Medicare Bad Debts: A Fatally Flawed Policy in Need of Review

I. Introduction

For many years, the Centers for Medicare & Medicaid Services and health care providers have been at odds over the regulatory requirements for Medicare bad debts. Advocates and many courts have assailed the agency’s Medicare bad debt policy as “strained, irrational,” or worse. ¹See, Baystate v. Aetna, PRRB Decision 97-D90 (August 4, 1997); Detroit Receiving Hospital v. Shalala, 194 F.3d 1312 (6th Cir. 1999); Power Point Presentations, Medicare and Medicaid Institute, J. Erde (Baltimore, March 2009), C. Crosswhite (Baltimore, March 2010).

At the heart of the controversy is the meaning of the regulatory requirement that providers conduct a “reasonable collection effort,” activities that may include the referral of the debt to an outside debt collection agency.

In general, the provider community and the Provider Reimbursement Review Board (PRRB) view bad debts as allowable or reimbursable if the debt is more than 120 days old—even if the debt has been referred to a debt collection agency for collection.

On the other hand, the CMS administrator has interpreted a reasonable collection effort to require that any debt referred to an outside debt collection agency be returned to the provider following the conclusion of collection activity to be reimbursable; absent the cessation of collection activity a bad debt cannot, according to the CMS administrator, be deemed “worthless” within the meaning of the applicable regulation.

Embedded in the debt collection controversy is the impact of the moratorium contained in the Omnibus Budget Reconciliation Act of 1987 (OBRA) barring the Secretary from changing the agency’s Medicare bad debt collection policies in effect on Aug. 1, 1987, or requiring a hospital to change its debt collection policy if a fiscal intermediary has accepted the provider’s debt collection policy in effect as of Aug. 1, 1987.

CMS has required providers to show that their policy was affirmatively accepted by an intermediary and that the policy was in full compliance with the rules and regulations in effect on Aug. 1, 1987, for the moratorium to apply. Providers have argued that the issuance of a Notice of Program Reimbursement (NPR) by an intermediary constitutes conclusive evidence that the policy has been accepted–even if the policy does not comply with regulatory requirements in existence on Aug. 1, 1987.

Providers and CMS have been ostensibly addressing Medicare bad debts based on policies that are nearly 25 years old–riddled with conflict and controversy even after all this time.

This article examines Medicare regulatory issues surrounding Medicare bad debts. ²Bad debts of Medicare enrollees are treated as “reasonable costs,” and are reimbursed to hospitals on a retrospective basis. Bad debts arise when the hospital cannot recover co-payments and deductibles from Medicare enrollees despite reasonable collection efforts. 42 C.F.R. §413.89(e). Historically, the Secretary reimbursed bad debt in full. However, in 1997 Congress decreased the amount of bad debt reimbursement in order to combat rising Medicare costs, Balanced Budget Act of 1997, Pub.L. No. 105-33, §4451, 111 Stat. 251, and provide the hospitals an impetus to make collection efforts, H.R.Rep. No. 105-149, at 1344 (1997).[T]he amount of bad debts otherwise treated as allowable costs which are attributable to the deductibles and coinsurance amounts under this subchapter shall be reduced --(i) for cost reporting periods beginning during fiscal year 1998, by 25 percent of such amount otherwise allowable,(ii) for cost reporting periods beginning during fiscal year 1999, by 40 percent of such amount otherwise allowable,(iii) for cost reporting periods beginning during fiscal year 2000, by 45 percent of such amount otherwise allowable, and(iv) for cost reporting periods beginning during a subsequent fiscal year, by 30 percent of such amount otherwise allowable. 42 U.S.C. §1395x(v)(1)(T).The Secretary promulgated a regulation that mirrors the statute at 42 C.F.R. §413.89(h)(1). For the remaining bad debt, the hospitals must either accept the loss or continue to pursue debt collection from the Medicare beneficiary. Detroit Receiving Hospital
v. Sebelius
, 575 F.3d 609, 611 (6th Cir. 2009). Although CMS’ interpretation of a reasonable collection effort as articulated over the last 25 years has been upheld by some courts, the PRRB has rejected the view and a number of courts have found that the moratorium bars the agency from enforcing its position because it was created after Aug. 1, 1987, and is, therefore, barred by the OBRA moratorium. Still other courts have developed a framework that allows fiscal intermediaries to retroactively deny bad debt claims based on “new” information that the provider’s bad debt policies did not comply with the regulatory scheme prior to Aug. 1, 1987, the date Congress barred any changes in bad debt policy.

Consideration will be given to the potential ramifications for providers when they continue to pursue collection activity of Medicare bad debts after they have sought reimbursement for such debts on their Medicare cost reports.

Having certified compliance with applicable Medicare regulations on a cost report, including a requirement that the debt be “worthless” and that “there is no likelihood of recovery at any time in the future,” can a provider lawfully maintain collection activities with a collection agency or “sell” the bad debts for a fee to other entities, all with the goal of potential collection? Or do such activities expose providers to possible sanctions, False Claim Act liability, or even criminal prosecution for fraud?

Finally, the issue of the moratorium will be closely examined. Can providers be more successful in reimbursement appeals by invoking the moratorium and its potential to protect providers from the vagaries of CMS’ debt collection policies? If so, does the moratorium as interpreted by the courts require CMS to affirmatively come forward and demonstrate that its interpretations of a reasonable collection effort predates Aug. 1, 1987? And, how can CMS so many years after the enactment of the moratorium demonstrate that “new” information indicates that a provider never complied with the rudimentary requirements of its Medicare bad debt policies?

