XXX Health System
Internal Audit and Corporate Compliance Department
Medicare Bad Debts Internal Audit Program
To review the Medicare bad debt policy to determine if the policy is in compliance with current
Medicare regulations and policies and that the policy assures that XXX receives all the payment due for
Medicare bad debts.
For unaudited cost reports or cost reports finalized through Medicare audit with appeal and reopening
rights (180 days for appeals and 3 years for reopenings) review the actual Medicare bad debt schedules
submitted for reimbursement to determine compliance with internal Medicare bad debt policy and
Medicare regulations and to assure that XXX is being reimbursed for all allowable Medicare bad debts
on a timely basis.
The amounts claimed as Medicare bad debts should be for XXX inpatient bad debts and for outpatient
hospital based facilities. Only bad debts billed under the XXX Medicare Part A provider number can be
included in Medicare bad debts. The Medicare bad debt receivable per the General ledger should agree
with the 70% amount per the applicable Medicare cost report. Uncollectible accounts relating to
outpatient rehabilitation facilities billed using a CMS – 1500 for the Medicare Part B program, are not
eligible for Medicare Reimbursement as a Part A bad debt to be included on the Medicare cost report.
Verify on both the Medicare bad debt schedule and Medicare cost reports that only bad debts for
Medicare Part A are included on the cost report and reimbursed.
To determine if each annual allowable Medicare bad debt amount is properly recorded as a third party
receivable in the General ledger. The amount recorded should be 70% of the allowable amount per the
submitted Medicare bad debt schedule. The Medicare bad debt schedules and Worksheet E Part A and
E Part B of the Medicare cost report should also be reviewed to validate that the 100% Medicare bad
debt amount and the reimbursable 70%
Obtain from the Patient Financial Services department the Medicare bad debt policies that were in
effect over the past five years.
Obtain a copy of the Medicare bad debt schedules that were submitted with the Medicare cost reports
for all years that are unaudited, audited with appeal rights and audited with reopening rights.
Sample approximately 20% of the patients noted on the Medicare bad debt schedule to assure
compliance with the Medicare bad debt policy noted above and relevant Medicare regulations that are
attached (42CFR 413.89 and Medicare PM 15 Part I Section 300 to 334). Pick a sample selection of
every nth item that allows for the testing of approximately 20% of the population.
Requested Documentation (continued):
For each patient sampled, acquire the following documentation
Medicare remittance advice
Medicare AR detail
Copy of collection notes
Report from collection agency noting the date returned to XXX from the collection agency and
the aggregate amount of collection and balance of the account at the time of return.
If the sampled patient account was a Medicare bad debt Charity write-off, documentation to
support that the patient meets charity guidelines should also be included in the file and
If the patient is eligible for both Medicare and Medicaid, a copy of the Medicaid remittance
advice should be obtained.
Copy of Medicare cost reports for years that are unaudited and years with appeals and
reopening rights. For audited years the cost report information should include Medicare audit
Audit Test Performed
Review the written Medicare Bad Debt Policy for the following Medicare regulatory requirements:
Does the policy require the Business office to bill the patient for specific Medicare deductible
and coinsurance amounts soon after discharge?
According to the policy, after the initial patient bill for deductible and coinsurance is sent, how
many statements are required to be sent to the supplemental insurance company or patient? At
what intervals are the statements sent? Are phone calls made? Does the policy require these
statements and phone calls be documented? According to Medicare policy, to be claimed as a
Medicare bad debt, each patient should have three contacts. This can be a combination of calls
Does the policy include specific processes to transfer accounts to a bad debt status leaving an
account balance of $0? Does the policy include a specific time, after the initial patient bill for
deductible and coinsurance is sent, for this transfer to a bad debt status and a zero balance to
occur? The policy should note that the minimum days after first bill for this transfer to a zero
balance and a bad debt is 120 days.
After the initial collection effort tested above is expended by the Business Office, is it
documented in the collection policy that accounts are forwarded to an additional collection
agency? According to the policy, at what point are the accounts returned to XXX by the
second collection effort or “Collection Agency”? The policy should note that a report should
be obtained from all collection agencies at least monthly noting accounts returned, the total
amount collected on each account and the account balance returned.
The collection policy should note that all payments made to a collection agency by the patient
or supplemental insurance company should be posted to the patient balance in the billing and
The policy should state that for patients that qualify for Medicare and Medicaid, Medicaid
should be billed for the D&C. If no Medicaid payment is received, a Medicaid remit with a $0
pay bill should be returned from the Medicaid program and available for audit support.. The
policy should also state that if a Medicaid payment is received, the payment should be posted
against the patient account effectively reducing claimed Medicare bad debts.
