Medicare Providers to Feel Pinch of New Bad Debt Reimbursment Reductions

As of October 1, 2012, health care providers who are reimbursed through Medicare will see payments for Medicare-related bad debt reduced over the next three years. The change affects acute inpatient hospitals, skilled nursing facilities (SNFs), critical access hospitals, end-stage renal disease (ESRD) facilities, community mental health clinics, federally qualified health centers, rural health centers, and some health plans reimbursed under Medicare Part C.

The changes, which are part of the Final rule relating to the 2013 reimbursement update for end-stage renal dialysis facilities, codify provisions of sec. 3201 of the Middle Class Tax Extension and Job Creation Act of 2012 (P.L. 112-96). CMS expects the change in bad debt reimbursement to save Medicare $10.92 billion over 10 years. The final rule also removes the cap on bad debt payments to ESRD facilities, starting January 1, 2013, for a savings of $170 million over 10 years.

The history of Medicare bad debt reimbursement was examined in a blog post earlier this year (see “CMS Proposes Reduction in Medicare Bad Debt Reimbursement,” July 11, 2012). A provider may claim bad debt reimbursement for “uncollectible” accounts that, after “reasonable collection efforts,” demonstrate “no likelihood of recovery at any time in the future.” (42 C.F.R. sec. 413.89(e)). A bad debt is considered uncollectible after 120 days from the date the first bill is mailed. Providers must make a reasonable collection effort before they can claim Medicare bad debt. The provider also must apply the same reasonable collection policies to the debts of both Medicare and non-Medicare patients.

Until the end of fiscal year 2012 (September 30, 2012), CMS reimbursed 70 percent of the bad debt incurred by hospitals and SNFs that had no patients who were dually eligible for Medicare and Medicaid. Starting October 1, 2012, bad debt reimbursement dropped to 65 percent.

Until the end of FY 2012, SNFs with dual eligible patients received 100 percent reimbursement of their Medicare bad debt; bad debt reimbursement drops to 65 percent starting in FY 2013.

All the other providers listed above also enjoyed 100 percent reimbursement of Medicare bad debt through the end of FY 2012; this reimbursement will drop to 88 percent in FY 2013; 76 percent in FY 2014; and 65 percent in FY 2015.

CMS noted in the Final rule that the reduction in bad debt reimbursement will have a “significant impact on the operations of a substantial number of small entities and small rural hospitals.”

In addition to these cuts, which are now in effect, Medicare providers face potential additional reimbursement cut-backs such as a 27 percent reduction in Medicare physician payments due to take effect January 1, 2013; a reduction in inpatient hospital reimbursement if the rate of readmission of certain patients is too high; productivity adjustments instituted by the health care reform law; and other unknown cutbacks that would go into effect at the beginning of next year, related to the still unresolved “fiscal cliff.”