These issues have produced a significant amount of litigation. In light of the reversals CMS has suffered in enforcing its bad debt policy, Medicare bad debt policies are in need of a comprehensive policy review to ensure consistency with law and the agency’s policy preferences. The “staleness” of CMS policy also suggests that a full policy review of its Medicare bad debt policies might be merited.

II. Legal Background

A. Reasonable Collection Effort

Under the Medicare Act, the Secretary reimburses provider hospitals for services afforded to Medicare patients. Bad debts are considered reductions in revenue rather than costs incurred in the delivery of medical and other related services. As such they are not allowable costs under Medicare. However, there is an exception, i.e., service providers receive reimbursement for “bad debts;” generally, deductibles and co-insurance not paid by the Medicare patient.

The fundamental requirements for the reimbursement of a Medicare bad debt are set forth in regulation and in the Provider Reimbursement Manual (PRM). These rules provide that (1) the debt must be related to covered services and derived from deductible and coinsurance amounts; (2) the provider must be able to establish that reasonable collection efforts were made; (3) the debt was actually uncollectible when claimed as worthless; and that (4) sound business judgment established that there was no likelihood of recovery at any time in the future. ³42 C.F.R. §413.89(e); Provider Reimbursement Manual (PRM), §308.

Collection effort is defined in PRM §310 as including the use of billings, collection letters, telephone calls, or personal contacts with the party; the efforts must be genuine, not token, and similar to those efforts to collect comparable amounts from non-Medicare patients. In addition, collection efforts may include the use of a collection agency in addition to or in lieu of the former measures. The PRM at §310.2 creates a “presumption of uncollectibility;” namely that “If after reasonable and customary attempts to collect a bill, the debt remains unpaid more than 120 days from the date of the first bill is mailed to the beneficiary, the debt may be deemed uncollectible.” The use of a collection agency is not required by any rule, policy, or regulation.

CMS asserts that its long standing policy with respect to collection agencies has been set forth in a number of memoranda and Medicare Intermediary Manual (MIM) provisions over the years. ⁴See, MIM, Part 1B, §13-2, 13-4; HCFA Policy Memorandum from Directors, Bureau of Program Operations, Bureau of Policy Development to All Regional Administrators, June 11, 1990; Policy Memorandum from Directors of Medicare Contractor Management Group and Chronic Care Policy Group to All Fiscal Intermediaries, May 2, 2008; PRM §§310 and 310.2. The crux of the dispute between providers and CMS is the agency’s policy that bad debts referred to an outside collection agency can be claimed only “after the collection agency completes its collection effort” and the debt has been returned to the provider as worthless.

Generally, providers and CMS take contrary positions on what constitutes a reasonable collection effort. Providers rely principally on the presumption of uncollectibility contained in §310.2 of the PRM that Medicare bad debts shall be “deemed” uncollectible after 120 days of collection activities. CMS relies on various subsequent policy interpretations to require any Medicare bad debt referred to an outside collection agency be returned to the provider after the outside collection agency has concluded its collection efforts.

B. The Moratorium

In the face of a series of HHS Inspector General’s reports beginning in 1987 recommending the termination of reimbursement for Medicare bad debts and closer scrutiny of providers’ request for reimbursement of such debts, Congress passed a series of bills designed to bar the Secretary from requiring providers to change their debt collection practices. ⁵See, HHS Inspector General Continues to Recommend Scrapping or Revamping Bad Debt Reimbursement, Modern Healthcare, June 17, 1991 at 50. Fearing a change in policy that might adversely impact providers, Congress passed three amendments to the Medicare statute essentially barring the Secretary from making any changes to the reimbursement rules for unpaid Medicare coinsurance and deductibles.

Initially, Congress responded as follows:

In making payments to hospitals under [Medicare], the Secretary of Health and Human Services shall not make any changes in the policy in effect on August 1, 1987, with respect to payment under [the Medicare program] to providers for service for reasonable costs relating to unrecovered costs associated with unpaid deductible and coinsurance amounts incurred under [the program] (including the criteria for what constitutes a reasonable collection effort.) ⁶Omnibus Budget Reconciliation Act of 1987 (OBRA), Pub. L. No. 100-203, §4008©, 101 Stat. 1330-55, 42 U.S.C. §1395f note.

In 1988, Congress acted again to add the following phrase to the 1987 amendment:

Including criteria for indigency determination procedures, for record keeping, and for determining whether to refer a claim to an external collection agency. ⁷Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §8402, 102 Stat. 3798, 42 U.S.C. §1395f note.

In 1989, Congress added this additional paragraph:

The Secretary may not require a hospital to change its bad debt collection policy if a fiscal intermediary, in accordance with the rules in effect as of August 1, 1987, with respect to the criteria for indigency determination procedures, record keeping, and determining whether to refer a claim to an external collection agency, has accepted such policy before that date, and the Secretary may not collect from the hospital on the basis if an expectation of a change in the hospital’s collection policy. ⁸Congress made this amendment retroactive to August 1, 1987. H.R. Conf. Rep. No. 386, 101st Cong., 1st Session 737 (1989).

This provision was made retroactive to 1987.

