Understanding and calibrating the differences in reporting bad debts and other uncompensated costs among the cost report, IRS Form 990, financial statements and other filings, such as a community benefits report, has always been a significant endeavor for providers. And things may have just gotten more challenging!
On April 4, 2019, CMS caused a stir in the provider community by releasing a Medicare Learning Network (MLN) Connects® article to clarify its position related to the accounting treatment for Medicare-Medicaid crossover bad debts. To understand the challenges this creates, we must first consider how things used to be.
Historically, CMS has defined bad debt expense based on 42 CFR Section 413.89 and §302.1 of the Provider Reimbursement Manual (PRM), Part I, as “amounts to be uncollectible from accounts and notes receivable which are created or acquired in providing services” and “represent reductions in revenue.” Based on 42 CFR §413.20, CMS requires providers to “maintain sufficient financial records … which are widely accepted in the hospital and related fields.” Further, for cost report purposes, an unmet deductible or coinsurance amount related to Medicare beneficiaries who also are Medicaid eligible could be claimed by providers as a reimbursable Medicare bad debt if the bad debt was deemed uncollectible and there’s no likelihood of recovery in accordance with 42 CFR §413.89.
With this historical guidance from CMS, there has long been a general consistency between the definition of bad debt for cost reports and the way bad debt expense is recognized under U.S. generally accepted accounting principles (GAAP) among health care providers. According to the April 4, 2019, CMS MLN Connects® article, however, providers must classify the unmet Medicare deductible and coinsurance amounts for Medicare-Medicaid crossover bad debts to an expense account for uncollectible accounts and can’t write off the claim to a contractual allowance. This “clarification” is effective October 1, 2019.
While this recent clarification of the CMS policy related to Medicare-Medicaid crossover bad debts will most likely be challenged and litigated by providers, CMS and providers must address a bigger issue related to bad debt expense—the adoption of FASB’s new standards on revenue recognition.
The implementation of FASB’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), introduced the concept of “implicit price concessions” into the health industry’s financial terminology. FASB Topic 606 was effective for public entities reporting under U.S. GAAP for annual and interim periods beginning after December 15, 2017, and for annual periods beginning after December 15, 2018, for nonpublic entities.
Under FASB Topic 606, health care providers must differentiate between an explicit price concession, an implicit price concession and a bad debt under U.S. GAAP.
Under FASB Topic 606, health care providers must differentiate between an explicit price concession, an implicit price concession and a bad debt under U.S. GAAP. An explicit price concession occurs when a provider accepts a discount or concession to standard pricing that’s explicitly stated, e.g., a contractually negotiated rate or self-pay policy discount. An implicit price concession occurs when the provider makes a determination that it will or is likely to accept a discount or concession to standard pricing for an individual patient or portfolio of patients before a credit risk assessment can be made, e.g., collection write-off. Bad debts under the new standard result when patients or payors who have been determined to have the financial capacity to pay for health care services (through a formal credit assessment prior to services being rendered) are later unwilling or unable to settle the claim. Under this new guidance, most previous bad debts will be classified as implicit price concessions in a traditional health care environment. Here’s a simplified example of what constitutes an implicit price concession under FASB Topic 606:
In furthering its not-for-profit mission, the health care provider doesn’t assess the patient’s intent and ability to pay for their responsibility (deductible or coinsurance) prior to providing services.
The standard charge for the services provided to the patient is $50,000. The provider receives $25,000 from Medicare as payment for the services, and the Medicare beneficiary’s responsibility is $5,000. The contractual discount of $20,000 is an explicit price concession. Based on its historical experience of Medicare patients, the health care provider expects to collect only 80 percent ($4,000) of the Medicare beneficiary’s responsibility.
In this example, the $1,000 difference between the Medicare beneficiary’s standard patient responsibility and the historical experience of what the provider expects to collect from the Medicare beneficiary is an implicit price concession.
When presenting the financial statements under FASB Topic 606, patient service revenue is net of implicit price concessions and explicit price concessions. In this example, patient service revenue is $29,000. Prior to the adoption of FASB Topic 606, the provider would have presented patient service revenue of $30,000 and a provision for bad debts of $1,000.
Under FASB Topic 606, a bad debt will only be recorded if the health care provider assesses the patient’s or payor’s intent and ability to pay their responsibility based on a credit assessment prior to services being performed and the provider is unable to collect the amount later. Therefore, in adopting FASB Topic 606, many health care providers will see a dramatic drop in the bad debt expense recorded in their financial statements and a new contra revenue account to capture implicit price concessions.
Therefore, in adopting FASB Topic 606, many health care providers will see a dramatic drop in the bad debt expense recorded in their financial statements and a new contra revenue account to capture implicit price concessions.
So why is this important from a Medicare reimbursement perspective?
First, as mentioned earlier, CMS issued a recent clarification that Medicare-Medicaid bad debts must be written off to an expense account and not a contractual discount account. Under FASB Topic 606, Medicare bad debts that were once written off to a bad debt expense account may now be written off to an implicit price concession contra revenue account (similar to how a contractual discount is recorded). Will CMS disallow all Medicare bad debt reimbursement—not just Medicare-Medicaid bad debts—if the unmet Medicare deductible and coinsurance amount is written off to an implicit price concession contra revenue account instead of to a bad debt expense account?
Second, Medicare disproportionate share hospitals (DSH) receive an additional Medicare inpatient payment for treating a disproportionate share of low-income patients. For federal fiscal year (FFY) 2020, the uncompensated care component of the Medicare DSH payment is determined, in part, based on the qualifying Medicare DSH hospital’s charity care and bad debt expense from Worksheet S-10 of its Medicare cost report that began in FFY 2015. As mentioned earlier, providers adopting FASB Topic 606 will see a dramatic decrease in bad debt expense on their financial statements and an increase in implicit price concessions. Will CMS allow hospitals to include implicit price concession amounts on Worksheet S-10 and in determining a hospital’s future Medicare DSH uncompensated care payments?
The Medicare bad debt and DSH reimbursement providers receive is significant. It’s important for CMS to address the implications of FASB Topic 606 on the health care industry and update the Medicare cost report instructions and regulations to reflect current industry standards.
It’s time for CMS to update and address the antiquated PRM and CFR as they relate to the definition of total and Medicare bad debts to be in line with industry standards. In the meantime, it’s important for providers to document their adoption of the new FASB Topic 606 requirements and how previous bad debts are recorded under the new standard as an implicit price concession. As always, continuing to educate key stakeholders on the differences in reporting bad debts and other uncompensated costs among the cost report, IRS Form 990, financial statements and other filings, such as a community benefits report, will continue to be an important role for the provider finance function.