How Do Hospitals Claim Medicare Bad Debt?
A hospital claims Medicare bad debt by documenting that a patient's unpaid deductible or coinsurance for a covered service met four criteria in 42 CFR 413.89(e), listing each account, and reporting the allowable total on its Medicare cost report. The hospital is then paid a reduced share of that amount. This post walks the steps in order, with the collection rules and the paperwork that auditors ask for.
Written by Salman Saeed, CEO and Co-Founder · Reviewed by a Certified Medical Coder · 
In short: only unpaid deductibles and coinsurance on covered services can qualify. Bill the patient on time, keep collecting for at least 120 days, write the account off, list it with its dates, and keep the file.
What Counts as Medicare Bad Debt?
Medicare bad debt is the patient share of a covered service that the hospital was unable to collect. Under 42 CFR 413.89(a), bad debts attributable to deductibles and coinsurance amounts are reimbursable under the program, subject to a reduction. Everything else the hospital fails to collect, such as non-covered services or charges above the Medicare rate, is not Medicare bad debt.
Medicare does not pay the full balance. For hospitals, 42 CFR 413.89(h)(1)(v) reduces the allowable bad debt by 35 percent for cost reporting periods beginning in a fiscal year after 2012. Bad debts from covered services paid under a fee schedule are not reimbursable at all, according to 413.89(i)(1).
The everyday meaning of bad debt is wider than Medicare's. Charity allowances are not allowable costs under 413.89(g), and indigence has its own test, covered below. The Chapter 40 cost report instructions also say the percentage reduction does not apply to critical access hospitals.
What Are the Four Criteria for an Allowable Bad Debt?
42 CFR 413.89(e) says a debt must meet all four of these tests. The Provider Reimbursement Manual, Part 1, chapter 3, section 308, lists the same four.
| Criterion | What it means in practice | What to keep |
|---|---|---|
| 1. Covered services, deductible and coinsurance | The debt is the patient's deductible or coinsurance from a Medicare-covered service | Medicare remittance showing the patient responsibility amounts |
| 2. Reasonable collection effort | You pursued the debt as you pursue comparable non-Medicare debts | Bills, letters, call notes and the collection policy |
| 3. Actually uncollectible when claimed | The account was worthless on the write-off date | Write-off date and the date collection effort ended |
| 4. No likelihood of recovery | Sound business judgment says nothing will be collected in the future | The reasoning in the file, including agency return notices |
How Long Must a Hospital Collect Before Writing off Medicare Bad Debt?
For cost reporting periods beginning on or after October 1, 2020, 42 CFR 413.89(e)(2)(i)(A) requires two time points. First, the hospital must issue a bill to the patient or the party responsible on or before 120 days after the latest of three dates: the Medicare remittance advice that created the cost sharing, the remittance advice from the patient's secondary payer if any, or the date the secondary payer said it does not cover the service.
Second, the collection effort must last at least 120 days after that billing requirement is met before the account is written off. Each time a payment arrives inside a 120-day period, a new 120-day period starts.
The patient has no secondary payer. The dates and amounts are invented.
If the patient pays $50 on August 20, a new 120-day period starts on that date, so the earliest write-off moves to December 17, 2026, and the allowable amount falls to the remaining balance. Count from the actual payment date with a date calculator rather than by hand.
What If the Account Goes to a Collection Agency?
The agency's effort counts, but three conditions apply under 413.89(e)(2)(i)(B). You reduce the patient's receivable by the gross amount the agency collects. You treat the agency's fee as an administrative cost. And before you claim the debt, you must stop all collection efforts, including the agency's, and confirm the accounts were returned to you. An account still sitting at the agency is not yet bad debt.
What About Patients Who Cannot Pay?
If the hospital determines a non-dual beneficiary is indigent, it can deem the debt uncollectible without applying the collection effort, but the determination has rules. Under 413.89(e)(2)(ii)(A), the hospital must not use the patient's own statement of inability to pay as the sole proof. It must analyze the patient's assets that are convertible to cash and unnecessary for daily living, and income, and conclude no other source, such as a legal guardian or a state Medicaid program, is responsible. It must also keep its indigence policy and the patient-specific documentation.