The policy should also note that for patients with Medicare bad debts that qualify for Charity
and not Medicaid, the Charity qualification must be documented. These accounts should be
listed as Medicare/Charity cases on the Medicare bad debt schedule. No collection effort is
required for these patients.
Determine if the processes used to create the initial Medicare bad debt schedule accurately produce
schedules that include all allowable Medicare bad debts.
How is the initial Medicare bad debt schedule derived? Is the report derived from the billing
and AR system based on specific transaction codes to write-off or transfer Medicare bad debts
to a zero balance?
Test to assure that these transaction codes are current and updated and complete. Have new
codes been added or deleted in recent years? If so, were the new codes included in the process
used to extract the initial population for Medicare bad debt patients for each of the years under
For the selected sample of Medicare bad debt from the relevant Medicare bad debt schedules using
the documentation requested above, perform the following audit test:
Verify that the days between date of first bill and the date of write-off to a Medicare bad debt
status and zero balance is at least 120 days for non-charity accounts. If not, is there a valid
reason for an early write-off and deviation from the approved Medicare bad debt policy such
as the patient qualifying for Charity? (See Column 4(a) of Bad Debt Schedule).
Do the deductible and coinsurance agree to Medicare remittance advice (Column 10 and 11
on XXX Bad Debt Schedule)?
Do the supplemental payments or Medicaid payments agree with the amounts listed on the
AR detail (Column 13 on XXX Bad Debt Schedule)?
If a patient had Medicare and Medicaid coverage, was Medicaid billed for the deductible and
coinsurance amount? If Medicaid did not pay, is there a zero pay remit noting that Medicaid
either did not pay or denied the claim?
If the patient qualifies for Medicare/Charity, the account can be written to a zero balance at
the time of determination that the patient qualified for Charity. No collection effort is
necessary. Determination of the patient file contains documentation to support that the patient
qualifies for Charity.
Do the patient payments listed on the Medicare bad debt schedule agree with total patient
payments per the AR detail? (Column 14 of the XXX Bad Debt Schedule).
Do the collection letters and calls listed agree with the collection notes? Do they total three?
(Column 17 and 18 of the XXX bad debt schedule).
Does the patient AR file contain a copy of the report noting the date returned from the
collection agency? Were payments made to a collection agency scheduled and offset against
net Medicare bad debts (Column 21 of the XXX Medicare bad debt schedule)?
Test to assure that the total Inpatient and outpatient Medicare bad debts from the final XXX bad debt
schedules agree with Worksheet E Part A and E Part B of the Medicare cost report.
For Medicare inpatient for XXX, the amount should agree with cost report schedule E Part A
(See Column 21).
For the outpatient hospital based therapy centers, the net Medicare outpatient bad debt amount
should be included on Worksheet E Part B of the Medicare cost report (See column 21).
Are the issues that resulted in Medicare audit adjustments for bad debts in prior Medicare cost
report included the relevant Medicare bad debt schedules and filed cost report amounts?
Analyze applicable third party receivables to determine if the annual allowable Medicare bad debt
amounts are properly recorded as a third party receivable in the General ledger.
The amount recorded in the XXX general ledger as a third party receivable/settlement should
be for inpatient bad debts and for outpatient hospital based facilities. Only bad debts billed
under the XXX Medicare Part A provider number can be included in Medicare bad debts.
The amount recorded should be 70% of the allowable amount per the audited Medicare cost
report and related Medicare bad debt schedules.
Potential Auditor Recommendations:
Medicare Bad Debt Policies
If a Medicare bad debt policy does not exist, one must be written as soon as possible
that is consistent with the Medicare bad debt regulations and policies noted above.
After the policy is written, the actual processes in place must comply with the specifics
of the Medicare bad debt policy.
Medicare Bad Debt Schedules - Creation
If upon testing, it is determined that the transaction codes used to produce the initial
Medicare bad debt schedule were incomplete and outdated, the program used to
produce the original report should be corrected and updated. After this correction and
update, Medicare bad debt schedules should be reran and the necessary corrections
made to Medicare cost reports with necessary re-filings. The specific general ledger
accounts should be adjusted to agree to the revised schedules.
If additional Medicare bad debts are found upon audit, the applicable Medicare bad
debt schedules should be revised, an amended Medicare cost report filed, and the
General ledger third party receivables adjusted accordingly.
If the testing of the bad debt sample from the filed Medicare bad debt schedule
produces significant findings, the entire schedule should be audited and potentially
recreated to comply with Medicare regulations with associated re-filings and
adjustments to follow.