These provisions reflect Congressional intent to bar CMS from changing its Medicare bad debt reimbursement policies after Aug. 1, 1987; therefore the use of the word, moratorium, initially perhaps as a temporary measure; now a prohibition that has lasted nearly 25 years. These provisions have given rise to much litigation as providers and CMS struggle over the issue of what represented CMS’ Medicare debt collection policy in the distant past.

C. CMS Policy Interpretation of a Reasonable Collection Effort

Policy memoranda issued by CMS shed light on the agency’s Medicare bad debt collection policy – under what circumstances, if any; can a Medicare bad debt be reimbursed while the account remains at an outside collection agency? A June 11, 1990 policy memorandum states the rationale for the agency’s interpretation of reasonable collection effort most plainly:

[U]ntil a provider’s reasonable collection effort has been completed, including both in-house efforts and the use of a collection agency, a Medicare bad debt may not be reimbursed as uncollectible. This is in accord with the fourth criteria in [42 C.F. R.] §308 which provides that an uncollected Medicare account cannot be considered an allowable Medicare bad debt unless sound business judgment established that there is no likelihood of recovery at any time in the future. We have always believed that, clearly, there is a likelihood of recovery for an account sent to a collection agency.

However, in light of the moratorium, CMS indicated that if a fiscal intermediary had, prior to August 1, 1987, allowed Medicare bad debt for an account sent to a collection agency consistent with the provider’s policy for the collection of non-Medicare debt, the moratorium prohibited the intermediary from changing its policy–notwithstanding agency directives to the contrary.

In essence, CMS ruled that intermediaries should continue to allow bad debts even in they had been referred to a collection agency and not returned the account(s) to the provider as “worthless” if they had such a “policy” prior to the enactment of the moratorium. This statement suggests that prior to August 1987 CMS policy was, at best, poorly understood by fiscal intermediaries and, at worse, not a written, well articulated policy at all.

In May 2008, some 18 years after the date of this long-standing policy memorandum, CMS repudiated its prior position, ruling that

It is Medicare’s policy not to reimburse hospital and nonhospital providers for Medicare bad debts while an account is at a collection agency.

***

Thus we have determined that any instructions previously issued which allowed hospitals to claim bad debts for accounts at a collection agency based on a Medicare contractor’s interpretation of the policy as of August 1, 1987, are incorrect. In no case is an unpaid Medicare account which is in collection, including at a collection agency, an allowable bad debt under the regulations. If a Medicare contractor’s practice has been to allow Medicare bad debts for some hospitals while the accounts are at a collection agency, based on its practices as of August 1, 1987, the Medicare contractor shall disallow these bad debts effective as of the date of this memorandum/letter.”

The affect of these policy memoranda is to clarify the agency’s position that no Medicare bad debt can be reimbursed that has been referred to a collection agency while the debt remains at a collection agency. The memorandum changes CMS’s previous position that the moratorium barred intermediaries who had, prior to Aug. 1, 1987, reimbursed bad debts referred to a collection agency from disallowing them while they remained at the collection agency if all other regulatory requirements were met. ⁹Prior to May 2, 2008 when CMS issued this policy memorandum, fiscal intermediaries routinely issued memoranda and other communications referencing the policy outlined in 1990. See, e.g., Medicare Provider Reimbursement Flash, 05-04 issued by Riverbend Government Benefit Administrator.

III. Legal Discussion

A. Reasonable collection effort

The “reasonable collection effort” requirements of the bad debt regulation have an irregular history in the administrative process and in the federal courts. It appears that the Provider Reimbursement Board (PRRB) has interpreted the regulatory requirements as “guidelines” and interpreted them broadly. The administrator has interpreted the requirements more consistently with the plain language of the regulation.

However, at critical junctures, there have been administrator decisions that appear to be a variance from the agency’s articulated bad debt policy. As the years have passed, the agency and the courts have made efforts to “distinguish” cases at odds with a strict reading of the applicable regulations and CMS’ policy.

However, a fair reading of the cases reveals inconsistencies–inconsistencies with the requirement that collections efforts be “similar” for both Medicare and non-Medicare bad debts and the requirement that all activity by an outside collection agency be terminated before a provider can seek reimbursement for Medicare bad debts. These decisions cast doubt on the vitality of CMS’ Medicare bad debt policies now–and during the period preceding the enactment of the moratorium.

In St. Francis Hospital v. BCBSA,
¹⁰PRRB Decision No. 86-D21 (November 12, 1985). and Reed City Hospital. v. BCBSA,
¹¹PRRB Decision No. 86-D67 (February 20, 1986). the PRRB found in 1985 and 1986, respectively, that sound business judgment justified dissimilar treatment of Medicare and non-Medicare bad debt claims; in both cases, the PRRB found that the provider referred non-Medicare bad debts to a collection agency but failed to do so for Medicare bad debts – a finding at odds with the regulation. ¹²In these cases, the PRRB appears to have been influenced by the cost associated with referring Medicare bad debts to a collection agency when weighed in light of the low rate of return, i.e., collection of the debts. This rationale clearly applied to an even earlier case, Cincinnati General Hospital v. BCBSA, PRRB Decision 81-D52, where the Board held that business reason justified the failure of the hospital to refer its non-Medicare bad debts to a collection agency when it referred its Medicare debts for collection to an outside agency. The Administrator declined review. Administrator Decision (July 16, 1981). In St. Francis, ¹³Administrator Decision (March 31, 1986). The failure of a tribunal to review and decide a case lacks precedential value. the then HCFA administrator affirmed; ¹⁴Administrator Decision, January 8, 1986. in Reed City, the administrator declined to review. ¹⁵The courts have sought to distinguish these cases, e.g., in Mt. Sinai Hospital v. Shalala, supra at 85-86, the court acknowledged that the two opinions do indicate that different treatment of Medicare and Medicaid accounts may constitute reasonable collection efforts under certain circumstances. However, they are specific applications of the rules to the specific facts of each case and do not “dictate a given result” in every case. On the other hand, years later in Arlington Hospital v. BCBSA, the Board sustained the intermediary’s adjustments of the provider’s bad debt claims because Medicare and non-Medicare accounts were treated differently, i.e., only non-Medicare debts were sent to a collection agency. ¹⁶PRRB Decision (April 10, 1997). Here, the Administrator affirmed again. ¹⁷Administrator Decision (June 13, 1997). ). It is interesting to note that in the early days of bad debt reimbursement, “it is not necessary to use a collection agency even if non-Medicare accounts are collected in this manner.” Intermediary Medicare Bulletin dated April 5, 1967 cited in Cincinnati General Hospital v. BCBSA, PRRB Decision 81-D52 (May 5, 1981).

