The Code of Federal Regulations (CFR) at 42 CFR 413.89(e) (scroll to section (e)) defines the criteria for an allowable Medicare bad debt. It requires that the Medicare bad debt meet four basic criteria:
Debt must be related to covered services and derived from deductible and coinsurance amounts.
Provider must be able to establish that reasonable collection efforts were made.
Debt was actually uncollectible when claimed as worthless.
The CFR at 42 CFR 413.89(f) 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.
To be considered a reasonable collection effort, the PRM 15-1, Section 310 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 310) 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. Delays in sending a timely first bill could result in the disallowance of the bad debt claim. During our testing of bad debts, we will use the following standards to define the timeliness of billing coinsurance / deductible:
Effective for cost report periods starting on or after 10/01/2020: Providers must issue the first bill within 120 days of the latter:
The date of the Medicare remittance advice that is produced from processing the claim for services furnished to the beneficiary that generates the beneficiary's cost sharing amounts.
The date of the remittance advice from the beneficiary's secondary payer, if any; and
The date of the notification that the beneficiary's secondary payer does not cover the service(s) furnished to the beneficiary.
Absent any verifiable documentation to support otherwise, bad debt billing outside the above timeframe will result in adjustments disallowing bad debts.
Additionally, the PRM indicates that the collection effort should include other actions such as subsequent billings, collection letters and telephone calls or personal contacts with this party 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.
The PRM 15-1, Section 310 (A) (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 310(A)) 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 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, Section 310(B) (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 310(B)), 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.
The PRM 15-1, Section 310.2 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 310.2) 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 will re-start the 120-day uncollectability timeframe.
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, Section 310 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 310), 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.
CMS has indicated that the moratorium on changes to Medicare bad debt policy in effect on August 1, 1987, does not apply to accounts at a collection agency. As a result, in no case is an unpaid Medicare account which is in collection, (including at a collection agency), an allowable bad debt. We will apply CMS instructions and will not allow bad debts in collection or at a collection agency. These instructions will be applied on all open cost reports; however, we will not reopen cost reports to apply this instruction.
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, Section 312 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 312) 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, Section 312 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 312). This requires the following:
Patient's indigence must be determined by the provider, not by the patient (e.g., a patient's signed declaration of his inability to pay his medical bills cannot be considered proof of indigence).
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.
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;
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, Section 310. Please refer to the "Must Bill Policy for Dual Eligible Beneficiaries" section of this bulletin for further guidance on indigent beneficiaries.
According to 42 CFR 413.89(b)(2) (scroll to section (b), then to section (2)) 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). The PRM 15-1, Section 328 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 328) clarifies that charity care, courtesy, and third-party payer allowances are not reimbursable Medicare costs and cannot be claimed as Medicare Bad Debts.
As provided by CMS in Change Request (CR) 2225 , 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 (e.g., 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.
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.
The Must Bill Policy states that if a patient is determined by the provider to be indigent or medically indigent, the provider does not need to attempt to collect from the patient. However, the provider must make certain that no source other than the patient would be legally responsible for the patient's medical bill; e.g., title XIX, local welfare agency... prior to claiming the bad debt from Medicare, as provided for in PRM 15-1, Sections 312, 322 (select chapter 3, open pr1_0300_to_0334.2 doc, then scroll to section 312 or 322).
With respect to dual-eligible, Section 1905(p)(3) of the Social Security Act (Act) imposes liability for cost sharing amounts for Qualified Medicare Beneficiaries on the States, though Section 1902(n)(2) allows the states to limit that amount to the Medicaid rate and essentially pay nothing toward dual eligible cost sharing if the Medicaid rate is lower than what Medicare would pay for the service.
In those instances where the state owes none or only a portion of the dual-eligible patients deductible or co-pay, the unpaid liability for the bad debt is not reimbursable to the provider by Medicare until the provider bills the State, and the State refuses payment with a state remittance advice.
Skilled nursing facility (SNF) providers that can demonstrate that they followed the instructions that were previously laid out at PRM 15-2, Section 1102.3L (select chapter 11, open pr2_1100_to_1102.3 doc, then scroll to section 1102.3L) for open cost reporting periods beginning prior to January 1, 2004, will be held harmless for those periods. Section 1102.3L, which was added in November 1995, permitted SNF providers to show other documentation in lieu of billing the states. This language conflicted with the billing requirements in Chapter 3 of the PRM 15-1, and due to a moratorium on changes in bad debt reimbursement policies imposed by Congress in August 1987, the Secretary lacked authority in November 1995, to effect a change in policy. CMS has reverted to the pre 1995 language, which requires all providers to bill the individual states for dual-eligible co-pays and deductibles before claiming Medicare bad debt. SNF providers were instructed via Provider Notice 04-116 to begin billing the state effective for services rendered on or after July 1, 2004.
Intermediaries who followed the now-obsolete Section 1102.3L instructions for cost reporting periods prior to January 1, 2004, may reimburse SNF providers for dual-eligible bad debts with respect to unsettled cost reports that were deemed allowable using other documentation in lieu of billing the state.
Therefore, for cost reporting periods beginning January 1, 2004, and forward, we will require that all providers have a processed State Medicaid remittance advice before allowing dual eligible bad debts.
CMS indicated in CR2174 that some hospitals have a policy of writing off small debit balances in patients 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 the Medicare administrative contractor (MAC) should forgo reviewing provider's policies for debit balances under ten dollars ($10.00).
Hospitals however must continue to follow their policy, which requires that collection efforts be followed prior to writing off small debit balances, and MACs 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 amounts must comply with a reasonable collection effort (120-day rule applies).
