When the Centers for Medicare and Medicaid Services (CMS) issued a Joint Signature Memorandum (JSM) to all Fiscal Intermediaries and Part A/B Medicare administrative contractors on May 2, 2008, the intent of the of JSM, which was titled, "Clarification of Medicare Bad Debt Policy Related to Accounts at a Collection Agency" was stated clearly to "…clarify longstanding policy concerning reimbursement for a Medicare bad debt while the account is at a collection agency." However, in practice, the JSM did little to clarify matters and provide objective guidance on the issue; instead it created confusion and controversy and spawned several lawsuits that have muddied the waters even further.

The concept behind Medicare's handling of bad debts is disengagingly simple: Tom Jendro, Assistant Professor at the University of Saint Francis and Senior Director of Finance for the Illinois Hospital Association, explains that typically Medicare beneficiaries have so-called Medicare supplemental insurance policies that cover their deductibles and co-pays under the program. Those that don't incur the expenses as out-of-pocket obligations.

The problems surface when Medicare beneficiaries lack a "gap" policy and are unable or unwilling to pay those expenses, which then languish on a hospital's books until they are deemed "uncollectible" and reported as such on the hospital's annual Medicare cost report. According to Jendro, as part of the annual audit of the cost report, the Medicare Fiscal Intermediary (FI) will perform a review of a sample of the bad debt amounts claimed by the hospital. At the end of the review of that sample, the FI will propose adjustments based on how well the sampled amounts met regulatory criteria. Adjustments disallowing some, all or none of the provider's filed" amounts may be proposed. Ultimately, 70% of the post-audit, Medicare bad debt amount will be reimbursed by the Medicare program to the hospital.

However, the scenario is rarely that straight forward and often questions arise about when a patient debt becomes a bad debt eligible for payment from Medicare. In particular, an area of contention surrounds what determines the status of a debt-that is, when it has been sent to an outside collection agency (OCA). Jendro adds that before implementation of the Medicare Prospective Payment System (PPS), the cost report was the basis for calculating a hospital's annual payments from the Medicare program. However, since the inception of PPS, bad debt write-offs represent one of the few remaining audit areas to have a financial impact. Consequently, that area of the report undergoes intense scrutiny by the auditors. (Note: Medicare reimbursement for critical access hospitals, (which, by law, are exempt from PPS), continues to be based on those hospitals' cost reports under Medicare's cost reimbursement principles.)

The Moratorium

Christopher L. Crosswhite, a Health Law Partner in the Washington, D.C, office of Duane Morris, LLP, explains the history of the Bad Debt Moratorium that is intended to address this issue, in an article on the firm's website www.duanemorris.com called "The Medicare Bad Debt Moratorium: Still Alive and Kicking":

"In the late 1980s, Congress passed a series of provisions intended to protect health care providers from disallowances of Medicare bad debt reimbursement based on the imposition of new requirements on providers. These statutory provisions collectively became known as the Medicare Bad Debt Moratorium (the "Moratorium"). Among other things, the Moratorium prohibits the Medicare program from requiring a provider to change its bad debt policy where (1) the provider's intermediary had accepted that bad debt policy prior to August 1, 1987, and (2) the intermediary's acceptance was in accordance with existing rules and regulations."

He goes on to note that "through informal guidance issued to intermediaries, CMS has contended that the Moratorium does not apply in numerous situations, such as when a provider undergoes a change in ownership, with a new provider number, or a change in its intermediary. Another way that the Medicare program has tried to defeat application of the Moratorium is to assert that the provider changed its bad debt policy so that the previously accepted policy is no longer applicable. In its latest attack on the Moratorium, CMS issued a "joint signature memorandum" in May 2008, instructing Medicare contractors to disallow Medicare bad debts for patient accounts remaining at an outside collection agency even where the contractors may have allowed such bad debts in past audits based on the Moratorium.

"CMS claims that its longstanding policy required that accounts be returned to providers from outside collection agencies before the providers may claim the unpaid balances as bad debts. According to CMS' logic, any previous allowance of bad debt reimbursement for accounts remaining at collection agencies would not have been in accordance with the rules in existence as of August 1, 1987, meaning that the Moratorium's protection is inapplicable."

According to the May 2 JSM, "It has always been CMS's policy to require a patient account to be returned from an OCA, before the account can be claimed as a bad debt. The agency argues that if a provider is still pursuing collection efforts by virtue of their being kept at an OCA, it cannot also claim that the account is worthless and uncollectible.

Re-Charting the Waters

However, Crosswhite and Joanne Erde, a partner in the Miami, FL office of Duane Morris, note that this point of view represents a new CMS position on bad debts. In "History Rewritten: New Medicare Bad Debt Joint Signature Memorandum--CMS takes new position on old debts" for Dennis Barry's Reimbursement Advisor, they write that "CMS is not bothered in the least by the fact that the position laid out in the JSM is inconsistent with the agency's prior policy."

The authors point to a statement in the JSM: "We have determined that any instructions previously issued which allowed hospitals to claim Medicare bad debts for accounts at a collection agency based on a Medicare contractor's interpretation of the policy as of August 1, 1987, are incorrect." According to Erde and Crosswhite, "the significance of this JSM is not in the analysis and discussion of CMS's position that bad debts may not be claimed on a cost report until the relevant patient accounts are returned from the OCA. Rather, its significance lies in the new position that CMS is taking regarding the application of the moratorium to these bad debts."

Erde also points out that it's a very complicated area because historically the intermediaries have not behaved consistently. She adds that although there have been a few new legal cases lately, it hasn't changed the situation significantly."