As cases have proceeded beyond the administrative process, the courts have found that Section 310 of the Provider Reimbursement Manual, the provision containing the requirement for “similar treatment” of Medicare and non-Medicare accounts preceded Aug. 1, 1987. ¹⁸See, e.g., Mt. Sinai Hospital Medical Center v. Shalala, 196 F.3d 703 (7th Cir. 1999). Courts have also noted that intermediaries as early as 1985 were advising providers of the requirement that the methods of the collection of Medicare and non-Medicare debts be similar. ¹⁹Hennepin County Medical Center v. Shalala, 81 F.3d 743 (8th Cir. 1996). However, none of these early decisions enforce or reference any HCFA policy requirement that no bad debt can be claimed when referred to an outside collection agency until collection activity has ceased and the debt has been returned to the provider as worthless. ²⁰It is noteworthy that the 120 day rule contained in the bad debt regulation has also received varied treatment. In King’s Daughter’s Hospital v. BCBSA, PRRB Decision 91-D5 (date), the Board held that the provider had engaged in a reasonable collection effort even though it had written the bad debts off prior to 120 days, but made no finding that the debts were worthless when claimed. Yet in Greenview Hospital v. BCBSA, PRRB Decision 99-D-1 (October 5, 1998), the Board ruled that the claimed pre-120 day write-offs of bad debts failed to meet regulatory requirements.

As to the early cases that shed light on then HCFA’s policy prior to Aug. 1, 1987, i.e., whether agency policy reflected a requirement that no bad debt can be claimed when referred to an outside collection agency until all collection activity has ceased and the debt returned to the provider, the cases suggest, at best, that the policy was unclear.

In Lourdes Hospital v. BCBSA, ²¹PRRB Decision 95-D59 (August 31, 1995). the Board upheld bad debt claims for a cost reporting period ending September 30, 1987, even though they were claimed before the expiration of 120 days and while they were “transferred to a collection agency.” The administrator affirmed–seemingly acquiescing in a board ruling finding it permissible for a bad debt claim to be reimbursed while the claim is still pending in a collection agency prior to the expiration of 120 days. ²²Administrator Decision (August 31, 1995). Likewise, the Administrator declined to review the Board’s decision in King’s Daughter’s Hospital, supra, where the Board found that the provider wrote off Medicare bad debts “when the accounts were sent to a collection agency.” ²³The PRRB opinion reports that the provider exercised sound business judgment by the “referral of all accounts to an outside collection agency which conducted sophisticated extended collection activities not available to the provider.” King’s Daughter’s Hospital, supra.

Finally, in Humana Hospital v. BCBSA, ²⁴PRRB Decision 92-D41 (July 17, 1992). the Board noted, in reversing the Intermediary’s denial of the provider’s bad debt claims, that “the Provider indicated that the accounts were written off as bad debts at the time they were turned over to the primary collection agency.” The administrator reversed the board decision finding the failure to refer all Medicare bad debts to a secondary collection agency when non-Medicare debts were so referred violated Section 310 of the Provider Reimbursement Manual requiring similar collection efforts. ²⁵Administrator Decision (August 31, 1987). However, the Administrator failed to note that the bad debts were written off at the time they were referred to a collection agency.

On the other hand, both the PRRB and the Administrator recognized in Arlington Hospital, supra, that the intermediary with responsibility for that provider advised hospital officials prior to Aug. 1, 1987, in reviewing their 1982 cost report that CMS policy required that Medicare and non-Medicare debts be treated similarly. Nonetheless, the facts as recited in that case indicate that the debts, both Medicare and non-Medicare, were written off at the time the debts were sent to a collection agency; there is no mention of any requirement that the activity of the collection agency be terminated and the accounts be returned to the provider in order to meet the requirement to conduct a reasonable collection effort. Arlington Hospital, supra.

Therefore, when the Administrator had opportunities to articulate a policy reflecting a requirement that no bad debt can be claimed when referred to an outside collection agency until collection activity has ceased and the debt returned to the provider as worthless, we are met either with silence or decisions that call the existence of the policy in question. No written policy with such a requirement is cited or referenced in any of these early cases.

In addition, it appears that as the years have passed, providers have adopted “similar policies” for the collection of both Medicare and non-Medicare bad debts. As a result that issue has receded in importance. However, CMS policies requiring that bad debts referred to an outside collection agency can be claimed only “after the collection agency completes its collection effort” and the debt has been returned to the provider as worthless continue to be litigated.

