Clarifying Rule Changes Regarding Accounting for Medicare Bad Debts

Many clarifications to Medicare Bad Debt rules were included as part of the IPPS Final Rule for 2021, leaving healthcare providers with questions. One portion of the rule causing confusion is related to the Accounting Standard Update Topic 606 and Accounting for Medicare Bad Debt. While it’s clear the purpose of the final rule is to prevent hospitals from writing off Medicare Bad Debts to a contractual allowance account, some uncertainty may still exist. For example, the final rule seems to make a distinction of the account title to be used for bad debts write offs for cost reports beginning prior to 10/01/20 and for those beginning on or after 10/01/20.

Why does it matter to Medicare how a hospital handles Medicare Bad Debts within their accounting system?

According to the final rule, “Medicare regulations require providers to follow standardized definitions, accounting, statistics and reporting practices that are widely accepted in the hospital and related fields” (See 42 CFR 413.20(a)). With that in mind, through this rule, CMS is attempting to:

• Use specific terminology from ASU Topic 606 in 413.89. Note: Topic 606 was implemented by the FASB to implement consistency across all industries, not only healthcare.
• Codify the use of an expense account rather than a contractual allowance.

The Final Rule specifically states that for cost reporting periods beginning prior to 10/01/2020, bad debts cannot be written off to a contractual allowance account. How does this intersect with the MLN Special Edition article from April 4, 2019, which states that Medicare bad debts can be written off to a contractual allowance account for cost reporting periods beginning before 10/01/2019?

Our TransUnion Healthcare team believes CMS will take the following approaches.

For cost reporting periods beginning before Oct. 1, 2019: Pursuant to the IPPS 2021 Final Rule, providers can’t write off Medicare bad debts to a contractual allowance account and must instead charge bad debts to an expense account for uncollectible accounts. However, given the provisions of the MLN article, and statements in the preamble to the Final Rule, it’s likely CMS will afford MACs discretion to allow bad debts written off to contractual allowance accounts in the “flexibility notice period” (i.e., cost reporting periods beginning before October 1, 2019).

For cost reporting periods beginning between Oct. 1, 2019 and Sept. 30, 2020: Providers can’t write off Medicare bad debts to a contractual allowance account and must charge bad debts to an expense account for uncollectible accounts. 

For cost reporting periods beginning on or after Oct. 1, 2020: Providers can’t write off Medicare bad debts to a contractual allowance account and must record the bad debts as implicit price concessions resulting in a reduction in revenue.

What should I be asking my MAC?
Knowing what your MAC is doing to best manage this rule is helpful. Some questions to consider asking include:

• Will your focus be primarily on whether bad debts are written off to a contractual allowance rather than the write off distinction to an expense account or an implicit price concession that results in a reduction in revenue?
• Will you require specific names for the accounts?
• If we’re still writing off bad debts to contractual allowance accounts, will journal entries to move from a contractual account to an acceptable account be allowed?
  • Note: Ask this well before your cost reporting period ends so an adjustment can be made properly within your fiscal year.

Next steps

It’s important to get your questions answered as soon as possible in order to maximize reimbursement in the year the account was deemed uncollectible. Delays in proper handling could significantly impact your Medicare Bad Debt reimbursement. It’s recommended you remain in contact with your MAC and accounting firm to stay informed of the latest issues related to bad debt accounting (both Medicare and non-Medicare).