Surviving the Audit

Crosswhite writes that "based on CMS' directives, Medicare contractors are increasingly disallowing providers' bad debt claims that in prior cost report audits would have been allowed." Jendro adds that the scope of the audit that is conducted by the FIs at the end of the year may depend on how much a hospital is claiming as bad debt. "If it's an unusually large amount,(dollars or volume) either for the hospital historically or compared to other providers the FI may insist on a larger sample of accounts to be reviewed. For hospitals with a comparatively small number of accounts or dollar amount, the FI could perform a 100% review.

Given these considerations, a provider may decide to sidestep the anticipated negative adjustments and recall their Medicare bad debts from outside collection agencies before the audit. Crosswhite warns that this may not be the best course of action. He writes that "providers faced with potential disallowances of Medicare bad debts may feel that they have little choice but to consider changes in their arrangements and practices involving outside collection agencies in an attempt to comply with current Medicare policy… before doing so, however, the provider must take into account that it will likely have to recall all patient accounts from the collection agencies (or at least the accounts with comparable balances and collection experience), not just the Medicare accounts. Otherwise, the Medicare contractor may next claim that the Medicare bad debts are not allowable because the provider engaged in dissimilar collection efforts for Medicare and non-Medicare accounts."

Erde notes that the issue at play here is having to recall both Medicare and Non-Medicare debts from outside collection agencies to demonstrate that the two types of accounts are being treated equitably by the provider. "Hospitals are trying to develop policies that are consistent with CMS rules, but they have to make sure that they are treating both Medicare and Non-Medicare accounts uniformly."

Impact of Court Cases

Erde adds that a significant impediment to clarity on this issue is that CMS has been changing the rules Erde and Crosswhite, writing in "D.C. District Court Decision Gives New Life to Medicare Bad Debt Moratorium," in Reimbursement Advisor in August 2008, point out that "in a decision with potentially far-reaching implications, the U.S. District Court for the District of Columbia-in Foothill Hospital-Morris L. Johnston Memorial v. Leavitt-held that CMS's policy disallowing Medicare bad debt for accounts remaining at collection agencies violates the statutory Medicare bad debt moratorium."

Crosswhite sums it up by saying that "Despite CMS's attempts to consign the Moratorium to ancient reimbursement history, the Moratorium remains in effect and may serve as a potent weapon for providers considering whether they may be able to challenge bad debt disallowances." Erde, in a letter to the editor to HFMA, adds that "as of this writing, events are still in flux. The JSM is still out there and intermediaries are going to be advising providers that the Moratorium will not protect them from disallowances of bad debt for accounts at collection agencies. Yet the handwriting may be on the wall." (Side-Bar 1)

Medicare Policy on Bad Debts

According to Chapter 3 of the Provider Reimbursement Manual (PRM), CMS Publication 15-1, and the Code of Federal Regulations (CFR) 42, Section 413.80, a Medicare bad debt must meet the following minimum requirements:

The bad debt must be related to Medicare covered services for coinsurance and deductible amounts. Bad debts relating to noncovered services or to physician charges are non-reimbursable bad debts.

Documentation must clearly indicate that a reasonable collection effort was made. Documentation of the collection effort should include copies of letters, follow-up letters, reports of telephone and personal contacts, etc. The collection effort must be "genuine", rather than a token effort. Your facility's collection effort for Medicare deductible and coinsurance amounts should be similar to the effort made for the collection of amounts from non-Medicare patients. If your facility refers non-Medicare claims to a collection agency, all Medicare claims should also be referred to a collection agency. (This collection effort is not required if the beneficiary is indigent - see item 4 below.)

The bad debt must actually be uncollectible when claimed as worthless. According to PRM, Part I, Section 310.2, a bill is presumed to be uncollectible if a reasonable effort was made to collect the bill and the bill remains unpaid for more than 120 days from the date the first bill was mailed to the beneficiary.

A Medicare bad debt can only be written off prior to the 120 days from the date of the first patient bill if the patient has been determined to meet the requirement of indigence. Patient files should contain documentation of the method by which indigence was determined in addition to all information supporting the determination. PRM Part I, Section 312 states the following regarding indigency : "Providers can 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." If the patient is on Medicaid, then Medicaid eligibility documentation should be maintained in the file, including the date of the Remittance Advice from the Medicaid fiscal intermediary processing the claim.

The uncollectible amount must be charged off as a bad debt in the accounting period in which the account is deemed to be worthless. If your facility recovers an amount that was previously written off and claimed as a Medicare bad debt, your current year's bad debts should be reduced by the amount recovered.

When filing your Medicare cost report, you are required to complete a CMS-339 questionnaire. The questionnaire indicates that if bad debts are claimed on the cost report, a supporting schedule must contain the following:

  • Patient Name and HIC Number
  • Date of Service
  • Coinsurance and Deductible Amounts
  • Date of First Patient Billing
  • Amounts Recovered from Beneficiary
  • Identification of Indigent Bad Debt
  • Date of Write-off
  • Date the Collection Agency Ceased Collection Efforts

More on Medicare Bad Debt Audits...

Note: "Column 4 - Indigency/Welfare Recipient.--If the patient included in column 1 has been deemed indigent, place a check in this column.

If the patient in column 1 has a valid Medicaid number, also include this number in this column. See the criteria in Provider From, Reimbursement Manual - I, §§312 and 322 and 42 CFR 413.80 for guidance on the billing requirements for indigent and welfare recipients, page 9 at: www.cms.hhs.gov/transmittals/downloads/R6P211.pdf

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CMS-339 questionnaire can be found at: www.cms.hhs.gov/cmsforms/downloads/cms339.pdf

Publication Date: Thursday, January 08, 2009