whether a fee schedule has its basis in charges or is resource-based, the payment is not related to a specific providers cost outlay for a service and does not embody the concept of unrecovered cost. Bad debts are allowable only to an entity that payment is made on the basis of reasonable cost.

Medicare Health Maintenance Organization (HMO) bad debts

Building upon the theory that bad debts must be related to services that are based upon cost reimbursement, Medicare HMO bad debts cannot be claimed on the Medicare cost report. According to CMS, Medicare pays most HMOs on a capitated basis and any arrangements between a hospital or other provider and an HMO is a contractual arrangement between the two. When an HMO sends a member patient to a provider for services and that patient does not pay coinsurance and deductible amounts, the provider must deal with the HMO and not the Medicare program.

Small balance write offs change request (CR) 2174)

CMS indicated in change request 2174 external pdf file that some hospitals have a policy of writing off small debit balances in patient’s accounts receivable. Realizing that it is unproductive for the Medicare program to expend audit resources to examine these policies for consistent treatment among all classes of payers it determined that contractors should forgo reviewing provider’s policies for debit balances under $10.
Hospitals however must continue to follow their policy, which requires that collection efforts be followed prior to writing off small debit balances, and contractors are authorized to disallow any bad debts that were written off, regardless of the amount, if the provider has failed to bill the Medicare patient for the deductible/coinsurance amounts. Additionally, any small debit balances remaining on larger Medicare deductible and coinsurance amount must comply with a reasonable collection effort (120 day rule applies).

Required documentation

Medicare regulations at 42 CFR 413.20 external pdf file and 413.24 external pdf file, and program instructions at PRM 15-1 Chapter 23, Sections 2300 and 2304 compressed file, require providers to maintain sufficient financial records and statistical data for the proper determination of costs payable under the program. Such data must be accurate and capable of verification by the contractor.
Provide your audit staff person with a copy of the bad debt, write-off, collection, indigence, and recovery policies and procedures.
To substantiate a Medicare bad debt PRM 15-1, Chapter 3, Section 314 compressed file, requires the provider to maintain the source documents to support its claim for a bad debt for each account. Examples of the types of information to be retained may include, but are not limited to, the beneficiary's name and health insurance number; admission/discharge dates for Part A bills and dates of services for Part B bills; date of bills; date of write-off; and a breakdown of the uncollectible amount by deductible and coinsurance amounts. This proposed list is illustrative and not obligatory.
When indigence is determined by the facility using a method other than Medicaid eligibility (see Indigent patients), PRM 15-1, Chapter 3, Section 312 compressed file requires that the patient's file contain documentation of the method by which indigence was determined in addition to all backup information to substantiate the determination.
Additionally, PRM 15-1, Section 310(B) compressed file requires that the provider's collection effort be documented in the patient's file by copies of the bill(s), follow-up letters, reports of telephone and personal contact, etc.

Bad debt log checklist

In order to ensure that your bad debt claims meet the criteria for cost report reimbursement we recommend that you consider the following items when preparing your bad debt logs:
Ensure that you do not include accounts that were claimed in prior years. Also ensure that the logs do not contain duplicate accounts for the current year (this could occur if a claim is cancelled and subsequently re-billed).
Ensure the bad debt relates to unpaid Medicare deductible and coinsurance only.
Ensure the bad debt is net of any payments received from the beneficiary or other third party payers. Be able to provide third party remittance advices or proof that deductible/coinsurance is not covered.
Ensure that coinsurance related to physician Part B professional services or outpatient fee-based services (e.g. therapy services and screening mammography services) is not included.
Ensure that indigent bad debt claims are fully documented with respect to the determination of the beneficiary's total resources.
For non-indigent accounts ensure that collection activity is documented in the file. If accounts are sent to a collection agency, be able to provide clear evidence that accounts were returned from collection.
For deceased patients, ensure that the determination that there was no estate available is fully documented. A statement from a surviving family member that there is no estate is not acceptable.
With respect to testing of bad debt logs submitted with the cost report, please note that the contractor reserves the right to reject a provider's request to submit revised bad debt logs once review of the provider's original submission has commenced.

The bad debt listing

Providers should utilize CMS Form 339 Exhibit 2 for claiming bad debts or a variation of the exhibit which encompasses the attributes of the exhibit which are stated in the PRM 15-2, Chapter 11, Section 1102 compressed file. Exhibit 2 requires the patient name, the Medicare ID, the dates of service, whether the patient has been deemed indigent and their Medicaid number if this was the method utilized to determine indigence, the date of first bill send to the beneficiary, the date the bad debt was written off, the remittance advice date, the deductible and coinsurance amount, and the total Medicare bad debt claimed (which should be reduced by recoveries as indicated in a separate column).
We ask that your bad debt log be submitted with your Medicare cost report in Excel format, either on diskette or CD-ROM.

Bad debt recoveries

In some cases an amount previously written off as a Medicare bad debt may be recovered in a subsequent accounting period. When this occurs 42 CFR 413.89(f) external pdf file provides that the income must be used to reduce the cost of beneficiary services for the period in which the recovery is made. Additionally, PRM 15-1,Chapter 3,Section 316 compressed file provides that such reductions in reimbursable costs should not exceed the bad debts reimbursed for the applicable prior period.
We ask that recoveries be readily identifiable on your submitted bad debt logs, or on a separate log. We also ask that logs be made available to us in Excel format, either on diskette or CD-ROM, when your cost report is submitted.

