The 65% That Most Hospitals Leave Unclaimed

The Reimbursement Rule in One Paragraph

When a Medicare beneficiary is responsible for a deductible or co-insurance amount that the hospital is unable to collect after reasonable collection effort, that uncollected balance is classified as Medicare bad debt. CMS reimburses 65% of that allowable bad debt to the hospital through the Medicare cost report — specifically, through the S-10 exhibit and related schedules. The remaining 35% is the hospital’s loss. The 65% recovery is not optional; it is owed to any hospital that meets the documentation standard.

The rule has been in force, in close to its current form, for years. What has shifted is the documentation standard. Worksheet S-10 was redesigned in the FY2018–FY2020 cost report cycles to standardize reporting of charity care, uninsured discounts, and bad debt — and audit scrutiny on S-10 has intensified since. A hospital filing S-10 to the same standard it used five years ago is operating against a higher audit bar today.

The Three Categories Most Hospitals Treat as One

The S-10 framework distinguishes three categories of bad debt. Each is reimbursed under different rules, with different documentation requirements, and at different effective rates. A hospital that does not segment them correctly is, in practice, leaving a portion of its reimbursement unclaimed.

1. Traditional Medicare bad debt. Uncollected Medicare deductible and co-insurance amounts from beneficiaries who have been billed, contacted, and not paid after reasonable collection effort. Reimbursed at 65% of the allowable amount.

The documentation standard requires evidence of reasonable collection effort, typically: (i) initial bill issued, (ii) follow-up contact attempts at defined intervals, (iii) referral to a collection agency or equivalent process, and (iv) determination that the debt is uncollectible. The collection effort timeline must be documented contemporaneously — not reconstructed at audit.

2. Crossover bad debt (dual-eligible Medicare/Medicaid). Uncollected co-insurance amounts for beneficiaries with both Medicare and Medicaid coverage, where Medicaid did not pay the full Medicare co-insurance because of state Medicaid payment ceiling rules. The hospital may claim the remaining balance as Medicare bad debt without going through the full collection effort process — but only if the documentation demonstrates the dual-eligible status and the Medicaid payment determination at the time the claim was processed.

Crossover bad debt is one of the largest unclaimed categories at independent hospitals. The documentation chain — eligibility verification at admission, claim adjudication record, Medicaid Remittance Advice — is rarely assembled into the S-10 audit package even when each component exists in the hospital’s billing system.

3. Indigent (charity) bad debt. Bad debt from Medicare beneficiaries who have been determined to be financially indigent under the hospital’s documented charity care policy. Reimbursed at 65% — but only if the hospital’s charity care policy is consistently applied, documented in writing, and the indigency determination is made before the bad debt classification.

The order of operations matters here. A patient who is first classified as bad debt and then retroactively re-classified as indigent loses the indigent bad debt reimbursement claim. The indigency determination must occur before, not after, the bad debt classification.

What the Cohort Data Suggests

Across the 1,114 independent PPS hospitals in our Q1 2026 distress cohort, median bad debt per hospital reached $4.09M in FY2024 — up 28.4% from $3.19M in FY2021. For the A2 (PC Collapsed) cohort specifically, the median is $12.2M.

Applying the 65% Medicare bad debt reimbursement rule against these aggregate figures requires a critical caveat: not all reported bad debt qualifies for Medicare reimbursement. Only the portion attributable to Medicare beneficiaries — and within that, only the deductible and co-insurance amounts that meet the documentation standard — is eligible. The portion of total bad debt that flows through to a Medicare bad debt reimbursement claim is hospital-specific and depends on payer mix.

What the public data does establish is the order of magnitude: the median independent PPS hospital is writing off roughly $4M annually in total bad debt, against a backdrop of structural collection compression. Even a 10–20% improvement in Medicare bad debt capture — from improved S-10 documentation, more disciplined collection effort logging, and correct categorization of dual-eligible crossover claims — represents a recurring, audit-defensible recovery that does not require operational change or capital investment.