In a series of more recent decisions, the PRRB has continue to examine the applicable regulations and addressed the nature of the collection effort required of providers to claim Medicare bad debts. The legal discussion has focused most recently on the Board’s decision in Battle Creek Health Systems v. BlueCross BlueShield Association
²⁶PRRB Dec. 2004-D 40 (September 16, 2004), 2004 WL 2584875. because the Board’s decision permitting the reimbursement of Medicare bad debts while the debts remained at an outside collection agency was rejected by the federal district court hearing the case, ²⁷423 F. Supp.2d 755 (W.D. Mich. 2006). and ultimately by the Sixth Circuit Court of Appeals, ²⁸498 F.3d 401 (2007).— both of which affirmed the Administrator and the requirement that all activity by the outside collection agency be terminated prior to seeking reimbursement. These federal court cases can be viewed as vindicating CMS’ position.

The Board’s decision in Battle Creek reversed the fiscal intermediary’s adjustment of the provider’s bad debts. The Board held that the provider was entitled to reimbursement because reasonable collection efforts had been made and the debts remained unpaid after 120 days of the first bill — even those the debts had been placed in the hands of a collection agency ostensibly for collection and had not been returned to the provider. The Administrator reversed holding that so long as the debts remained in the hands of the collection agency, the challenged bad debts could not be considered “actually uncollectible” or “worthless” within the meaning of the applicable regulations.

The federal district court upheld the Administrator, finding his conclusions “not arbitrary or capricious.” ²⁹423 F. Supp.2d supra at 761. The court cited the Administrator’s conclusion that where a provider continues to attempt to collect a debt through the use of a collection agency, “it is reasonable to conclude that the provider still considers the debt to have value and not worthless.” ³⁰Administrator Decision, 2007 WL 1804073; also see, 423 F. Supp.2d supra at 761. Likewise, the court of appeals affirmed, opining that the Secretary’s view of the applicable regulation, 42 CFR §413.89(e)(3) to be “eminently reasonable.” ³¹498 F.3d supra at 411.

Each of these decisions analyzes the “presumption of uncollectibility” found in in PRM 15-1 §310.2. The Board placed great weight on this presumption, finding the presumption to be essentially conclusive. The Board found that a provider’s use of an outside collection agency did not oblige the provider to engage in collection activity greater than the 120 days set forth in §310.2. The Board found any requirement to do so – to conclude collection agency activity and return the debts to the provider as “worthless,” – “not supported by the applicable Medicare regulations or manual instructions.” ³²PRRB Dec. 2004-D40, supra.

The Administrator, on the other hand, found the presumption to be “discretionary,” i.e., the use of the word, “may,” precluded any mandatory application of the manual provision. Any presumption does not relieve the provider from documentation requirements demonstrating that the debts were “worthless” at the time they were written and off and claimed on the cost report. The Administrator found it reasonable to expect a provider to demonstrate that it had concluded all its collection efforts, including those of an outside collection agency, before claiming a debt as worthless. Pursuit of collection of a debt suggests that the provider did not view the debt to be “uncollectible” or “worthless.” ³³Administrator Decision, 2004 WL 3049346.

The federal district court sided with the agency, finding the agency’s view of the “presumption of uncollectibility” to be reasonable and to give “effect to each of the four requirements” of 42 CFR §413.89(e)(3). The Secretary’s interpretation of the presumption of uncollectibility does not work to the detriment of providers. As the court stated, “[I]t is within the discretion of the service provider to either continue collection efforts or cease collection efforts and deem the debt uncollectible” after 120 days of reasonable collection activity. ³⁴423 F. Supp.2d supra at 761.

The Sixth Circuit agreed. It found the Secretary’s interpretation of the presumption of uncollectibility to be reasonable. “The very fact that a collection agency was still attempting to collect the bad debts at issue indicates that these debts had not yet been determined to be ‘actually uncollectible when claimed as worthless’ and certainly contraindicates that “[s]ound business judgment established that there was no likelihood of recovery at any time in the future.” ³⁵498 F.3d supra at 411.

In sum, the Administrator and the federal courts hearing this issue found the presumption of uncollectibility to be effectively rebutted by the referral of a Medicare bad debt for unpaid deductible and co-insurance to a collection agency where collection efforts were continuing and the debt had not yet been returned to the provider so that it might be properly claimed as “uncollectible” or “worthless.”

Likewise, in Mesquite Community Hospital v. Leavitt, a federal district court followed the 6^th Circuit’s analysis in Battle Creek – upholding the Administrator’s analysis that reversed the PRRB. ³⁶2008 WL 4148970 (N.D. Tex.). The federal district court found that

an account has some value as long as the provider permits a collection agency to continue its collection efforts. Only when the provider recalls the account and ceases collection efforts is the account deemed uncollectible. ³⁷Although the plaintiffs in Mesquite did not argue the moratorium, it appears that pursuant to the Fifth Circuit’s ruling in Harris, supra, the moratorium would have barred the responsible intermediary from disallowing any bad debt claims based on the failure of the provider to terminate collection activity by a collection agency.

