Last week, CMS announced on its website that for cost reporting periods beginning on or after October 1, 2019, providers must comply with a so-called “longstanding” rule to claim reimbursement for crossover bad debts from the Medicare program. The announcement, available here, says that providers will be denied reimbursement for their crossover bad debts unless the underlying balances are logged to a bad debt expense account in their financial accounting records. This requirement is expected to be controversial in the provider community. The industry standard is to log crossover balances to contractual allowance accounts, and many now consider this practice mandatory due to recent changes to the Generally Accepted Accounting Principles (GAAP) regarding revenue recognition. CMS’s announcement creates a conflict between GAAP rules and CMS’s policy for reimbursing for crossover bad debt.
Crossover bad debts arise in the context of patients who are eligible for both Medicare and Medicaid. Medicare is the primary payor for this population of patients, but providers often bill the applicable state Medicaid program for Medicare coinsurance and deductibles that “dually-eligible” patients do not pay. Most state plans will only reimburse providers for unpaid Medicare coinsurance and deductibles up to specified ceilings. Any portion of a Medicare coinsurance or deductible that a state Medicaid agency does not cover is known as a crossover balance. Because dually-eligible patients rarely pay their coinsurance and deductibles and the state payment ceilings are infamously low, the vast majority of the coinsurance and deductibles of dually eligible patients become crossover balances.
For reimbursement purposes, the Medicare program has historically reimbursed hospitals for crossover balances as Medicare bad debt. Section 322 of the Provider Reimbursement Manual (PRM) recognizes that crossover bad debts are “worthless” and states that if a patient who is eligible for both Medicare and Medicaid owes a Medicare coinsurance or deductible that the applicable state plan is not obligated to cover, the provider may claim the balance as a Medicare bad debt without the need to engage in “reasonable collection efforts.”
But for financial accounting purposes, providers do not report crossover balances the same way they report other bad debts. Providers generally write off crossover balances to contractual allowance accounts instead of bad debt expense accounts. A contractual allowance is a GAAP concept that refers to the difference between a provider’s standard charge for a given service and the amount the provider accepts as payment at a discounted contractual rate. Crossover balances are contractual allowances because providers are contractually bound by their Medicaid provider agreements to accept amounts paid by the state plan as payment in full, even if the state plan pays nothing. Because there is no legal ability to recover the contractual allowance—it is in effect a price concession—providers consider them to be “worthless” and claim them as bad debt pursuant to Section 322.
For years, providers have logged crossover balances to contractual allowance accounts while claiming reimbursement for them from the Medicare program. But recently, the Medicare Administrative Contractor (MAC) Palmetto GBA began denying crossover bad debt claims because the underlying balances were not written off to bad debt expense accounts. Palmetto also denied provider requests to reopen past cost reports to claim additional crossover bad debt for the same reason. Such reopening requests were routinely granted in the past. When providers inquired about the basis of this accounting classification rule, Palmetto cited to Section 320.1 of the PRM, which says that “amounts deemed to be uncollectible are charged to an expense account for uncollectible accounts.”
Representatives from King & Spalding along with several providers and hospital associations in Palmetto’s jurisdiction met with CMS in late January 2019 to discuss Palmetto’s policy. Following this meeting, CMS communicated that it would direct Palmetto to reverse any denials it has made for crossover bad debt in past cost reporting periods on the basis of the accounting classification rule. CMS also signaled that it would direct Palmetto to reconsider reopening requests that were denied for the same reason. We have received reports that CMS has issued a Technical Direction Letter (TDL) to MACs that include these instructions.
As a result of this intervention, providers in Palmetto’s jurisdiction no longer appear to be facing steep financial losses due to Palmetto’s retroactive application of this policy. Any provider that has received an NPR denying crossover debt, or was previously denied a reopening on this basis, should request reopening. However, despite expressing their understanding that there is no legal possibility of recovering a crossover contractual allowance, CMS representatives have apparently not yielded on this issue entirely. With last week’s announcement, CMS has decided to apply Palmetto’s policy prospectively for cost reporting periods beginning after October 1, 2019. What’s more, CMS has decided to apply this policy on a nationwide basis.
For more information about the accounting classification rule, we refer readers to the article titled “Crossovers in the Crosshairs” from the February 2019 edition of the Reimbursement Advisor.
