With the recent focus on the Final Rule for the ESRD Prospective Payment System that became effective in January, there is a need to remind freestanding dialysis providers of revised rules published in 2012 that are now in place and that impact cost report-based bad debt settlements.  

For cost reporting years prior to 2013, Medicare paid dialysis facilities 100% of their allowable bad debt, but the amounts were capped at the facility's reasonable cost in accordance with Section 413.178(a). Only facilities with “unrecovered costs,” based on Medicare rules for costs allowable on the cost report, qualified for a bad debt settlement. This limitation meant that those facilities with allowable costs less than their Medicare reimbursement (negative "unrecovered cost") became ineligible for a bad debt settlement on their Medicare cost report.

The good news

With the passage of the Middle Class Tax Extension and Job Creation Act of 2012 (P.L. 112-96), under section 1861(v)(1)(T) of the Act and Section 413.89(h)(1) of the regulations, the “unrecovered cost” limitation was lifted. This essentially opens up a cost report bad debt settlement to all dialysis facilities.

The bad news

Bad debt settlements will be reduced by the following percentages:

FY 2013:                                 12% reduction

FY 2014:                                 24% reduction

FY 2015 and subsequent:       35% reduction

This is especially bad news for those facilities that previously qualified for bad debt based on unrecovered costs––typically smaller independent facilities that are stuck with higher costs than their larger competitors. The combination of the good news and the bad news above favors the larger, most cost-effective organizations that now have a cost report settlement opportunity where they did not have previously.

The detail

In the final rule, CMS decided to eliminate the cap to allow facilities to claim bad debts at an amount exceeding unrecovered costs, to be in compliance with the order of the D. C. Circuit Court in Kidney Center of Hollywood, et al. v. Shalala, 133 F.3d 78 (D.C. Circuit 1998). In addition, the changes will allow CMS to apply bad debt policies consistently across all the types of providers eligible to receive bad debt payments. The good news and bad news scenarios above become effective on different dates––the bad debt reductions become effective Oct. 1, 2012, and the removal of the cap on the bad debt reimbursement will become effective on Jan. 1, 2013. Therefore, for cost report periods beginning between Oct. 1, 2012 and Dec. 31, 2012 (relatively few facilities), the cap on bad debt reimbursement will be calculated with both the required bad debt reduction and the cap on bad debt reimbursement.

Here are the examples used in the final rule:

Example A. For cost reporting periods beginning before October 1, 2012, only the cap applies.

1. Unrecovered costs = $100

2. Aggregate gross bad debt = $110

3. Bad debt amount of $110 is capped at the unrecovered costs of $100, therefore, the facility receives $100.

 Example B. For cost reporting periods beginning between Oct. 1, 2012 and Dec. 31, 2012, the 12% reduction applies up to the facilities' unrecovered costs.

1. Unrecovered costs = $100

2. Aggregate gross bad debt = $110

3. Bad debt amount of $110 is reduced by 12% (bad debt reduction in FY 2013), which equals $96.80. Since the reduction is less than the cap, the facility receives $96.80.

Example C. For cost reporting periods beginning on or after Jan. 1, 2013 and before Oct. 1, 2013, only the 12% reduction applies:

1. Unrecovered costs = $100

2. Aggregate gross bad debt = $110

3. Bad debt amount of $110 is reduced by 12% (bad debt reduction in FY 2013) that equals $96.80. The facility receives $96.80 with no cap applied.

Example C above is directly from the final rule and is confusing. Hence, the following is Example D, which is another iteration of Example C:

Example D. For cost reporting periods beginning on or after Jan. 1, 2013 and before Oct. 1, 2013, only the 12% reduction applies.

1. Unrecovered costs = $100

2. Aggregate gross bad debt = $130

3. Bad debt amount of $130 is reduced by 12% (bad debt reduction in FY 2013) that equals $114.40. The facility receives $114.40 because there is no unrecovered cost cap.

Remember, bad debts are considered deductions from revenue and are not to be included in allowable cost listed on the cost report. If the facilities' working trial balance captures the bad debt as an expense (versus a reduction in revenue), the expense should be adjusted using worksheet A-2 of the CMS-265 cost report.  Cost report periods beginning Jan. 1, 2013 and ending Dec. 31, 2013 will be due by May 31, 2014.

Now is the time to insure that your collection policies are current, and that your billing department is following those rules. Often, facilities requesting a bad debt settlement will undergo an audit (either desk or on site) by the Provider Audit Department of their MAC/FI. The common request is for a representative sample of the detail showing adequate collection attempts on the accounts claimed as bad debt. Patients who qualify as indigent do not need collection attempts. Typically, patients who qualify for Medicaid are deemed as indigent (the facilities' indigent policy matches Medicaid's), and do not require follow up attempts. Check with your FI/MAC on that question.  Hard copy files should be kept with your billing office to provide the documentation of collection efforts.

Summary

Bad debt settlement amounts for dialysis care continue to be limited to those expenses attributable to the former composite payment rate, and exclude the expenses attributable to previously separately billable drugs such as erythropoiesis-stimulating agents, IV iron, and Vitamin D. Since 2011, the cost report form automatically reduces the bad debt amount reported on Schedule E by a percentage of composite rate only costs to total costs entered on schedule B. Therefore, make sure that the bad debt detail submitted includes the entire amounts written off of the patients' account.   

When in doubt, you can contact individuals at the provider audit departments of the MACs who are assigned to these bad debt recoveries and are knowledgeable about the requirements.