Reduce Medicare’s Coverage of Bad Debt

Background

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, private insurance plans and people who are not Medicare beneficiaries). The unpaid and uncollectible deductible and coinsurance 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 included in 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. The Congressional Budget Office estimates that Medicare's spending on allowable bad debt was $3.5 billion in 2017.

Option

This option consists of three alternatives that would decrease the share of allowable bad debt that the program reimburses to eligible facilities. Under the first and second alternatives, the percentage of allowable bad debt that Medicare reimburses to participating facilities would be reduced from 65 percent 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 2020 and would be phased in evenly until becoming fully implemented in 2022.

Effects on the Budget

The first alternative—reducing the percentage of allowable bad debt that Medicare reimburses to participating facilities by 20 percentage points (that is, from 65 percent to 45 percent) by 2022—would reduce outlays by $12 billion from 2020 through 2028, CBO estimates. The second alternative, in which the reduction would be doubled from 20 to 40 percentage points (that is, from 65 percent to 25 percent), would reduce outlays over that period by twice as much—$24 billion. The third alternative, eliminating coverage of bad debt, would save $39 billion over that period. The estimated savings associated with other percentage-point reductions would be roughly proportional to the magnitude of the reduction. For each of these alternatives, CBO estimates that the reductions in spending would increase over the period in line with the projected growth in Medicare spending.

Because hospitals account for most of the reimbursement for spending on bad debt (about 70 percent), the largest source of uncertainty in this estimate is whether private prices for hospital services would change in response to hospitals' loss of revenue from Medicare's reduced reimbursements for bad debt—and if so, whether private prices would increase or decrease. Some observers expect that reducing federal payments for bad debt would lead hospitals to increase prices for private insurers to make up for lost Medicare revenues—a phenomenon often referred to as cost shifting. If private prices increased, on average, then federal subsidies for private insurance would also increase, which would raise federal costs. Some studies have found no evidence of cost shifting or have found limited evidence of cost shifting that depends on factors such as local market power and contracting arrangements with insurers (Frakt 2011). Further, another study has found that private prices have fallen in response to Medicare's price reductions, which, in turn, suggests that federal subsidies could fall in response to Medicare's payment reductions (White 2013). Although that result might seem counterintuitive, there is evidence that hospitals respond to Medicare's payment reductions by lowering long-run operating expenses, which would allow for lower profit-maximizing private prices (White and Wu 2014). Because the direction of the impact on private prices stemming from changes in Medicare's payments is unknown, CBO's estimate of this policy does not include any changes in the prices charged to private insurers. However, any changes in federal spending related to changes in those prices are likely to be negligible.

Another source of uncertainty is whether facilities (including hospitals) would respond to the lost revenue by increasing their efforts to collect allowable bad debt (that is, unpaid deductible and coinsurance amounts) from Medicare patients. However, facilities are required to demonstrate a reasonable collection effort before debt can be classified as allowable bad debt. For example, the Centers for Medicare & Medicaid Services requires facilities to use the same strategies for collecting medical debt from Medicare patients as they do for private-pay patients. Because of that requirement and because facilities are not reimbursed by Medicare for debt incurred by private-pay patients, it is likely that facilities are already exerting significant effort to collect this debt, and the ability of facilities to collect further on Medicare debt would probably be small. Therefore, changes to Medicare's reimbursements of bad debt are unlikely to substantially change overall strategies for collecting medical debt. In addition, CBO estimates that facilities cannot collect about two-thirds of allowable bad debt because it is attributable to dual-eligible beneficiaries. (Currently, Medicaid programs are frequently not required to pay all out-of-pocket expenses for dual-eligible enrollees.) To the extent that increased collection efforts by facilities led to a reduction in allowable bad debt, any reduction in the coverage of that debt—other than elimination—would be associated with an additional reduction in outlays.

Other Effects

One argument for implementing this option is that 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 previously 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. The option would therefore lead to an effective cut in Medicare's payments to institutional providers. Also, those providers might try to mitigate the impact of this option by limiting their treatment of dual-eligible Medicare beneficiaries and those without other supplemental coverage. Consequently, 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.