Why Independent Hospitals Underclaim

The structural reasons appear consistently across the cost-report literature:

S-10 is filed by the cost report team; collection effort is documented by the patient financial services team. The two functions sit in different parts of the hospital and rarely share a documentation framework. The result is a cost report filing that under-reflects the collection effort that actually occurred — because the documentation lives in the PFS system and is not surfaced to the cost report preparer.

Crossover bad debt is the easiest category to forfeit. Capturing crossover bad debt requires (a) confirmation of dual-eligible status at the time of service, (b) the Medicaid payment determination, and (c) the calculated unpaid co-insurance balance. Each component exists in most hospital billing systems individually, but assembling the three into an S-10 audit package is non-trivial and rarely done at independent hospitals without dedicated cost-report specialist support.

Charity care policy and indigent bad debt classification are inconsistently applied. A hospital with a charity care policy on paper, but inconsistent application across registration sites or service lines, may not be able to defend the indigency determination at audit. Indigent bad debt reimbursement is the highest-documentation category and the easiest to lose at audit.

The 65% rule applies only to the qualifying portion. A hospital that bills Medicare bad debt at the full reported total — without filtering for non-qualifying balances — risks both underclaim (if the qualifying portion is conservatively defined) and audit disallowance (if it is aggressively defined). The middle ground requires the cost-report preparer to walk the bad debt aging file line by line.

Where to Look First

Four diagnostics a CFO can run against the most recent cost report:

1. Pull your most recent S-10 exhibit and the Medicare bad debt schedule. Confirm that the three categories — traditional, crossover, and indigent — are reported separately, and that the documentation standards for each are met. If the S-10 reports Medicare bad debt as a single aggregate figure without category breakdown, the hospital is almost certainly underclaiming.

2. Reconcile the bad debt total reported on S-10 against the bad debt total in the hospital’s general ledger. A material variance in either direction is a documentation problem. The general ledger reflects what was written off; the S-10 reflects what is being claimed for Medicare reimbursement. The variance is the gap between operational write-off and reimbursement claim.

3. Audit the collection effort documentation for a sample of Medicare bad debt accounts. For each account, confirm the four-step chain: initial bill, follow-up contacts, collection agency referral, uncollectibility determination. If contemporaneous documentation does not exist for each step on a sample basis, the hospital is exposed at audit and is also likely understating its qualifying bad debt.

4. Identify your hospital’s dual-eligible patient volume and the corresponding crossover bad debt capture rate. Dual-eligible patients are concentrated at independent hospitals serving lower-income communities and are a primary source of unclaimed crossover bad debt. The capture rate is a function of eligibility verification quality at admission and claim adjudication tracking through the billing cycle.

A Note on Audit Risk

Medicare bad debt is one of the most frequently audited line items in the hospital cost report. The 65% reimbursement rate makes it material; the documentation requirements make it auditable. A hospital that increases its Medicare bad debt claim without correspondingly strengthening its documentation chain is increasing both its reimbursement and its audit exposure.

The objective is not to maximize the claim; it is to claim accurately what is owed under the rule, supported by audit-ready documentation. A hospital that has been conservative on Medicare bad debt for several years — under the assumption that audit risk outweighs the recovery — is typically leaving 10–25% of its qualifying claim on the table. That is the optimization opportunity. It is not aggressive accounting; it is the documentation work that translates uncollectible patient balances into the recovery the statute allows.

Methodology

This note is a policy mechanics overview drawn from public CMS guidance, the cost-report consulting literature, and the aggregate distress cohort data analyzed in our Q1 2026 reference report. References:

• CMS, Medicare Provider Reimbursement Manual (PRM-15-1), Chapter 3 — bad debt reimbursement rules
• CMS Worksheet S-10 instructions (FY2018 redesign and subsequent updates)
• 42 CFR §413.89 — bad debts, charity, and courtesy allowances
• Revenue Cycle Distress at Independent U.S. Hospitals, Q1 2026 — Synergize AI, distress cohort bad debt aggregates

No hospital is named individually. The cohort-level bad debt figures are drawn from CMS HCRIS public filings, FY2021–FY2024.