A Collaborative Approach to Medicare Bad Debt Reimbursement

Medicare bad debts are part of the revenue cycle and consist of unpaid patient co-insurance and deductible amounts. Reimbursement of bad debt represents substantial revenue for providers, including hospitals. For example, a December 2022 audit report compiled by the Department of Health and Human Services’ (HHS) Office of the Inspector General (OIG) reviewed provider cost reports from federal fiscal years 2016 to 2018 and found that, during this period, providers claimed more than $15 million in Medicare bad debts.

As Medicare bad debts are reimbursed at a rate of 65 percent, the reimbursable amount was nearly $10 billion. However, to comply with federal requirements, and maximize Medicare bad debt reimbursement, hospitals need to be proactive and promote a collaborative effort among their revenue cycle, reimbursement, and information technology (IT) departments.

A collaborative effort is important because the information needed to claim Medicare bad debts is based on documentation kept in separate systems. Notably, the reimbursement staff must rely on information that is collected and documented by revenue cycle staff in patient accounts. In turn, an effective, robust IT department is needed to support the necessary documentation of revenue cycle activities and identify any lapses or delays that may jeopardize Medicare bad debt reimbursement. While the Centers for Medicare and Medicaid Services (CMS) Provider Reimbursement Review Board (PRRB) and federal courts have reported many examples of hospitals failing to comply with Medicare bad debt regulatory requirements, a joint effort by revenue cycle, reimbursement, and IT departments presents a path for hospitals to achieve not only compliance but also greater reimbursement.

In 2020, CMS issued the fiscal year (FY) 2021 Inpatient Prospective Payment System (IPPS) final rule, providing new and clarified rules for claiming reimbursable Medicare bad debts on a provider’s cost report. Many of these rules mirror or expand upon provisions in the Provider Reimbursement Manual (PRM), which has served as a guide to providers for decades. The final rule noted that many of the clarified rules have a retroactive application, but a select few provisions became effective for cost reporting periods beginning October 1, 2020.

The final rule included regulations that define the processes, steps, and requirements a provider must follow to claim its Medicare bad debts. Importantly, all requirements are now in effect for cost reporting periods going forward, and providers will want to be up to speed on the most current Medicare bad debt requirements.

Key elements of the debt collection process include:

• Development and implementation of a strategic bad debt policy that meets Medicare requirements and ensures reasonable flexibility for the provider;
• Consistent implementation of the policy by revenue cycle staff; and,
• Utilization of robust and effective IT systems that ensure consistent implementation of the provider’s debt collection policy and documentation of collection activities.

Collaborating to Collect Medicare Bad Debts

An effective Medicare bad debt policy, if consistently implemented, will maximize reimbursement. A collaborative effort by hospital revenue cycle, reimbursement staff, and IT staff can best meet this challenge. Collecting Medicare bad debts is a “team sport.”

A patient must be billed in a timely manner. In the FY 2021 IPPS final rule, CMS clarified the time period for billing a patient. Recognizing the need for a “more definitive timeframe,” the agency changed the standard from “shortly after the discharge or death of the patient” to no later than 120 days after receipt of a remittance advise (RA) —from Medicare or a secondary payer—or the date of notice of no coverage. As a result, providers now have a more objective standard to apply to the time frame for billing patients. The standard also recognizes that providers bill payers first, then the patient.

Many providers contract with vendors to bill the patient and conduct collection activities either before or after payment by Medicare or any secondary provider. It is important, for compliance purposes, for the provider to reflect its own policy in vendor contracts.

In addition, a vendor needs all of a provider’s billing records for the patient, i.e., date of the Medicare RA, RA of a secondary payer, or the date of a notice of no coverage, when the patient’s file is transferred to the vendor to enable the vendor to bill the patient in a timely manner — or no later than 120 days after the latest of the numerated events. Denials of Medicare bad debt claims based on untimely billing — or the inability of a provider to document timely billing — are fairly common. While the first bill can be delayed for many reasons, such as a dispute over the Medicare payment, the reasons for any delay should be documented in the patient’s file. Nonetheless, the priority should be billing the patient promptly—far sooner than the 120-day period specified in the regulation.

To support the priority of prompt patient billing throughout the revenue cycle, robust automated systems are essential. Providers should select a vendor who is committed to following up periodically with revenue cycle staff to ensure that all systems are meeting the hospital’s objectives. Workflow tools, such as alerts when there is a deviation from the provider’s debt collection policy, can keep collection efforts on track. These tools can also assist in compliance and documentation of any reasons for delay in implementing collection activities.

In whatever shape or form, monitoring solutions can provide a means to evaluate progress and generate reports on the status of accounts, including the issuance of a bill to the patient. A technology-driven process can help maximize reimbursement. 

A reasonable collection effort must be conducted. The core of Medicare bad debt regulation revolves around what is known as a “reasonable collection effort,” a requirement maintained in the FY 2021 IPPS final rule.  In particular, the regulation specifies that a reasonable collection effort involves initially billing the patient and may consist of “other actions such as subsequent billings, collection letters and telephone calls or personal contacts.” Each provider can decide the specific elements and scope of its bad debt collection activities to be included in their debt collection policy.

