Bad Debt Write Off Requirements

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Bad Debt Write Off Requirements

Published on Jun 24 2019, Last Updated on Mar 08 2021

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Jurisdictions: J8A,J5A,Bad Debt,Audit

Bad Debt Write Off Requirements Overview

Medicare policy at CMS Pub. 15-I, section 300ff allows a provider to report their bad debts related to uncollectible Medicare patient deductibles and coinsurance for reimbursement on the cost report. Providers must meet several requirements within this policy section before WPS GHA can allow a bad debt for reimbursement. An underlying requirement is that it must truly be a bad debt.

Section 314 specifies the period in which providers can report these bad debts on the Medicare cost report. It also discusses some of the documentation requirements.

Excerpt from section 314 (bolding added)

“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.”

Historical GAAP Financial Accounting Requirements

Generally Accepted Accounting Principles (GAAP) have historically required providers to use the allowance/reserve method to estimate bad debts in the same period as the corresponding revenues. The provider can then write the accounts receivable off as a bad debt off in a later period in which the provider has determined it to be uncollectible. The first transaction generates an estimated bad debt expense entry, and the second reports an actual write off. The provider does not use the first estimated bad debt expense entry to report Medicare bad debts on the cost report. Instead, the provider uses the later write off entry that supports the amount and timing the provider reports on the Medicare cost report.

Entry 1 – Estimation of Bad Debts Expense
Debit – Bad Debts Expense xxxx
Credit – Allowance for Bad Debts xxxx

Entry 2 – Actual Bad Debt Write Off
Debit – Allowance for Bad Debts xxxx
Credit – Accounts Receivable-John Doe xxxx

Timing of Medicare Bad Debt Write-off

The entry that reduces the specific patient’s accounts receivable is the one that determines when the provider can write off the account for Medicare purposes. However, that write off must also reflect the debit to the allowance for bad debts (sometimes referred to as a provision for bad debts, allowance for doubtful accounts, etc.). This is a contra asset account that offsets the accounts receivable asset on the balance sheet.

Non-Allowable Write-offs to Contractual Allowance Accounts

If the provider instead writes off the account to a contractual allowance account, WPS GHA will not allow Medicare reimbursement. This contractual allowance account is a contra-revenue, which offsets the revenue account on the income statement. In these situations, there would never have been a corresponding bad debts expense, and thus never an allowable Medicare bad debt.

Although this is a long standing fundamental requirement of bad debt reporting, CMS has recently become aware of providers that have been reporting these contractual allowance write offs as Medicare bad debt. CMS published a clarification of long standing policy in the MLN Connects for April 4, 2019. Effective for cost reporting periods beginning on or after October 1, 2019, providers must comply with these long standing Medicare bad debt requirements. Any bad debts found to be a contractual allowance write off will be subject to disallowance during desk review or audit.

The September 18, 2020 Federal Register (FFY 2021 Inpatient Prospective Payment System Final Rule) codified this same requirement into regulation effective October 1, 2020. The policy discussed in the previous section will be the authority in effect for cost report periods beginning between October 1, 2019, and October 1, 2020, before the regulation is effective.

Revised GAAP Financial Accounting Requirements (effective for 10/1/2020 cost report FYBs)

The Financial Accounting Standards Board’s (FASB) published revised accounting standards (referred to as Accounting Standards Update 606.) This was initially published in May 2014, but had a deferred effective date. This GAAP change was effective for publicly traded corporations for financial statement periods beginning on or after December 15, 2018. It was extended for privately-held companies and private not-for-profit organizations, to be effective for fiscal years beginning after December 15, 2019.

These revised standards now require the estimated bad debts to be written off as an “implicit price concession.” This is a direct revenue offset (contra-revenue) instead of an expense as was previously required. For these reasons, the September 18, 2020 Federal Register (FFY 2021 Inpatient Prospective Payment System Final Rule) revised the regulations to incorporate verbiage allowing “implicit price concessions” instead of only expense writeoffs. This regulation change is effective for cost reporting periods beginning on or after October 1, 2020.

global-tags: J8A,J5A,Bad Debt,Audit

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Bad Debt Write Off Requirements

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Bad Debt Write Off Requirements

Bad Debt Write Off Requirements Overview

Historical GAAP Financial Accounting Requirements

Timing of Medicare Bad Debt Write-off

Non-Allowable Write-offs to Contractual Allowance Accounts

Revised GAAP Financial Accounting Requirements (effective for 10/1/2020 cost report FYBs)

global-tags: J8A,J5A,Bad Debt,Audit