What Changes When the Patient Also Has Medicaid?
For a patient eligible for both programs, the hospital generally must bill the state first. Where the state allows the hospital's Medicaid enrollment for processing, 413.89(e)(2)(iii)(A) requires the hospital to bill Medicaid, submit the Medicaid remittance advice to its Medicare contractor, and reduce the bad debt by any amount the state is obligated to pay, whether or not the state actually pays. Only the part the state is not obligated to pay and the patient has not paid can be claimed.
If the state does not issue a remittance advice or does not permit enrollment for this purpose, the hospital submits the state's notice, a calculation of what the state owes and proof of the patient's eligibility on the service date, as listed in 413.89(e)(2)(iii)(B).
How Do You Report the Bad Debt on the Cost Report?
What Records Will an Auditor Ask For?
- The written collection policy for Medicare and non-Medicare patients, because the effort must be similar for both.
- The patient account history with dates of each bill, letter, call and email or text.
- The bills and follow-up notices in the patient file.
- For indigent patients, the indigence policy and the asset and income analysis.
- For dual-eligible patients, the Medicaid remittance advice or the state's no-obligation notice.
- Agency return notices that show the account came back.
Bad debt is one piece of the back end of the hospital revenue cycle. The Medicare payer guide covers the program's filing rules, and the in-house vs outsourced billing costs page covers who should run collections.
How Does Nucleus Align Help with Bad Debt Reporting?
Our hospital and facility billing includes payment reconciliation, so the patient responsibility amounts on each remittance are visible from the start, and our A/R recovery work on denials and old A/R is where 15 to 20% of revenue is recovered. See accounts receivable recovery, the internal medicine billing page, or book a call. More explainers are on the blog.
- 42 CFR 413.89, Bad debts, charity, and courtesy allowances · eCFR
- Provider Reimbursement Manual, Part 1, Chapter 3, Bad Debts, Charity, and Courtesy Allowances · CMS
- Provider Reimbursement Manual, Part 2, Chapter 40, Form CMS-2552-10 (Transmittal 1) · CMS
- Hospital 2552-2010 form · CMS
We check every rule, code and deadline against the official source. See our editorial policy.
Common Questions
Straight answers from the team that does the work.
Ask a billing lead directly. A 20-minute call, Monday to Friday, 9am to 5pm Eastern.
01How do hospitals claim Medicare bad debt?
A hospital lists each unpaid deductible and coinsurance account that met the criteria in 42 CFR 413.89(e), supports it with its collection file, and reports the allowable total on its Medicare cost report. Medicare then reimburses the amount reduced by 35 percent for hospitals in current periods.
02How long must a hospital try to collect before claiming Medicare bad debt?
For cost reporting periods beginning on or after October 1, 2020, 42 CFR 413.89(e)(2)(i) requires a collection effort of at least 120 days after the first bill requirement is met. A payment inside the period starts a new 120-day period, and the first bill is due within 120 days of the latest remittance date.
03Can a hospital claim bad debt for a patient who is indigent?
Yes, but the hospital must determine indigence itself under 413.89(e)(2)(ii). It cannot rely on the patient's declaration alone and must review assets and income, confirm no other party is responsible, and keep its indigence policy and the patient's documentation. Once determined, no further collection effort is needed.
04Is Medicare bad debt reimbursed in full?
No. Under 42 CFR 413.89(h)(1)(v), the allowable bad debt for hospitals is reduced by 35 percent for cost reporting periods beginning during a fiscal year after 2012. A $412 allowable account therefore produces $267.80 in reimbursement, and the hospital absorbs the rest.
05What happens if the patient pays after the account was written off?
The payment reduces what Medicare reimburses. Under 413.89(f), a payment before the end of the same cost reporting period lowers the claimed bad debt, and a later recovery reduces reimbursable costs in the period of recovery, never by more than the amount Medicare reimbursed for that account.
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