Medicare Bad Debt

Recognizing that the ability for a patient to pay his or her cost-share should not undermine the fundamental promise of access to care for American seniors, the federal government built into the original design of the Medicare program a “backstop” policy commonly referred to as “Medicare Bad Debt.” The Medicare bad debt policy was built at full reimbursement — 100% — for beneficiaries, acknowledging that there will always be a gap between the amount of individual cost-sharing that is paid and cost sharing that remains uncollected.

Today, as a result of repeated cuts to Medicare bad debt, providers are able to collect 65% of the unpaid beneficiary cost-sharing amount. Hospitals are forced to absorb the cost of the 35% of care that goes uncovered.

Hospitals are eligible for bad debt payments only if they satisfy rigorous government criteria — a process that can often take years to complete. These criteria are legally required under Medicare and ensure that every reasonable step has been taken to receive the cost-sharing from the beneficiary directly. Then, and only then, are providers eligible to receive a bad debt payment under the backstop policy — at the 65% rate. 

Further complicating the collection of cost-sharing are specific rules that dictate from whom hospitals can and cannot collect. By law, hospitals cannot collect cost-sharing from Medicaid patients. With regard to dual eligible patients (those patients covered by Medicare and Medicaid), states will often set payment policies where the state payment for the service satisfies the minimum payment requirement; this means the state is not required to cover the beneficiary copayment.

Over time, some policymakers have targeted Medicare bad debt payments as part of a larger focus on Medicare hospital spending for budget savings or used bad debt as a “pay for” for unrelated policies. Those who propose reducing or eliminating these payments note that private payers (i.e., insurance companies) typically do not reimburse hospitals for unpaid patient cost-sharing and advocate the government (Medicare) should adopt similar policies.

This rationale ignores a fundamental difference between Medicare and private insurance: under Medicare’s fixed price system, the government determines both the amount Medicare pays and the amount of the cost-sharing responsibility of the patient. Private insurers and hospitals, however, establish payment rates through negotiation, which enables them to account for inevitable unpaid cost-sharing from policyholders. The bad debt program helps ensure full payment for hospital services to seniors when they are unable to pay the cost-share amount set by the government.

The Medicare bad debt program is a fundamental component of Medicare’s benefit design, and cuts to these bad debt payments are cuts to the central promise of Medicare to its beneficiaries. Preservation of the core Medicare payment — composed of the government’s payment, the beneficiary’s cost-sharing amount and the bad debt payment when low-income seniors are not able to pay their share — safeguards the central promise of Medicare to make access to essential health care a right for all American seniors.