Medicare Bad Debts: New Enforcement of a Longstanding Requirement

Medicare bad debts have long been included and reimbursable on Medicare cost reports. Today, most providers will receive 65% of any Medicare bad debt written off and claimed on their annual cost report filing. Quite often, a Medicare Administrative Contractor (MAC) will review a sample of the bad debts claimed on a cost report to ensure that requirements for reimbursement have been met. In accordance with Section 308 of the Provider Reimbursement Manual, an allowable bad debt must meet the following criteria:

• The bad 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.
• Sound business judgement established there was no likelihood of recovery at any time in the future.

Section 320 of the Provider Reimbursement Manual also states, “The amounts deemed to be uncollectible are charged to an expense account for uncollectible accounts.” Many providers have been writing off balances to a contractual allowance account, or using a balance sheet account to which both the bad debts and the periodic interim payments are posted, which does not follow the manual’s requirements. Although most MACs have not been enforcing this, CMS has made a clarification to this regulation in its April 4, 2019, MLN Connects publication. It states that for cost reporting periods beginning on or after October 1, 2019, providers must comply with the requirement of charging bad debt amounts to an expense account for uncollectible accounts.

Failure to follow these guidelines could result in having bad debts disallowed. Providers should review how they record the unpaid Medicare coinsurance in their general ledgers to ensure that the write-off of these balances is posted in separate bad debt expense accounts, for cost reporting periods beginning on or after October 1, 2019.

This requirement may raise questions about the reporting for external financial statement purposes. Accounting Standards Codification (ASC) Topic 606, issued by the Financial Accounting Standards Board (FASB), provides guidance on how and when organizations shall report revenue in external financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP). Under Topic 606, such patient-related bad debts and uncollected accounts are considered implicit price reductions and are, therefore, to be reported as reductions of net patient revenue in external financial statements. This guidance, however, does not affect how an organization classifies and tracks financial information in its general ledger or in its internal-use financial statements. While CMS guidance on this appears inconsistent with GAAP external reporting requirements, providers should classify Medicare bad debts as bad debt expenses in their general ledgers to comply with CMS requirements, while appropriately reporting the balances for financial reporting purposes according to GAAP.

The 2021 Inpatient Prospective Payment Service (IPPS) final rule was released by CMS on September 18, 2020, finalizing a number of clarifications to its Medicare bad debt requirements. Based on public feedback and comments, CMS revised its initial proposal to state that for cost reporting periods beginning before October 1, 2020, Medicare bad debts must not be written off to a contractual allowance account but must be charged to an expense account for uncollectible accounts. This is consistent with the discussion above. However, it further goes on to state that for cost reporting periods beginning on or after October 1, 2020, Medicare bad debts must not be written off to a contractual allowance account but instead must be charged to an uncollectible bad debt account that results in a reduction in revenue.

Summary

To summarize, for cost reports beginning between October 1, 2019, and September 30, 2020, CMS is requiring that Medicare bad debts be charged to an expense account. For cost reports beginning on or after October 1, 2020, the entire amount of the Medicare bad debt to be claimed on the Medicare cost report should be charged to an uncollectible bad debt account in the general ledger that results in a reduction in revenue. This treatment of bad debts is for cost reporting purposes only.

Providers should take the necessary steps to ensure that the bad debts reported on their cost reports are accurate and properly supported in accordance with previous and recently clarified regulations. The Marcum Advisory team can review bad debt policies and procedures to ensure providers receive the proper amounts of reimbursement to which they are entitled.