Furthering the controversy, some provider advocates argue that Medicare bad debts can be sold to an outside collection agency, warehoused by a collection agency for potential future collection, or reported on a debtor’s credit report as an incentive for the debtor to ultimately pay the debt and still be listed on a cost report as “worthless” and proper debts for reimbursement. When a Medicare bad debt is sold by a provider, the outside collection pays a fee, however discounted. To “warehouse” a debt means that the outside collection agency retains the debt, temporarily ceasing collection activity until monitoring of the debtor’s financial circumstances justifies the recommencement of collection activity. Credit reporting can be part of either the provider’s action, the outside collections agency’s instigation, or both.

All these efforts to maximize reimbursement raise serious legal issues. These devices call into question whether the debt when claimed on the provider’s cost report was “worthless” or, in some circumstances, whether a “reasonable collection effort” has been undertaken by the provider. If only Medicare debts are sold, even at significant discount, the question arises as to whether the provider has engaged in similar collection efforts for all accounts. More significantly, if the debt is sold and claimed on a cost report, the debt is being utilized to produce two payments, i.e., one from the United States Treasury and one from the collection agency even if the debt is never collected. Is this the kind of “double billing” that violates the federal False Claims Act (hereinafter “FCA”) ? And if the debt is never collected, does the sale signal an acknowledgement by the provider that the debt is not “worthless.”

Cases decided pursuant to the FCA suggest that providers who sell Medicare bad debts to an outside collection agency face serious FCA liability. FCA precedent bars a broad range of “schemes” designed to produce more than one payment from only one bill. Payment by Medicare of a provider’s bad debt claim extinguishes any claim the provider might have against the Medicare beneficiary. When the provider seeks to sell or otherwise collect the beneficiary’s bad debts for deductible and co-insurance that have been claimed as “worthless” on a cost report and paid by Medicare, the provider may be engaging in impermissible fraudulent double billing. ³⁸See, e.g., Rybicki v. Hartley, 1985 WL 56544 (D. N.H.). Any fraud-based claim in the Medicare program thus results in an impairment of the federal treasury because the Government expends money it would not expend “but for” the fraud violates the FCA. ³⁹U.S. ex rel. Fahner v. Alaska
, 591 F. Supp. 794, 798 (N. D..Ill.1984)

Indeed, if the debt is sold and ultimately collected by the outside collection agency, the collection agency itself may have exposed itself to FCA liability by using a claim already paid by Medicare to collect other funds that its retains as a result of the sale of the debt by the provider. In this manner the collection agency generates a third “sum of money” from the beneficiary from one bad debt and implicates itself in a payment the government might not have made but for the collection agency’s successful collection of the Medicare bad debt.

Providers who “warehouse” their bad debts with an outside collection agency face similar FCA issues. ⁴⁰“Warehousing” is a practice where the outside retains the bad debt after its has ceased collection activity; a computer monitors the debtors circumstances and when it appears the patient’s financial situation has changed, collection efforts are resumed by the outside collection agency. Although the provider may not have sold the debt, it has acquiesced in a purposeful decision to commence debt collection in the future with the expectation that the debt might be collectible. In this circumstance, the provider faces the challenge of arguing that notwithstanding this expectation – and the business expense entailed in the enterprise – the debt is worthless and that there is no likelihood of recovery in the future. Common sense suggests that this argument is weak. ⁴¹See,
Price Waterhouse v. Hopkins, 490 U.S. 228, 241, (1989) (“We need not leave our common sense at the doorstep when we interpret a statute.”).

Providers also assert that the notification of a credit reporting agency does not reflect any collection activity. CMS apparently takes the position that if an outside collection agency reports the debt to a credit reporting agency such a report is a means of furthering collection of the debt, i.e., the patient may pay the debt to wipe the slate clean at the reporting agency. In any event, CMS’ “policy” holds that no debt can be deemed uncollectible if it remains with the outside collection agency for any purpose. In the context of warehousing and credit reporting, there appears to be no written CMS policy.

The Inspector General of HHS has long recognized that the submission of false cost reports can generate FCA liability. ⁴²See, e.g., 63 F.R. 8987 (February 23, 1998) for an early statement by the OIG that fraudulent practices incorporated in cost reports places providers in jeopardy of FCA liability. More specifically, the agency frequently advises hospitals of areas of concern in “model compliance programs,” including potential liability for double billing. ⁴³Id. Double billing is generally defined as the act of submitting more than one claim for the same service or submitting the same bill to more than one payer at the same time. Bauman, Health Care Fraud and Abuse, American Bar Association: Chicago 2001. More significantly, the OIG has in its most recent work plan promulgated in 2010 announced its intention to “review Medicare bad debts claimed by acute care inpatient hospitals.” The OIG will “determine whether the bad debt payments were appropriate under Medicare regulations.” ⁴⁴FY 2010 Office of Inspector General Work Plan, CMS.

While it is certainly in the interest of providers to monitor government enforcement initiatives, a critical evaluation is always merited of any practice that might potentially give rise to a violation of the FCA. The practices of selling bad debts and “warehousing” debts are practices that should be reviewed by all providers due to the liability issues they may raise.

B. Impact of the OBRA Moratorium

At its core, the moratorium bars the Secretary from changing its debt collection policies in effect on August 1, 1987 and forbids the Secretary from requiring a provider to change any of its policies that an intermediary had accepted – “in accordance with the rules in effect as of August 1, 1987, with respect to the criteria for … determining whether to refer a claim to an external collection agency….” Two legal issues have arisen: 1) what constitutes acceptance; and 2) what is the meaning of “in accordance with the rules” in effect as the operative date “with respect to the criteria” for referral to a debt collection agency.

