Reduce Medicare's Coverage of Bad Debt

When hospitals and other providers of health care are unable to collect out-of-pocket payments from their patients, those uncollected funds are called bad debt. Historically, Medicare has paid some of the bad debt owed by its beneficiaries on the grounds that doing so prevents those costs from being shifted to others (that is, to private insurance plans and people who are not Medicare beneficiaries). Bad debt that is partly paid for by Medicare is called allowable bad debt. In the case of dual-eligible beneficiaries—Medicare beneficiaries who also are eligible for Medicaid benefits—allowable bad debt also includes any out-of-pocket payments that remain unpaid by Medicaid. Under current law, Medicare reimburses eligible facilities—hospitals, skilled nursing facilities, various types of health centers, and facilities treating end-stage renal disease—for 65 percent of allowable bad debt. The Congressional Budget Office estimates that Medicare spending on bad debt was $3.3 billion in 2015.

This option would reduce federal spending on Medicare by decreasing the share of allowable bad debt that the program reimburses to eligible facilities. The reductions would start to take effect in fiscal year 2018, and they would be phased in evenly over the course of three years.

CBO examined two alternatives. The first would reduce the percentage of allowable bad debt that Medicare reimburses participating facilities from 65 percent to 45 percent by 2020. That approach would save $15 billion between 2018 and 2026, CBO estimates. The second would reduce the percentage from 65 percent to 25 percent, saving $31 billion.

In both cases, CBO’s assessment was that providers’ responses to the changes would have negligible effects on the federal budget. If reducing federal payments for bad debt led hospitals to engage in cost shifting—that is, requiring private insurers to pay higher rates to make up for lost Medicare revenues—the cost of private insurance plans would rise, and so would the cost of federal subsidies for those plans. But research has shown that providers’ ability to engage in cost shifting is limited and depends on such factors as local market power and contracting arrangements with insurers. Furthermore, some research has demonstrated that Medicare payment reductions have led to lower private payment rates.

An argument for this option is that lowering Medicare’s reimbursement of bad debt would increase facilities’ incentive to collect funds from Medicare patients. Reducing coverage of bad debt could also encourage facilities to discuss treatment costs with Medicare patients ahead of time, examine their alternatives more carefully, and set up manageable payment plans as needed. In addition, Medicare currently reimburses facilities for allowable bad debt but does not reimburse doctors or other noninstitutional providers, so this option would reduce that disparity. Also, the reimbursement of bad debt was originally intended to reduce the incentive for cost shifting—but as this discussion just noted, the evidence for cost shifting is mixed, possibly meaning that the need for such reimbursement is smaller than originally thought.

An argument against this option is that facilities might have difficulty collecting additional payments from enrollees or other sources—especially in the case of dual‑eligible beneficiaries and enrollees without other supplemental coverage, such as private medigap plans or coverage from former employers. (Currently, Medicaid programs are frequently not required to pay all out-of-pocket expenses for dual-eligible enrollees. As a result, the out-of-pocket expenses for those enrollees constitute a large portion of bad debt.) The option would therefore lead to an effective cut in Medicare’s payment rates, just as reductions to the updates to Medicare payments continue to take place over the next few years. Also, institutional providers might try to mitigate the impact of this option by limiting their treatment of dual-eligible Medicare beneficiaries and for those without other supplemental coverage. The option could place additional financial pressure on institutional providers that treat a disproportionate share of those enrollees, potentially reducing their access to care or quality of care.