CMS Proposes Retroactive Codification of “Longstanding” Bad Debt Policies in IPPS Proposed Rule

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In the Medicare inpatient prospective payment system (IPPS) proposed rule for fiscal year (FY) 2021 (the Proposed Rule), CMS has proposed to amend its existing bad debt regulation to incorporate the agency’s bad debt policies from the program instructions in Chapter 3 of the Provider Reimbursement Manual (PRM). CMS also proposes that most of these changes would apply retroactively to past cost reporting periods, including at least one controversial proposal involving so-called indigent bad debts. Other proposals would apply only for cost reporting periods beginning on and after October 1, 2020.

Since its inception, the Medicare program has reimbursed providers for the unpaid deductibles and coinsurance of Medicare beneficiaries. The stated objective of this policy is to prevent shifting the costs of covered Medicare services to non-Medicare patients.

The existing bad debt regulation at 42 C.F.R. § 413.89 contains four requirements that providers must satisfy to claim bad debt from Medicare: the debt is related to covered Medicare services, the provider made reasonable collection efforts, the debt is uncollectible and the provider exercised sound business judgment in writing off the bad debt.

Additional requirements for claiming bad debt are set forth in Chapter 3 of the PRM. Although CMS did not adopt the requirements in PRM Chapter 3 through notice and comment rulemaking, CMS has attempted to enforce them throughout the years on the basis that they are interpretative rules. Last year, however, the Supreme Court held in Azar v. Allina Health Services that, under the Medicare statute, even interpretive rules must be adopted through notice and comment rulemaking if they establish a substantive legal standard. Otherwise, they are unenforceable. That decision likely prompted CMS’s current proposal to codify the requirements in PRM Chapter 3 as part of the bad debt regulation. The fact that CMS proposes to adopt some of these requirements retroactively signals CMS’s intention to apply these rules to open or reopenable past cost reporting periods.

CMS first proposes to codify the reasonable collection effort requirements in PRM Chapter 3. Providers would be required under the new regulation to bill beneficiaries no later than 120 days after the date of the Medicare remittance advice or the date of remittance advice from the beneficiary’s secondary payer, whichever is later. (This billing deadline is one of the few changes that would only apply after October 1, 2020.) The new regulation would also bar providers from writing off a bad debt sooner than 121 days after issuing the bill. The 121-day period would reset each time the patient makes a partial payment. In addition, providers will be required to use similar collection efforts between Medicare and non-Medicare accounts of “like amounts,” and will be prohibited from claiming bad debts while pending at a collection agency. Providers would also have to maintain and furnish the following upon request: the provider’s bad debt collection policies, the patient’s account history, and the patient’s file documenting all collection efforts made.

Under current CMS policy, if a provider determines that a patient is indigent, the provider need not attempt to collect the debt before claiming it for reimbursement from Medicare. CMS is proposing to codify the guidelines in PRM Chapter 3 for determining whether a patient is indigent and apply these guidelines retroactively. Providers will have to independently verify a patient’s indigent status, meaning they will not be able to rely solely upon signed declarations. Providers will also have to take into account a patient’s total resources in determining indigence, including assets, liabilities, income and expenses. Finally, providers will have to confirm that no source other than the beneficiary is legally responsible for the bill. The indigent bad debt proposal is a significant change. Federal courts have previously held that the PRM guidelines did not require providers to factor in a patient’s resources or assets. As a result, many providers have charity care or financial assistance policies that focus solely upon a patient’s income.

Providers are also excused from attempting to collect debt from beneficiaries who are eligible for both Medicare and Medicaid. This is known as crossover bad debt. CMS proposes requiring providers to attempt to bill the applicable state Medicaid program and submit remittance advice to the MAC before claiming reimbursement from Medicare for crossover bad debts. The agency is soliciting comments for alternatives to the remittance advice requirement for providers in states that fail to issue remittance advice. CMS also proposes that any amount that a state is obligated to pay cannot be claimed as a bad debt, even if the State does not pay.

Finally, CMS proposes to prohibit providers from claiming bad debt that is written off to a contractual allowance account. Effective October 1, 2020, providers will only be allowed to claim bad debt that is written off to a bad debt expense account in the provider’s financial accounting statements. (This is one of the few changes that will only apply prospectively, if finalized.) CMS also proposes to update the definition of bad debt in the regulation to reflect current GAAP principles.

As noted above, CMS proposes to apply many of these regulatory changes retroactively. In the Proposed Rule, the agency specifically cites to its authority under the Medicare statute to adopt retroactive rules, stating that it would be contrary to the public interest to not apply its proposed changes retroactively. “Failing to adopt the clarification and codification of longstanding Medicare bad debt policies with a retroactive effective date might lead some providers to believe that those policies did not apply to earlier cost reporting periods, and thus might cause those providers to resubmit previously submitted cost reports.” The agency also asserts that these changes will not impose additional burdens on providers because the proposed changes merely reflect “longstanding” policies that have existed for decades. But at least one of these proposals—the requirement that providers factor a patient’s resources and assets in making charity care decisions—is arguably a significant and substantive change from past policy.

A copy of the Proposed Rule is available here. Comments are due July 10, 2020.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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