At Iron Horse, we have long held a rule of thumb: Medicare bad debt runs about 15% of the deductibles and coinsurance a hospital bills its Medicare patients. The rule comes from our best practices and prior experience, not from CMS. We tested it against every acute-care and critical access hospital cost report that CMS has published since 2010 and that bills Medicare cost sharing, 70,779 in all. The rule held for acute-care hospitals paid under the inpatient prospective payment system (PPS) through 2020. Since then the typical hospital has fallen well below it, and hospitals differ widely from one another.
How we measured it
For each cost report, we divided allowable Medicare bad debt by the deductibles and coinsurance billed to Medicare patients. We took both from these lines of the CMS-2552-10 cost report:
- PPS acute hospitals: Worksheet E Part A line 64 plus Part B line 34, over Part A lines 62 and 63 plus Part B lines 25 and 26.
- Critical access hospitals: the same Part B lines, with Worksheet E-3 Part V lines 20, 23 and 25 in place of Part A.
Every report counts on its own, so a hospital that changed its fiscal year does not appear twice in one blended figure. The figures below use reports that cover 11 to 13 months. We also checked our figures against a consultant's working spreadsheet. All 472,061 amounts that appear in both matched to the dollar; the remainder belong to reports that CMS has since revised.
The ratio has fallen since 2020
| Reports ending in | PPS acute, all hospitals combined | PPS acute, median hospital | Critical access, all combined |
|---|---|---|---|
| 2015 | 14.2% | 12.5% | 9.8% |
| 2020 | 14.6% | 14.1% | 9.7% |
| 2021 | 12.8% | 12.2% | 8.1% |
| 2022 | 12.2% | 11.2% | 7.7% |
| 2023 | 11.0% | 10.0% | 6.7% |
| 2024 | 10.0% | 9.2% | 6.1% |
| 2025 | 10.0% | 8.4% | 6.1% |
From 2015 to 2020, the PPS figure stayed near 14% to 15%, so the 15% rule fit. It no longer does. A reviewer who flags every hospital under 15% would now flag most of them.
We do not know why the ratio fell. Fewer unpaid balances, changes in how hospitals bill or write off accounts, and hospitals claiming less than they could all fit the numbers. Cost report data cannot separate them. The last is the one to investigate, hospital by hospital.
Hospitals differ far more than years do
Among PPS acute hospitals with reports ending in 2025, the bottom quarter sits below 4.1% and the top quarter above 15.2%. About 9% of those reports (261 of 3,030) show no Medicare bad debt at all, and 34 of the 261 belong to Maryland. Among critical access hospitals with reports ending 2021 or later, those with fewer than 25 beds have a median of 3.4%, against 5.6% for those with 25 to 99 beds.
State is the largest divider. The table shows the median PPS acute hospital in the five lowest and five highest states, for reports ending 2021 through 2025.
| Lowest | Median | Highest | Median |
|---|---|---|---|
| Maryland | 0.0% | Michigan | 19.4% |
| South Dakota | 0.9% | Nevada | 18.3% |
| Nebraska | 1.9% | California | 17.2% |
| Montana | 2.2% | West Virginia | 16.5% |
| Utah | 2.9% | Kentucky | 16.5% |
Maryland is a special case. The state pays its hospitals under a waiver, and few report Medicare bad debt on this worksheet. We left the territories out of the table because their ratios sit far from the states'; Puerto Rico's median is 59.3%.
State Medicaid policy shapes what the bad debt is made of
One likely driver of the state differences is how each state's Medicaid program pays the Medicare cost sharing of patients covered by both programs. Some states pay the full amount. Most pay the lesser of the cost sharing or the Medicaid rate, which can leave Medicaid owing nothing and the hospital holding the whole balance. We classified all 50 states and the District of Columbia from state rules, state plans and payer manuals: 27 pay the lesser of, 18 are mixed or depend on the service, 4 pay the full cost sharing, and 2 are not yet established.
The class does not predict how large a state's ratio is. Among the 27 lesser-of states, the median hospital runs from 1.9% (Nebraska) to 19.4% (Michigan). The class does predict the make-up of the bad debt. Cost reports carry a separate line for bad debt from patients who are also on Medicaid. In lesser-of states, 63.2% of the median hospital's bad debt comes from dual-eligible patients; in the four full-payment states, 5.5%. Only 7.8% of hospitals in lesser-of states report less than a tenth of their bad debt from dual-eligible patients, so a hospital that does stands out.
What it means for a bad debt review
- A single national threshold misleads. The same 8% ratio can be far above normal in Nebraska and far below it in Michigan. Compare a hospital with others of the same type, in the same state, and of similar size.
- Type matters first. Long-term care, rehabilitation and psychiatric hospitals report on other worksheets, and a ratio built on the acute-care lines means nothing for them. We left them out.
- Check the report status. Recent years are mostly as-submitted reports; about 85% of 2025 PPS reports are still unsettled. Settlement timing does not explain the whole decline. Among settled reports alone, the combined ratio fell from 14.5% for reports ending in 2020 to 10.3% for 2023. Unsettled 2023 reports ran higher (12.2%), so read the status before reading the ratio. Settlement itself moves the figure. Comparing the same hospitals and periods in an older and a newer download of the files, bad debt fell by 5.9% in total when CMS settled a report without audit and by 10.0% when it settled with audit.
- A low ratio is a question, not a finding. It marks where to look. Whether a hospital has claimed what its records support takes account-level work: dates, collection effort, and each state's rules on Medicaid crossover claims.
Limits of this analysis
We took hospital type from the CCN number range and bed counts from the acute-care line of Worksheet S-3 alone. The state policy classes describe what each state's own rules say. For most states, it remains unresolved whether the state or a health plan pays a dual-eligible patient's cost sharing, and four states are not yet confirmed from a state or payer document. We excluded 102 PPS acute reports with ratios above 100%, which look like filing errors.
How Iron Horse can help
Iron Horse Analytics now publishes a Medicare bad debt screen for its subscribers. It compares each acute-care and critical access hospital's allowable bad debt with its peers: hospitals of the same type and state, and of similar size where the group is large enough. It shows the cost report lines and the report status behind every figure, notes where dual-eligible bad debt is unusually small in a lesser-of state, and prints a report for a client conversation. Our Offline Review Tool then lets you review a hospital's accounts on your own computer; the patient files stay there, and only a de-identified summary you confirm can leave. A position below peers is a question to look into, not a finding. To see how a particular hospital compares, or to talk through what the figures could mean, get in touch.