Published March 9, 2021

Clarity for Medicare Bad Debt Requirements and Guidance for Implementation

The various accounting treatment clarifications for Medicare bad debt reimbursement, combined with the recent 2021 Inpatient Prospective Payment System (IPPS) Final Rule changes, are presenting significant challenges for many providers, particularly those with limited resources. Proactive education and a collaborative effort between revenue cycle and reimbursement functions are key in addressing these new challenges.

Specifically, providers seeking Medicare bad debt reimbursement from the Centers for Medicare & Medicaid Services (CMS) are adapting to significant changes related to IPPS Final Rule codifications and Paperwork Reduction Act (PRA) formatting guidelines. The Final Rule clarifies and codifies Provider Reimbursement Manual (PRM) guidelines related to accounting treatment, along with several other requirements. Also, CMS has proposed a new format for Medicare bad debt log submission for cost reporting periods beginning on or after October 1, 2020. Providers also must continue to comply with applicable regulations and PRM guidance (Chapter 3), which includes indistinct information for properly classifying unpaid deductible and coinsurance amounts in accounting records.

Accounting Treatment Changes

On April 4, 2019, CMS provided clarification through a Medicare Learning Network article titled “Medicare-Medicaid Crossover Bad Debt Accounting Classification,” instructing providers to “correctly classify unpaid deductible and coinsurance amounts for Medicare-Medicaid crossover claims” in their accounting records. The term “crossover claims” refers to Medicare beneficiaries also entitled to Medicaid. After Medicare makes its payment, any deductible and coinsurance amounts are “crossed over” to the responsible Medicaid agency. If the Medicaid agency determines it does not have any liability for the unpaid deductibles and coinsurance, the provider is notified, and the amount can be claimed as a Medicare bad debt without exhausting the normal collection effort requirements of non-indigent (traditional) bad debts. Prior to these instructions, providers would often treat the remaining unpaid deductibles and coinsurance as deductions from revenue (Medicaid contractual allowances), because Medicaid was the last payer involved in the history of the account.

The CMS article explains that crossover bad debt amounts should be charged to an expense account for uncollectible accounts and explicitly states, “Do not write off to a contractual allowance account.” These requirements were effective for cost reporting periods beginning on or after October 1, 2019.

The 2021 IPPS Final Rule, published September 2020, further clarified how providers should treat Medicare bad debt in their accounting records, while also adopting the Financial Accounting Standards Board terminology for “implicit price concession.” Similar to the previous terminology of “allowance for uncollectible accounts,” implicit price concession represents providers’ estimates of the collectability of remaining balances, based on actual write-off experience and other factors. This terminology is related to all patient account activity and not specifically Medicare bad debts for uncollectible deductibles and coinsurance for covered services. Implicit price concession informs external financial reporting of bad debt, but it has no impact on the underlying transaction of writing off patient deductible and coinsurance as uncollectible.

The Fiscal Year (FY) 2021 IPPS Final Rule clarifications do not change certain criteria for providers seeking Medicare bad debt reimbursement.

  • For cost reporting periods beginning:
    • 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” (reduction in revenue or allowance for bad debts).
    • On or after October 1, 2020, Medicare bad debt “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” (implicit price concession).

The 2019 clarification is specific to crossover bad debt, whereas the Final Rule clarification does not differentiate between crossover and other types of Medicare bad debt. The Final Rule language represents a change in terminology only, so there should be no need for providers to adjust their accounting treatment of Medicare bad debt based on the Final Rule clarification. However, an evaluation of the process of recording write-offs in the general ledger is recommended to ensure compliance for all types of Medicare bad debt. A best practice would be to establish unique transaction codes to capture this activity and perform routine reviews of the transactional activity to establish that the codes are used consistently and correctly.

Additional Final Rule Codifications & Clarifications

CMS’ intention in the Final Rule is to clarify and codify policy that has been the subject of litigation and Provider Reimbursement Review Board (PRRB) appeals related to Medicare Administrative Contractors’ (MACs) inconsistent treatment of Medicare bad debt. The clarifications and codifications include both retroactive and prospective changes:

  • Retroactive (effective for cost reporting periods beginning prior to and after October 1, 2020) (deemed “longstanding” policy):
    • Definitions (three types of Medicare bad debt):
      1. Non-indigent (previously known as “traditional”)
      2. Indigent dual-eligible (formerly crossovers)
      3. Indigent non dual-eligible (often referred to as charity)
    • Write-off (120-day rule clarified)
    • Valid billing mechanisms addressed
    • Similar collection effort clarified
    • Medicaid “Must Bill” policy (alternative supporting documentation)
    • Recoveries clarified
    • Technical corrections
  • Prospective
    • Timely billing (defined with 120-day thresholds)
    • Indigency determination requirements
    • Adoption of Accounting Standards Codification® Topic 606 terminology

PRA Formatting Guidance

Providers seeking reimbursement for Medicare bad debts have historically been required to submit detailed logs with sufficient detail so that MAC auditors could perform review procedures at the individual account level. The historical requirements of the CMS Exhibit 2 (cost report questionnaire) included:

Patient Name

Dates of Service

HIC (or MBI) Number

Medicare Remittance Date

Indigency Determination

First Bill Date

Medicaid Number

Write-Off Date


Total Medicare Bad Debt

In November 2020, CMS published a new notice in the Federal Register regarding a proposed revision to the Hospital and Health Care Complex Cost Report. The notice adds Exhibit 2A, which has 25 columns and provides instructions as to the information required to support the bad debt claimed in the cost report. Exhibit 2A replaces Exhibit 2 as of October 1, 2020.

Proposed Additional Requirements

 (Paperwork Reduction Act – Effective FY Beginning 10/1/2020)

Header: CCN

Source of payment(s)

Header: Provider name

Medicaid remit date

Header: Fiscal year-end

Provider comments

Header: Preparer name

Recoveries (after write-off–current or prior period)

Header: Date prepared

Fiscal year bad debt was claimed (recoveries)

Patient account #

Collection agency (Y/N)

Secondary remit date

A/R write-off date

Patient responsibility

Date returned from collection agency

QMB status (Y/N)

Date all collection efforts ceased (internal/external)

State Medicaid liability

Payments received (before write-off)

How To Respond

Since implementation of the new guidance and log formatting requirements could represent a significant undertaking, providers should quickly communicate Final Rule clarifications and codifications to those involved in the Medicare bad debt compilation process, evaluate the process of recording write-offs in their general ledger, and implement critical controls and measures. We recommend closely reviewing all cost report communications and determining if a reopening request for denials related to retroactive clarifications may be warranted.

Additional educational material, recommendations, and action steps can be found on our website:

On-Demand Webinar: Medicare Bad Debt as It Relates to the Revenue Cycle Process

“Strategies for Meeting New 2021 IPPS Medicare Bad Debt Requirements”

If you have questions related to changes in Medicare bad debt requirements or need assistance implementing them, contact a PYA executive below at (800) 270-9629.

Executive Contacts

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