When hospitals are unable to collect cost-sharing payments owed by Medicare beneficiaries, they record these payments as bad debt, and are reimbursed a portion of the amount directly from the Centers for Medicare & Medicaid Services (CMS).

The majority of bad-debt comes from approximately 10 percent of beneficiaries who do not have additional coverage to pay their co-payments and deductibles. These beneficiaries are generally ineligible for Medicaid (Medi-Cal in California), yet cannot afford the premiums associated with Medigap insurance. This group of beneficiaries represents the “near poor” who cannot afford co-payments and deductibles, and account for a disproportionate share of bad debt in the Medicare program.

Historically, CMS has reimbursed hospitals for 100 percent of Medicare bad debts. However, in 1997, the reimbursement was reduced to 55 percent of Medicare bad-debt costs, and then raised to 70 percent in 2000. Additional cuts to bad-debt reimbursement have not been authorized by Congress, but some policymakers view bad debt as a source for Medicare savings in the future.