CMS has consistently argued that the intermediary must “affirmatively” accept the provider’s bad debt policy and that the policy must be in full compliance with all aspects of CMS bad debt policies in effect on August 1, 1987 in order for the moratorium to apply. In contrast, providers have argued that the issuance of an NPR constitutes acceptance of its bad debt policies and practices as it is the only means that a fiscal intermediary has to demonstrate approval of a provider’s policies, i.e., the policies upon which a provider has based its request for reimbursement. Providers argue further that the NPR acts as conclusive acceptance – irrespective of whether the provider’s bad debt policies comply with all CMS regulations and policies. The Board has consistently rejected CMS’ position and found it to be “strained.” ⁴⁵The Board follows the 5th Circuit’s analysis in Harris, supra. For example, in Baystate Medical Center, supra, the Board stated, “ If HCFA’s strained interpretation [of the moratorium] were permitted, then the entire legislative provision would be evaded and rendered useless.” It also criticized intermediary auditors for “lack of diligence” or simply making an “improper bad debt acceptance determinations.”

The Sixth, Seventh, Eighth, and Eleventh Circuits ⁴⁶Detroit Receiving Hospital v. Shalala, 1999 WL 970277 (6th Cir.), 194 F.3d 1312; Mt. Sinai Hospital Medical Center v. Shalala, 196 F.3d 703 (7th Cir. 1999); Hennepin County Medical Center v. Shalala, 81 F.3d 743 (8th Cir. 1996); and University Health Services v. Shalala, 120 F.3d 1145 (11th Cir. 1997). have endorsed some form of the CMS’ position holding, generally, that while an NPR may constitute acceptance, an intermediary may re-open a cost report if it can be shown from information not available to the intermediary at the time the NPR was issued that the provider’s debt collection policies were not in compliance with the agency’s policies as of August 1, 1987. The 5^th Circuit, Harris County Hospital v. Shalala, ⁴⁷64 F.3d 220 (5th Cir. 1995). has rejected this reasoning holding that such an interpretation deprives the OBRA moratorium of its meaning by allowing the Secretary to force changes in a provider’s policy as to collection efforts through the withholding of bad debt reimbursement payments. ⁴⁸No federal court of appeals has accepted the Secretary’s view that an intermediary must affirmatively accept the provider’s bad debt policy by some demonstration of acceptance other than an NPR.

As a result of a “split in the circuits,” there is no one, nation-wide Medicare bad debt policy. Indeed, there has been no uniform policy for 25 years. As one circuit has observed, “In its post-Harris decisions, the Administrator of [CMS] has grudgingly complied with Harris when the provider is located in the Fifth Circuit.” ⁴⁹Detroit Receiving, supra. Thus, for providers in Texas, Louisiana, and Mississippi, the issuance of an NPR has constituted conclusive acceptance of their debt collection practices since 1995.

Those circuits rejecting the issuance of an NPR as conclusive acceptance of a provider’s debt collection policies read the moratorium as “freezing” or “preserving” the bad debt reimbursement rules and regulations as they existed prior to August 1, 1987. As such, they do not read the moratorium as precluding the Secretary from disallowing bad debt payments based on regulations – or policies — as they existed prior to August 1, 1987. Under this reading of the moratorium, an intermediary can reopen and “correct” improper applications of rules as they existed on August 1, 1987 but is precluded from retroactively applying more stringent rules. For the OBRA moratorium to apply, the provider must have been in compliance with the rules as they existed on August 1, 1987, as embodied in regulations, manual provisions, and PRRB decisions.

In summarizing the various circuit decisions, the Sixth Circuit found the following test to apply: “The issuance of an NPR raises a presumption that the intermediary knew of, accepted, the hospital’s policies, i.e., in most cases the issuance of an NPR will be dispositive evidence of acceptance; however, the intermediary can rebut this presumption by presenting evidence that they had not specifically reviewed the hospital’s policies, or, more likely, that the intermediary found new, material evidence previously unavailable to it.” ⁵⁰Id., supra.

The circuits’ reasoning suggests what might constitute “new evidence” demonstrating non-compliance by providers with the agency’s bad debt rules in effect as of August 1, 1987. For example, a number of circuits referred to “an investigation and audit,” or a “full audit.” Another simply referenced “new information.” Yet another appears to frame the issue around concealment and fraud.

Since it is now 23 years following the enactment of the moratorium and a decade following the relevant circuit decisions, it is unclear how new information regarding provider debt collection practices will come to light. After all this time, there appears to be little excuse available to any fiscal intermediary for not conducting the kind of full audits or investigations contemplated by these decisions – especially if any issues have arisen regarding the bad debt claims lodged by a provider. Moreover, the reopening provision limits the ability of intermediaries to go back to “correct errors” to three years. ⁵¹42 CFR §405.1885.

Due to the passage of time, the issuance of an NPR may be entitled to greater weight than those issued immediately following the enactment of the moratorium or even just after the issuance of the relevant circuit decisions. Fiscal intermediaries have had many years to discern provider bad debt policies. However, concealment by providers of non-compliance with CMS’ bad debt policies or fraud may remain viable means for fiscal intermediaries to disallow bad debt claims. Concealment or fraud would deprive fiscal intermediaries of accurate information upon which to base their bad debt reimbursement decisions. In any event, CMS must come forward to rebut any presumption a NPR may represent and demonstrate that it has “new” information that the provider did not comply with the agency’s bad debt policies in effect on August 1, 1987.

