Mandatory Spending

Function 570 - Medicare

Reduce Medicare’s Coverage of Bad Debt

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlays  
  Reduce the percentage of allowable bad debt to 45 percent 0 -0.6 -1.3 -2.1 -2.3 -2.5 -2.7 -3.1 -3.1 -3.5 -6.4 -21.3
  Reduce the percentage of allowable bad debt to 25 percent 0 -1.3 -2.7 -4.1 -4.7 -5.1 -5.5 -6.2 -6.2 -6.9 -12.7 -42.6
  Eliminate the coverage of allowable bad debt 0 -2.1 -4.3 -6.7 -7.6 -8.2 -8.9 -10.1 -10.0 -11.3 -20.7 -69.2

This option would take effect in October 2021.

When hospitals and other health care providers cannot 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 fee-for-service beneficiaries on the grounds that doing so prevents those costs from being shifted to others (that is, private insurance plans and people who are not Medicare beneficiaries). The unpaid and uncollectible cost-­sharing amounts for covered services furnished to Medicare beneficiaries are referred to as allowable bad debt. In the case of dual-eligible beneficiaries—Medicare beneficiaries who also are enrolled in Medicaid—out-of-pocket obligations that remain unpaid by Medicaid are uncollectible and therefore are also included in Medicare’s allowable bad debt. Under current law, Medicare reimburses eligible facilities—hospitals, skilled nursing facilities, various types of health care centers, and facilities treating end-stage renal disease—for 65 percent of allowable bad debt.

This option consists of three alternatives. Under the first and second alternatives, the percentage of allowable bad debt that Medicare reimburses to participating facilities would be reduced to 45 percent and 25 percent, respectively. Under the third alternative, Medicare’s coverage of allowable bad debt would be eliminated. The reductions would start to take effect in 2022 and would be phased in evenly until becoming fully implemented in 2024.