Medicare bad debt cut plan threatens struggling hospitals

Congress is considering phasing out Medicare bad debt payments to hospitals, but new data shows that this plan would disproportionately affect struggling hospitals.

Bad debt occurs when patients do not pay their medical bills -- whether by choice or an inability to pay because they are uninsured or underinsured or are experiencing other life circumstances like unemployment -- and when hospitals fail to collect what is owed. Unlike charity care, these patients don't apply or qualify for financial assistance, leaving hospitals to write off the debt.

The Medicare program seeks to offset some of the bad debt incurred by its beneficiaries by reimbursing hospitals 65% of the cost-sharing that Traditional Medicare beneficiaries fail to pay, as long as hospitals make reasonable efforts to collect the debt.

However, the U.S. House Committee on Ways and Means recently calculated that eliminating hospital bad debt reimbursement would save Medicare up to $42 billion over ten years. They rationalized the potential budget option by saying it would bring the Medicare program more in line with the private sector, which does not reimburse hospitals at all for bad debt incurred by beneficiaries.

But the calculations do not account for the "distributional consequences" of phasing out the reimbursement, and therefore, the savings that would be achieved, researchers from the Harvard T.H. Chan School of Public Health and Brown University School of Public Health pointed out in the new study.

The study recently published in JAMA Network Open analyzed nearly 4,300 general short-term hospitals with 2023 cost report data to determine the characteristics of facilities with higher bad debt. Researchers defined high bad debt as Traditional Medicare bad debt represented by 0.5% or more of net patient revenue.

They found that nearly all hospitals (92%) reported Medicare-eligible bad debt on their 2023 cost reports, with total Medicare bad debt coming to over $2.5 billion that year. The mean amount of bad debt per hospital was $593,942.

However, about a fifth of the hospitals studied (848 facilities) qualified as having high bad debt. These hospitals tended to be smaller, with 64.7 beds, on average, versus 164.1 beds. As a result, they had significantly higher ratios of Medicare bad debt to beds, with an average ratio of $15,558 versus $3,176.

Hospitals with high bad debt also reported lower operating margins. The study found an average operating margin of -0.6 points versus 2.2 points. However, hospitals with high bad debt notably had similar liquidity at about 0.6 to 0.7, on average.

Additionally, the study shows that nearly three-fifths of high-bad debt hospitals were considered critical access hospitals. The hospitals also tended to be located in the Upper Midwest, although the facilities were geographically dispersed, researchers stated.

Federal spending would decrease by about $1.7 billion based on the study's findings. However, hospitals already struggling to make ends meet could be severely impacted by eliminating hospital bad debt reimbursement, indicating further scrutiny of the proposed budget policy, researchers said.

Additionally, researchers stated that lawmakers should consider hospital characteristics before enacting other policies that would potentially offset some hospital bad debt, like the proposed Medicare Safety Net Index.

Years ago, the Medicare Payment Advisory Commission (MedPAC) proposed the Medicare Safety Net Index to consolidate several support policies for hospitals, including uncompensated care payments like bad debt reimbursement, and scale support payments based on hospital characteristics.

"Implementation of this index would better target scarce Medicare resources to support hospitals that are key sources of care for low-income Medicare beneficiaries and may be at risk of closure," MedPAC wrote in its March 2023 report to Congress.

The Ways and Means Committee also recently proposed removing uncompensated care support to hospitals that serve a disproportionate share of low-income patients from the Medicare Trust Fund and establishing a new fund that would "equitably distribute payments to providers based on their true share of charity care and non-Medicare bad debt."

However, researchers explained that lawmakers should understand that the characteristics of hospitals with high bad debt "meaningfully differ" from other measures of safety-net status, including payer mix.

Hospital bad debt is worsening despite improvements in financial margins, data released earlier this month by healthcare consulting firm Kaufman Hall showed. Data from 1,300 U.S. hospitals showed margins improving to 3.7% in June, up from 1.9% in May. However, bad debt increased in June compared to the previous month and grew at a greater rate than in recent months.

The increase in bad debt may reflect a change in insurance enrollment, the consultants explained. Hospitals are already bracing for more enrollment changes as the Trump Administration implements Medicaid program reform.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.