Partial payments

When a beneficiary, or a third party on behalf of the beneficiary, makes a partial payment of an amount due the provider, which is not specifically identified as to which debt it is intended to satisfy, the PRM 15-1, Chapter 3, Section 326 compressed file requires that the payment is to be applied proportionately to Part A deductibles and coinsurance, Part B deductibles and coinsurance and non-covered services. The basis for pro-ration of partial payments is the proportionate amount of amounts owed in each of the categories.

Reduction of bad debts

The CFR at 42 CFR 413.89(h) external pdf file provides for the limitation on bad debts for hospitals. This limitation is a reduction of the total allowable bad debts. The reductions of bad debts for each component are discussed in PRM 15-2, Section 4000 – 4070.

CMS clarifies Medicare bad debt policy related to accounts at a collection agency

Providers must follow all of the criteria for allowable bad debt as described in 42 CFR 413.89(e) external pdf file and Chapter 3, Section 308 and Section 310 compressed file of the Provider Reimbursement Manual. According to these criteria, a provider must establish that reasonable collection efforts were made. A provider must establish that the debt is uncollectible when claimed as worthless and use sound business judgment to establish that there is no likelihood of recovery at anytime in the future.
It has been longstanding CMS policy that a provider cannot have determined that a debt was uncollectible and could not have established that there was no likelihood of recovery while the account is still at the collection agency 42 CFR 413.89 (e) external pdf file. PRM 15-2, Chapter 3, Section 310.A compressed file of the PRM clearly states that “A provider’s collection effort may include the use of a collection agency in addition to compressed file or in lieu of subsequent billings, follow-up letters, telephone, and personal contacts.”
Until a provider’s reasonable collection effort (including the use of a collection agency as well as in-house efforts) has been completed, Medicare bad debts may not be deemed as uncollectible Chapter 3, Section 310.2 compressed file of the PRM, presumption of non-collectibility provides that, “If after reasonable and customary attempts to collect a bill, the debt remains unpaid for more than 120 days from the date the first bill is mailed to the beneficiary, the debt may be deemed uncollectible.” However, PRM 15-1, Chapter 3, Section 310.2 compressed file must be read within the context of the regulations and Section 310 compressed file. As noted above, the manual makes it clear that CMS deems the use of a collection agency to be part of the provider’s ongoing collection effort, and as long as the debt remains with a collection agency (even if more than 120 days), the debt cannot be deemed “uncollectible.” Therefore, in accordance with the regulation/policy in effect prior to the moratorium, effective August 1,1987, until a provider’s reasonable collection efforts have been completed, including both in-house efforts and the use of a collection agency, unpaid deductible and coinsurance amounts cannot be recognized as a Medicare bad debt.

Must-Bill Policy for Reimbursement of Dual Eligible Bad Debts

With the exception of Puerto Rico providers and IMD (Institution of Mental Disease) patients ages 21 – 64, before a “dual-eligible” bad debt can be claimed, CMS requires the provider to bill a patient or entity legally responsible for the patient’s bill with respect to those deductibles and coinsurance owed by “dual-eligible” patients. Title XIX eligible bad debts are commonly classified as “crossovers” or “dual-eligibles”. This type of bad debt pertains to a patient that has Medicaid and Medicare eligibility.
Section 1905(p) (3) of the Social Security Act imposes liability for cost-sharing amounts for “dual-eligibles”. It allows the State to limit the cost-sharing if the Medicaid rate is lower than what Medicare would pay for the service. However, whether the State owes part or none of the deductible or coinsurance, a bad debt cannot be claimed for reimbursement until the provider bills the State and the State refuses payment (with a State Remittance Advice).

Medicare-Medicaid Crossover Bad Debt Accounting Classification

Medicare regulations require providers to follow standardized definitions, accounting, statistics, and reporting practices that are widely accepted in the hospital and related fields. (42 CFR 413.20(a)). PRM 15-1, chapter 3, 320 sets forth methods of determining bad debt expense, where accounts receivable are analyzed and a determination made as to specific accounts which are deemed uncollectible. The amounts deemed to be uncollectible are charged to an expense account for uncollectible accounts. The amounts charged to the expense account for bad debts should be adequately identified as to those which represent deductible and coinsurance amounts applicable to beneficiaries and those which are applicable to other than beneficiaries or which are for other than covered services. Those bad debts which are applicable to beneficiaries for uncollectible deductible and coinsurance amounts are included in the calculation of reimbursable.
Providers claiming Medicare bad debt must meet 42 CFR 413.89 in conjunction with all requirements set forth in CMS Pub. 15-1, Chapter 3. The unpaid deductible and coinsurance amounts for Medicare-Medicaid crossover claims must be classified correctly in providers’ accounting records pursuant to CMS Pub. 15-1, Chapter 3. These Medicare bad debt amounts must not be written off to a contractual allowance account but must be charged to an expense account for uncollectible accounts (bad debt). Effective for cost reporting periods beginning on or after October 1, 2019, providers must comply with these longstanding Medicare bad debt requirements
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