Yet, we have not finished the requisite analysis. What were the contours of CMS’ bad debt policy prior to August 1, 1987? This issue lurks in all the decisions regarding the moratorium. More specifically, how did CMS define a reasonable collection effort? Prior to August 1, 1987, did CMS require providers who had referred their bad debts to a debt collection agency to ensure that collection activities had ceased and the debt collection agency had returned the file to the provider — prior to the provider claiming the Medicare bad debts on their cost reports?

Two federal courts have examined the issue and found against CMS. Courts have found that the blanket prohibition against reimbursement while collection efforts are ongoing did not exist prior to the effective date of the moratorium. On the contrary, the courts found that CMS policy was inconsistent and that the Administrator had even found that bad debts could be properly claimed when collection activities were still underway at a debt collection agency.

In Foothill Hospital v. Leavitt, ⁵²558 F. Supp.2d 10 (D.D.C. 2008). the federal court for the District of Columbia found that a provider was required to meet CMS’s bad debt policy in effect on August 1, 1987 — but found the prohibition against reimbursement while collection efforts are ongoing to be a new rule enacted in 1989 in the agency’s Medicare Intermediary Manual (MIM) 13-4 §4198, labeled, “NEW POLICY … For Prospective Payment System (PPS) cost report audits performed after 10/29/89.” Although the agency argued that reference to the MIM was unnecessary because the regulation providing the criteria for bad debt reimbursement, 42 C.F.R. §413.89(e), afforded an adequate basis for the decision, the court rejected that argument opining that the agency was confusing the regulation with the agency’s interpretation of the regulation. ⁵³Id. In addition, the court observed that several sources pre-dating the moratorium suggested that the “new view” was contrary to the agency’s articulated policy as of August 1, 1987, citing a 1968 PRM requirement that omitted any mention of the exclusions for debts held by a debt collection agency; a Hospital Audit program dated 1985 that describes debts held by a debt collection agency as “uncollectible;” and the MIM in effect at the time the moratorium was enacted that fails to reference any exclusion of debts held by a debt collection agency. Finally, the court cited Lourdes Hospital v. BCBSA, ⁵⁴1995 WL 933979 (P.R.R.B.), Adm. Decision, CCH Medicare and Medicaid Guide ¶ 43,723 cited in Foothill Hospital v. Leavitt, 558 F. Supp.2d 1 (D.D.C. 2008). albeit an old case referenced above, in which the Administrator approved a bad debt claim even though an outside collection agency was still managing the delinquent accounts.

Moreover, in Dameron v. BCBSA, ⁵⁵Dameron Hosp. Ass’n v. Leavitt
, 2007 WL 2288289, 1 (E.D.Cal.,2007). another federal court held that the moratorium precluded enforcement of CMS’ view of the required collection effort. The court found that plaintiff’s policy of writing off active collection accounts as Medicare bad debt was accepted by the Intermediary prior to August 1, 1987, by the issuance of NPRs and thus, under the moratorium, the agency was statutorily barred from denying plaintiff’s reimbursement claim. The court noted that the provider’s policy had been in effect since at least 1983 and was accepted without challenge until some twenty years later in 2003 when the intermediary denied all the provider’s bad debt claims on the ground that the bad debts were pending with an outside collection agency. The court duly noted that long period of time in which the allowance of the provider’s bad debts remained unchallenged and undisturbed.

In sum, although the courts have been receptive to CMS’s views on what constitutes acceptance under the moratorium and will permit, in a proper case, retroactive disallowances of bad debt claims where the provider failed to comply with the agency’s debt collection policies in effect prior to August 1, 1987, the agency bears the burden to demonstrate that “new information” unavailable earlier disclosed that a provider’s debt policy failed to comply with policies in effect as of August 1, 1987.

As to the agency’s view that no bad debt sent to an outside collection agency can be claimed until the collection activity has been terminated and the file returned to the provider was “policy” prior to August 1987, the agency appears to face an uphill battle. Moreover, the challenge appears to have been heightened by the issuance of the agency’s 2008 memorandum reversing a 1990 policy allowing fiscal intermediaries to follow their pre August 1987 bad debt collection reimbursement policies. For other requirements, e.g., a similar collection effort for both Medicare and non-Medicare debts, the agency has had more success.

IV. Conclusion

Under attack by the courts and advocates alike, the Medicare bad debt policy is in need of a full review by agency policy makers.

Providers continue to explore new ways to maximize the collection of bad debts, including certifying debts as “worthless” as they sell their bad debts to collection agencies or otherwise renew outside collection efforts.

Nearly 25 years following the enactment of the ‘moratorium” designed to “freeze” the agency’s rules in effect prior to August 1, 1987, litigation has resulted in the dismantlement of a nation-wide bad debt policy.

Moreover, those court decisions developing a framework where intermediaries can lawfully retroactively correct “errors” based on “new information” demonstrating that the provider’s bad debt policies violate applicable regulations extant in 1987 are now old, stale, and moot.

After so many years, there is little likelihood that any new information about the provider’s bad debt policies will come to light – especially after the receipt of NPRs by providers for many years accepting bad debt claims. For a number of years, CMS has articulated its view of a proper national bad debt policy. Providers continue to resist CMS policy based on their 1987 practices or acts and practices nearly 25 years old.

We need a fresh look – and perhaps a new policy that reflects 21^st century practices and needs of both providers and the agency.