How does Medicare bad debt reimbursement work?

What counts as Medicare bad debt

Under 42 CFR 413.89(e), the debt must be related to covered services and derived from deductible and coinsurance amounts. The provider must also be able to establish that reasonable collection efforts were made.

The collection effort and the 120 days

For cost reporting periods beginning on or after October 1, 2020, the regulation fixes a clock in 42 CFR 413.89(e)(2)(i)(A). The hospital must issue a bill on or before 120 days after the latest of three events: Medicare's remittance advice, the secondary payer's remittance advice, or the notice that the secondary payer does not cover the service. The collection effort must then last at least 120 days after the billing steps in paragraph (e)(2)(i)(A)(2) or (3) are met, before the debt is written off.

For earlier periods, the Provider Reimbursement Manual (section 310.2) says that if, after reasonable and customary attempts to collect a bill, the debt remains unpaid more than 120 days from the date the first bill is mailed to the beneficiary, the debt may be deemed uncollectible. The two clocks start from different events, so a hospital's period begin date decides which one applies.

Patients who also have Medicaid

Providers may deem a Medicare beneficiary indigent or medically indigent when the person has also been determined eligible for Medicaid, either as a categorically needy or as a medically needy individual (42 CFR 413.89(e)(2)(iii); Provider Reimbursement Manual section 312).

State obligations come first. As the Provider Reimbursement Board quotes section 322 of the manual, a provider may not claim as bad debt the part of the deductible or coinsurance that the State is obligated, by statute or under the terms of its plan, to pay. It may claim any portion the State is not obligated to pay, provided the requirements of section 312 or, if applicable, section 310 are met. What a state's Medicaid program owes therefore decides how much of a dual-eligible patient's cost sharing can be bad debt.

How much Medicare reimburses

The allowable bad debt is reduced before it is paid (42 CFR 413.89(h)). For a hospital, the reduction is 30 percent for cost reporting periods beginning in fiscal years 2001 through 2012, so 70 percent is reimbursed, and 35 percent for later periods, so 65 percent is reimbursed.

For critical access hospitals and the other providers under paragraph (h)(4), the reduction is 12 percent for periods beginning in fiscal year 2013, 24 percent for fiscal year 2014 and 35 percent for later years: 88, 76 and then 65 percent reimbursed.

Money collected later reduces the claim. The reduction for a recovery must not exceed the actual amount the program reimbursed for the related bad debt in the applicable prior cost reporting period (42 CFR 413.89(f)(2)(ii)).

Where it appears on the cost report

On Worksheet E, Part A, line 62 is deductibles billed to program patients, line 63 is coinsurance billed, line 64 is the allowable bad debt reduced by recoveries, line 65 applies the reimbursement percentage, and line 66 shows the gross allowable bad debt for dual-eligible beneficiaries, for statistical purposes only (it must also be reported on line 64). Part B has the same pattern: line 25 is the deductible and coinsurance billed, line 34 the allowable bad debt net of recoveries, line 35 the reimbursable amount, and line 36 the dual-eligible subset.

Critical access hospitals report their inpatient bad debt on Worksheet E-3, Part V: line 20 for deductibles billed, line 23 for coinsurance, line 25 for allowable bad debt net of recoveries, line 26 for the reduced amount, and line 27 for the dual-eligible subset.

Exhibit 2A: the support for the claim

For a cost reporting period beginning on or after October 1, 2022, the manual tells the hospital to complete Exhibit 2A to support the bad debts claimed, with separate exhibits for inpatient and outpatient services. Exhibit 2 applies to earlier periods (Provider Reimbursement Manual, Part 2, Chapter 40).

Comparing hospitals: the bad debt ratio

Cost report files let anyone divide a hospital's allowable bad debt by the deductibles and coinsurance it billed. For an acute-care hospital paid under the inpatient prospective payment system that is Worksheet E lines 64 and 34, over lines 62, 63, 25 and 26. This is a measure we compute, not a figure CMS publishes, and it is one of several ways to read the same lines.

The table below shows how it has moved. Iron Horse's rule of thumb, drawn from its own best practices and prior experience, puts bad debt at about 15 percent of billed cost sharing. It described acute-care hospitals through 2020, and the typical hospital has since drifted below it. Cost report data cannot say why. Fewer unpaid balances, different billing or write-off practice, and hospitals claiming less than they could all fit the numbers. A hospital with a low ratio is a question to look into, not a finding.

Iron Horse Analytics computation from CMS HCRIS hospital cost report files, reports of 11 to 13 months with billed cost sharing, computed 2026-11-07; recent years are mostly as-submitted reports and move as reports settle

Frequently asked questions

Does Medicare reimburse all of a hospital's bad debt?

No. Only deductible and coinsurance amounts that meet the collection rules qualify, and the allowable amount is then reduced under 42 CFR 413.89(h): a hospital with a cost reporting period beginning on or after October 1, 2012 is reimbursed 65 percent of it.

How long must a hospital try to collect before writing a debt off?

For cost reporting periods beginning on or after October 1, 2020, the collection effort must last at least 120 days after the event the regulation names, and the first bill must go out within 120 days of the latest remittance or non-coverage notice. Earlier periods use the manual's 120 days from the first bill mailed to the beneficiary.

Can a hospital claim the cost sharing of a patient who also has Medicaid?

Only the part the State is not obligated to pay, and only if the indigence or collection requirements are met. A State obligation, by statute or under its plan, comes before any bad debt claim.

What is Exhibit 2A?

The exhibit a hospital completes to support its bad debts claimed, for cost reporting periods beginning on or after October 1, 2022, with separate exhibits for inpatient and outpatient services.

Is a low bad debt ratio a problem?

It is a question, not a finding. It can reflect fewer unpaid balances or different practice, and it can reflect a hospital claiming less than its records support. Telling them apart takes account-level work.

Sources

• 42 CFR 413.89: Bad debts, charity, and courtesy allowancesWhat qualifies, the collection effort and 120-day clock, the Medicaid indigence rule, the reimbursement percentages and the limit on recoveries
• CMS Provider Reimbursement Manual, Part 1, Chapter 3 (Transmittal 435)Sections 310.2 and 312: the earlier 120-day rule and indigence for patients also on Medicaid
• CMS Provider Reimbursement Manual, Part 2, Chapter 40 (Transmittal 26)The cost report lines for bad debt on Worksheets E and E-3, and Exhibit 2A
• Provider Reimbursement Review Board Decision 2024-D30Section 322 of the Provider Reimbursement Manual, as the Board quotes it, on amounts a State is obligated to pay
• CMS: Cost ReportsThe hospital cost report data files behind the ratio table

This guide is general information drawn from the sources above, last reviewed November 7, 2026. It is not legal, reimbursement, or filing advice. Rules, figures, and file listings change; confirm against the source before relying on them.

Related

• The Medicare bad debt screen→
• How to look up a hospital's cost report data by CCN→