What Belongs in the Bad Debt Line
Pinehurst Community Hospital is a 140-bed acute care hospital with a June 30 fiscal year end. At year end the patient accounting system shows these Medicare-related write-offs: $22,600 of coinsurance on dual-eligible inpatient accounts, where the state Medicaid plan makes the beneficiary liable for coinsurance and requires the hospital to bill the beneficiary; the hospital billed twice, received nothing, and wrote the accounts off at 190 days. $14,900 written off under the hospital's financial assistance policy at 120 days with no collection effort. $8,300 of Medicare coinsurance written off automatically at 90 days after a single statement, with no telephone follow-up, no agency referral, and no indigence screening. $6,100 of coinsurance on professional claims billed by the hospital's wholly owned physician group, and $11,200 of coinsurance owed by members of a Medicare Advantage plan. A $2,400 collection agency recovery arrived in March on an account claimed as Medicare bad debt in the prior cost report.
1. Which amounts qualify as Medicare bad debt, at what payment rate, and what must be fixed before any are claimed?
Read the worked answer
Qualification requires all of the following: the debt is Medicare deductible or coinsurance (or, for a dually eligible patient, an amount the state requires the beneficiary to be liable for), the patient is liable, there has been reasonable collection effort, the account is written off as uncollectible on the provider's books, and the provider pursues bad debt for all Medicare beneficiaries without discriminating.
- $22,600 dual-eligible: allowable, and often the most valuable category. The state plan makes the beneficiary liable and requires billing, the hospital billed twice, and it waited 190 days. Keep the state policy citation, the two statements with dates, and the write-off documentation in the file.
- $14,900 charity write-offs: not allowable. Once an account is written off under the financial assistance policy it is charity care, not bad debt. Indigence for bad debt purposes is a separate determination with its own documentation.
- $8,300: not allowable as presented. One statement at 90 days with no follow-up, no agency referral, and no indigence screening is not reasonable collection effort. If the accounts are still open, cure it prospectively with follow-up billing and an agency referral; if already written off, the hospital must be able to show the effort was made.
- $6,100 professional fees: not allowable on the hospital cost report. Those are Part B fee schedule claims; the cost report bad debt line covers facility services.
- $11,200 Medicare Advantage: not allowable. The bad debt rules apply to original Medicare; MA cost sharing is a plan and member collection matter, and the hospital should pursue the plan under its contract.
Allowable bad debt is reimbursed at 65 percent, not 100 percent. 'We never got paid' establishes collectability, not allowability - the two are different tests and only the first is satisfied by the write-off.
2. How should the $2,400 collection agency recovery be handled given that the account was claimed in a prior, settled cost report?
Read the worked answer
A recovery on a previously claimed bad debt must reduce what the program ultimately pays. The hospital cannot keep the prior-year reimbursement and the recovery.
Two acceptable routes, and the choice depends on what the MAC's instructions for the cycle allow:
- Net it against the current year's bad debt line, with a workpaper tying the $2,400 to the specific prior-year account, the date claimed, and the date recovered. This is the simplest and is what most MACs expect for recoveries of this size.
- Refund it through a reopening or adjustment of the prior year, which is cleaner conceptually but administratively heavy for $2,400 and consumes reopening capacity the hospital may want for larger issues.
Whichever route is chosen, the key is the paper trail: the recovery must be traceable to an account that was claimed, and the current year's bad debt line must be reduced by it so the same dollars are not paid twice. If the hospital nets recoveries in aggregate without an account-level tie-out, an auditor will question whether some recoveries relate to accounts never claimed, and the whole netting convention becomes an issue.
3. How should the $14,900 be treated instead, and is the cost of the services behind it recoverable anywhere in the cost report?
Read the worked answer
Classification. The $14,900 belongs in charity care, reported on Worksheet S-10 and in the hospital's charity care disclosure, not in the bad debt line. The distinction is about the provider's own decision: an account written off under the financial assistance policy was determined to be a patient who could not pay, which is charity, not a failed collection.
Cost recovery. Charity care is forgone revenue, not a cost. The cost of furnishing the services is already in the cost report through the departmental costs on Worksheet A and is recovered through the normal apportionment - there is no separate charity care add-on in the cost report. Adding the write-off amount as a cost would double count: once as the direct and indirect cost of the department, and again as a phantom expense.
Controls. The larger exposure is consistency. If some accounts go to a collection agency while similar accounts are written off as charity, the hospital has an inconsistent financial assistance policy and an inconsistent bad debt population, and both S-10 and the bad debt line become challengeable. Review the policy application annually, document each determination, and make sure the patient accounting system flags the classification at write-off rather than after the fact.