Saltmarsh Siren: CMS Guidelines Regarding Bad Debt

10/3/2023 - By Cade Crawford

For Medicare Part A providers, bad debt can be an important yet tricky subject. Since bad debt is a key area of focus for the clients we serve, the Healthcare Team at Saltmarsh wanted to highlight some of the crucial points from Chapter 3 of Part 1 of the Medicare Provider Reimbursement Manual:

Uncollectible vs. Unrecovered Costs

Bad debts resulting from deductible and coinsurance amounts that are uncollectible from beneficiaries are not includable as such in the provider's allowable costs; however, unrecovered costs attributable to such bad debts are considered in the Program's calculation of reimbursement to the provider.

Criteria for Allowable Bad Debt

  1. The debt must be related to covered services and derived from deductible and coinsurance amounts (see §305 for exception).
  2. The provider must be able to establish that reasonable collection efforts were made.
  3. The debt was actually uncollectible when claimed as worthless.
  4. Sound business judgment established that there was no likelihood of recovery at any time in the future.

Reasonable Collection Effort 

To be considered a reasonable collection effort, a provider's effort to collect Medicare deductible and coinsurance amounts must be similar to the effort the provider puts forth to collect comparable amounts from non-Medicare patients. It 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. It also includes 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 (see §312 for indigent or medically indigent patients).

Documentation Required – The provider's collection effort should be documented in the patient's file by copies of the bill(s), follow-up letters, reports of telephone and personal contact, etc.

Presumption of Noncollectibility – 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. Please note that any payment received on a bad debt restarts the 120-day period.

Accounting Period for Bad Debts 

Uncollectible deductibles and coinsurance amounts are recognized as allowable bad debts in the reporting period in which the debts are determined to be worthless. Allowable bad debts must be related to specific amounts which have been determined to be uncollectible. Since bad debts are uncollectible accounts receivable and notes receivable, the provider should have the usual accounts receivable records-ledger cards and source documents to support its claim for a bad debt for each account included. Examples of the types of information to be retained may include, but are not limited to, the beneficiary's name and health insurance 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.

Applying Collections from Beneficiaries

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 payment is to be applied proportionately to Part A deductibles and coinsurance, Part B deductibles and coinsurance and noncovered services. The basis for proration of partial payments is the proportionate amount of amounts owed in each of the categories.

Methods of Determining Bad Debt Expenses 

Direct Charge-Off – Under the direct charge-off method, 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. See §§300, 302.2, 314, and 316.

  • 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 bad debts. 

Reserve Method – Bad debt expenses computed by use of the reserve method are not allowable bad debts under the program.  However, the specific uncollectible deductibles and coinsurance amounts applicable to beneficiaries and charged against the reserve are includable in the calculation of reimbursable bad debts (see §308). Under the reserve method, providers estimate the amount of bad debts that will be incurred during a period, and establish a reserve account for that amount. The amount estimated as bad debts does not represent any particular debts, but is based on the aggregate of receivables or services.

Dual Eligible Bad Debts

Dual eligible bad debts are from persons who qualify for both Medicare and Medicaid coverage. Medicare covers their acute care services, while Medicaid covers Medicare premiums and cost-sharing and long-term care services. Medicare beneficiaries can qualify for Medicaid if they meet certain income and resource requirements or have high healthcare bills. Each state has its own eligibility standards and determines the scope of benefits provided to Medicaid beneficiaries, within federal guidelines.

With respect to "dual-eligibles," states are allowed to limit that amount to the Medicaid rate and essentially pay nothing toward dual eligibles' 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 patient's deductible or co-payment, 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). Even if the State Plan Amendment limits the liability to the Medicare rate, by billing the State a provider can verify the current dual-eligible status of a beneficiary and can determine whether or not the State is liable for any portion thereof.


If you have questions regarding the Medicare Provider Reimbursement Manual, please don’t hesitate to reach out to the Healthcare Consulting team at Saltmarsh. Our team of experienced professionals can help you understand the Manual and CMS guidelines related to bad debt.

Stay Up To Date!
Join our Saltmarsh Siren email list to receive our team's analysis of hot topics in healthcare and insight on current changes, such as complex regulatory matters, Medicare and Medicaid updates and more.

About the Author | Cade Crawford
Cade Crawford is a consultant in the Healthcare Consulting practice of Saltmarsh, Cleaveland & Gund. His primary areas of focus include Medicare and Medicaid cost report preparation, data analysis of revenue and expenditures and reimbursement consulting for the firm’s post-acute healthcare clients. Prior to joining Saltmarsh, Cade was a legal assistant at a regional law firm where he provided bookkeeping and lien resolution assistance.

Related Posts