Medicare regulations at 42 C.F.R. 413.20 and 413.24, and program instructions at PRM 15-1, Sections 2300, 2304 (click on Chapter 23 and select pr1_2300_to_2307.doc) and 2404.2 (click on Chapter 24 and select pr1_2400_to_2409.4.doc), 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 Intermediary.
To substantiate a Medicare bad debt the PRM 15-1, Section 314 (select Chapter 3 and open pr1_0300_to_0334.2.doc, scroll to section 314) 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 Medicare Beneficiary ID 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.
For beneficiaries who are dually eligible for Medicare and Medicaid, the patient file must contain the Medicaid remittance advice indicating payment or denial of payment (see CMS' "Must Bill Policy for Dual Eligible Beneficiaries"). When indigence is determined by the facility using a method other than Medicaid eligibility (see Indigent Patients), PRM 15-1, Section 312 (select Chapter 3 and open pr1_0300_to_0334.2.doc and scroll to section 312) 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) (select Chapter 3 and open pr1_0300_to_0334.2.doc, scroll to section 310(B)) 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.
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.
For inpatient dual eligible bad debts, ensure that all charges are billed to Medicaid. For outpatient dual eligible bad debts, ensure that at least all charges with associated coinsurance are billed to Medicaid. Ensure that Medicaid is billed timely and a remittance advice showing payment, or a valid rejection is available for our review.
Ensure that indigent bad debt claims are fully documented with respect to the determination of the beneficiary's total resources.
For non-indigent, non-dual eligible 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.
We ask that you submit your bad debt log with your Medicare cost report in EXCEL format on CD-ROM.
Providers should utilize CMS Form 339 Exhibit 5 (select Chapter 11; select pr2_1102.3_(Cont.)_ex_6.doc, scroll to page 24) 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, Section 1102. Exhibit 5 requires the patient name, the Medicare Beneficiary ID number, the dates of service, whether the patient has been deemed indigent and their Medicaid number if this was the method utilized to determine indigency, 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 you submit your bad debt listing with your Medicare cost report in EXCEL format on CD-ROM.
Bad Debt Listing format: See CMS 339 form Exhibit 5 (select Chapter 11; select pr2_1102.3_(Cont.)_ex_6.doc)
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) (scroll to section f) provides that the income must be used to reduce the cost of beneficiary services for the period in which the collection is made. Additionally, PRM 15-1, Section 316 (open pr1_0300_to_0334.2.doc and scroll to section 316) 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.
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, Section 326 (open pr1_0300_to_0334.2.doc and scroll to section 326), 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.
The CFR at 42 CFR 413.89(h) (scroll to section h) provides for the limitation on bad debts for hospitals. This limitation is a reduction of the total allowable bad debts
Providers must follow all of the criteria for allowable bad debt as described in 42 CFR 413.89(e) (scroll to section e) and PRM 15-1, Sections 308 and 310 (open pr1_0300_to_0334.2.doc and scroll to section 308 and 310). 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 any time in the future.
It has been CMS' longstanding 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. CRF 413.89(e) (scroll to section e). See 31 FR 14183; published November 22, 1966. PRM 15-1, Section 310.A (open pr1_0300_to_0334.2.doc and scroll to section 310.A) clearly states that “A provider’s collection effort may include the use of a collection agency in addition to 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. PRM 15-1, Section 310.2 (open pr1_0300_to_0334.2.doc and scroll to section 310.2), Presumption of Noncollectibility, 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, section 310.2 must be read within the context of the regulations and Section 310. 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.
As a result of the above clarification of the bad debt regulations, Novitas Solutions will not allow claimed bad debts found during its current or future cost report reviews that are still at a collection agency. For future cost report submissions, providers must not include bad debts on its cost reports for any accounts that are still at the collection agency. Providers must wait until the account is returned from the collection agency before claiming it as a bad debt. The provider must show documentation that provides clear evidence that the accounts have been returned from the collection agency.
PRM 15-1, Chapter 3 and §413.89 of the Federal Register set forth the general requirements and policies for payment of bad debts attributable to unpaid Medicare deductibles and coinsurance amounts. Additional requirements for ESRD facilities are set forth at §413.178. Under the basic case-mix adjusted composite payment system Medicare pays ESRD facilities 80 percent of a prospectively set composite rate for outpatient dialysis services. The Medicare beneficiary is responsible for the remaining 20 percent as co-insurance, as well as any applicable deductible amounts as set forth in §413.176 of the regulations. If the ESRD facility makes reasonable collection efforts, as described in PRM 15-1, Section 310, but is unable to collect the deductible or coinsurance amounts for items or services associated with the composite rate, we consider the uncollected amount to be a “bad debt”, if the facility meets the requirements at proposed §413.178 and proposed §413.89 of the regulations. Thus, any bad debt amounts associated with drug and laboratory tests or with any non-composite rate amounts will not be allowed. Below is how to calculate an ESRD bad debt.
Composite Rate * Number of Treatments = Composite Rate Payment
Composite Rate Payment * 20% + Deductible = Maximum Allowable Bad debt Related to the Composite Rate
Composite Rate * Number of Treatments = Composite Rate Payment
Composite Rate Payment * 20% = Composite Rate Coinsurance
Composite Rate Coinsurance / Total Medicare Coinsurance = Composite Rate Percentage
Composite Rate Percentage * Amount Paid = Amount Applied Toward Composite Rate Bad Debt
Composite Rate Coinsurance + Deductible – Amount Applied Toward Composite Rate Bad Debt = Maximum Allowable Bad Debt Related to the Composite Rate
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, Section 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 PRM 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 PRM 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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