As the PRRB has opined, “It is up to the provider to make a business decision as to how much and what types of actual ‘collection effort’ it will expend to collect debts.” Nonetheless, steps set forth in the policy and any activities undertaken pursuant to the policy must be genuine and represent “more than a token effort,” as noted in the PRM. In brief, a provider may — within specified limits — design its own bad debt collection policy.

Long-standing agency policy dictates that a Medicare bad debt can be written off as worthless only after a customary and reasonable collection effort that has been conducted for at least 120 days. Unpaid co-insurance and deductible of patients who are determined to be indigent pursuant to the regulations may be written off without any collection effort. This subject has been widely litigated before the PRRB and in the federal courts over the years. However, the rule specifies that all collection efforts must last at least 120 days, essentially eliminating the provider’s ability to write off a bad debt prior to the 120-day period if they can prove that the debt is actually worthless.

Providers should design their debt collection policy to be consistent with sound business judgment and best practices. The PRRB has consistently held that, in order to invoke the presumption that reimbursable bad debts can be written off following 120 days of customary and reasonable collection efforts, a provider must have implemented its bad debt collection policy during the requisite 120 days. Board precedent suggests that the Board requires strict adherence to each and every step identified in the policy. Thus, providers should be strategic in designing their debt collection policy and ensure compliance with the steps therein.

In addition, Medicare Administrative Contractor (MAC) auditors will be looking for a “continuous collection effort” (i.e., a series of activities during the 120-day collection period). As a result, providers need to avoid large gaps in their collection activities. If an account is placed on hold, or it has gaps or periods longer than those specified in the policy, the reasoning for the hold should be detailed in the account notes. Again, documentation is critical. Unexplained long periods of no collection efforts form the basis of many MAC bad debt claim denials.

Debts written off as worthless must be documented in detail. Providers must be able to document collection efforts have been implemented for at least (and including) 120 days. The 120-day period set forth in the regulation and PRM means that no debt can be written off until day 121. Moreover, under the rule, any payment—of any amount—by a patient starts a new clock (i.e., reasonable collection efforts must continue for another 120 days). MAC auditors deny write offs that are made prior to the entire 120-day period of collection efforts. This means that Medicare bad debt claims written off 119 or 120 days after the first bill to the patient will be denied.

Collection efforts for both Medicare and non-Medicare accounts must be similar. In the FY 2021 IPPS final rule, CMS retained the longstanding requirement that the steps a provider takes to collect debts from Medicare patients be similar to those used for non-Medicare patients. If, for example, non-Medicare patient accounts are referred to a collection agency, Medicare accounts must also be referred. In addition, the rule permits a provider to set a floor for referral (e.g., only accounts with balances over $500 will be referred to a collection agency). This floor, however, must be applied to both Medicare and non-Medicare accounts.

Recoveries or payments after write-off reduce bad debt. From time to time, a payment will be received from a patient after the account has been written off. The long-standing rule is that this amount — called a recovery by CMS — must be deducted from the total amount of bad debts claimed during the cost reporting period in which it is received, but not in excess of the total amount of bad debt claimed. Here, close coordination between revenue cycle and reimbursement staff is essential since the revenue cycle staff will receive the payment, and the reimbursement staff will make an entry on a bad debt log and report it on the cost report.

Documentation is essential. Full, detailed documentation is a key element of maximized Medicare bad debt reimbursement as CMS has maintained its requirement that all bad debt claims be documented. The agency’s requirements are explicit: a provider must keep (1) a bad debt collection policy; (2) account history; and (3) copies of bills and follow-up notices as well as documentation of other collection activity. Documentation should be kept and made readily accessible. In light of the protracted nature of cost report appeals, providers should ensure that old accounts are properly stored in an archive and sufficient documentation is retained to meet the requirements of the regulation.

Specifically, Notices of Program Reimbursement (NPRs) are not always issued promptly and PRRB appeals are protracted — both circumstances resulting in delay in resolving bad debt issues. As a result, it is not uncommon for a provider to require patient account information dating back 10 years to 15 years. To overcome challenges presented by legacy or disparate systems within providers’ IT infrastructure, providers need comprehensive migration plans to address changes and updates to automated systems, as well as proper document archiving.

Accounting practices must meet regulatory requirements. The regulation also addresses how bad debts are to be written off: bad debts “must be recorded in the provider’s accounting records as a component of net patient revenue” and “must not be written off to a contractual allowance account but must be charged to an uncollectible receivables account that results in a reduction in revenue.” For cost reporting periods prior to October 1, 2020, Medicare bad debt “must not be written off to a contractual allowance but must be charged to an expense account for uncollectible accounts.” The FY 2021 IPPS final rule appears to represent a refinement of the accounting terminology used to describe this requirement. In any event, providers should evaluate the process of recording write-offs in the general ledger.

Finally, staff training is critical to success. Providers need to implement effective training programs and prioritize staff retention. All staff need to be made aware of Medicare’s bad debt collection policies and the critical need to implement the provider’s policy. Knowledge of Medicare’s requirements by revenue cycle, reimbursement, and IT staff will facilitate compliance. All three teams are interdependent, and close collaboration among them is the key to success.

Arthur E. Peabody, Jr., is an attorney with Hooper, Lundy & Bookman, PC, based in Washington, DC. His areas of expertise include Medicare payment and reimbursement for hospitals and other providers.