Medicare Bad Debt Reporting Rules for SNFs

Medicare bad debt reimbursement lets skilled nursing facilities recover a share of the Medicare cost-sharing amounts that residents never pay, and it survives as one of the only cost-based settlement items left in a payment system built around flat, prospective rates. The SNF Prospective Payment System covers nearly every cost of furnishing covered services, routine, ancillary, and capital-related alike, folding them into a single bundled payment. Bad debt sits outside that bundle, along with costs tied to approved educational activities, because federal rule carves it out by name.

What actually qualifies as bad debt is narrow: the Medicare Part A and Part B deductibles and coinsurance that a facility cannot collect from a resident. Those uncollectible amounts get reported on the facility's annual Medicare cost report and settled through its Medicare Administrative Contractor, the MAC assigned to that provider's jurisdiction. Under current law, Medicare reimburses eligible facilities for a fixed percentage of allowable bad debt rather than a dollar-for-dollar recovery, which means the facility absorbs the remaining minority share regardless of how diligently it pursued collection.

Getting that 65 percent requires more than identifying an unpaid balance and listing it on a form. SNFs report allowable Medicare bad debt expense on the Medicare cost report, and for cost reporting periods ending on or after September 30, 2025, that means using the redesigned CMS-2540-24 form, which replaces the prior CMS-2540-10. The redesign gets its own treatment later in this piece: the vehicle for claiming this reimbursement just changed, and facilities that treat the new form as a cosmetic update rather than a structural one risk mapping their bad debt data incorrectly.

Bad debt reimbursement is conditional: a debt only qualifies if it passes a specific legal test, and every subsequent step, from the 120-day collection clock to the dual-eligible billing sequence to the documentation sitting in the resident file, exists to prove that the test was met. The next section lays out what that test requires.

The four-part eligibility test every SNF bad debt claim must satisfy

Before a facility can write off a balance and claim it as Medicare bad debt, the debt has to satisfy four criteria set out at 42 CFR 413.89(e). All four have to be true at once. Failing even one disqualifies the claim, no matter how thorough the rest of the documentation looks.

The first criterion requires that the debt be related to covered services and derived from deductible and coinsurance amounts. That single requirement does a lot of work on its own. It immediately excludes Medicare Advantage and Medicare HMO claims from the bad debt schedule, because those arrangements are contractual matters between the provider and a private plan rather than Medicare fee-for-service cost-sharing, and the cost report's bad debt provisions simply do not reach them. It also excludes deductibles and coinsurance tied to physicians' professional services, which belong to a different billing stream entirely and have no place on the SNF bad debt schedule.

The second criterion asks whether the provider made a reasonable effort to collect the debt before giving up on it. This is not a formality. CMS expects the collection effort applied to a Medicare balance to resemble, in intensity, what the facility applies to a comparable non-Medicare balance. Because this criterion has its own detailed sub-rules, governing when the clock on collection starts and what resets it, it gets a full section of its own next.

The third criterion requires that the debt was actually uncollectible at the moment it was claimed as worthless. This is a present-tense judgment made at a specific point in time, not a retrospective one. A facility cannot claim a debt as worthless in one period and justify it later based on information that only became available afterward.

The fourth criterion requires sound business judgment establishing that there was no likelihood of recovery at any time in the future. This is where the facility has to show its reasoning, not just its outcome. CMS wants evidence that the determination of worthlessness rested on a considered judgment.

Two threshold conditions underlie all four criteria. The accounting treatment has to be correct: Medicare bad debts must be charged to an expense account for uncollectible accounts, never written off to a contractual allowance account. And the timing has to be correct: under 42 CFR 413.89(f), the bad debt must be written off and recognized as allowable in the cost reporting period in which the account is deemed worthless. There is no retroactive do-over for a missed period.

Rules governing the 120-day collection clock

The reasonable-collection-effort criterion from the previous section is abstract on its face. CMS translates it into something concrete through what is generally called the 120-day rule, and this rule is where most SNF bad debt claims succeed or fail at audit.

Under Provider Reimbursement Manual 15-1, Section 310.2, if a facility has made reasonable and customary collection attempts and the debt still sits unpaid beyond the applicable period measured from the date the first bill was mailed to the beneficiary, the debt may be deemed uncollectible. The first bill itself has a timing requirement attached to it. Get that first bill date wrong, or fail to document why it was sent when it was, and the whole claim is vulnerable. Delays in sending the first bill, if they are not backed by verifiable documentation explaining the delay, result in disallowance.

One detail trips up billing teams more than almost any other: any payment received from the beneficiary restarts the 120-day clock. Facilities that assume partial payments simply reduce the amount eventually written off are making an assumption the rule does not support.

Collection agencies complicate the sequencing further. The order matters: agency referral and agency return both have to happen, in that order, before the write-off is valid. There's also the "like amount" rule, which closes an obvious loophole. Doing so disqualifies the Medicare bad debt claim.

When an agency does collect something, even a partial amount, the full amount collected has to be credited back to the patient's account receivable. The agency's collection fee gets charged to administrative costs. It is not itself treated as part of the bad debt calculation. Keeping that distinction straight in the facility's books prevents the bad debt schedule's reconciliation from being thrown off later on.

Special rules for dual-eligible residents

Residents enrolled in both Medicare and Medicaid, commonly called dual-eligibles, make up one of the most heavily scrutinized categories in SNF bad debt claims, and the reason comes down to a single procedural requirement that has to happen before anything else. CMS's Must Bill Policy for Dual Eligible Beneficiaries requires providers to bill the individual state for the Medicare co-pays and deductibles before claiming Medicare bad debt on that resident's balance. It is a condition the claim has to satisfy to be valid.

The policy itself is not new. A facility encountering this requirement for the first time during an audit is running into a standard that has been in place for roughly two decades.

What the rule demands in practice is sequencing. The resident file has to contain the Medicaid remittance advice indicating either payment or denial before the facility can write off the remaining balance and claim it as Medicare bad debt. Billing the state and waiting for its response is a precondition for the write-off, and the resident file needs the evidence of Medicaid's response sitting in it before the facility takes the write-off.

Following this sequence pays off: skipping the state-billing step means the amount never becomes eligible for Medicare bad debt reimbursement, no matter how uncollectible it ultimately proves to be.

Documentation requirements for the resident file

Every rule described so far, the four-part eligibility test, the 120-day clock and what restarts it, the dual-eligible billing sequence, has to be demonstrable from the resident file at the moment a MAC auditor opens it. None of it can be reconstructed from memory or inferred after the fact once a claim is under review.

The file needs to document the initial bill date and the basis for determining when the 120-day clock started, whether that basis is the Medicare remittance advice date or a secondary payer's response date. Subsequent collection actions belong in the file too: follow-up billings, letters, phone or in-person contacts, each with a date attached, because those dated entries are what distinguish a genuine collection effort from a token one in the eyes of an auditor applying Criterion 2.

If a collection agency was involved, the file needs documentation of the referral to that agency and, just as important, documentation that the agency returned the account as uncollectible. For dual-eligible residents, the Medicaid remittance advice showing payment or denial has to be in the file before the write-off is taken, consistent with the sequencing requirement described in the previous section. And the write-off date itself has to fall within the cost reporting period being claimed on; Medicare bad debts are claimed based on the actual write-off date, not the date the debt was first identified as a concern.

Two more pieces round out a complete file. Comparing the detailed statistical and reimbursement report against the facility's own records is a basic step in catching discrepancies before a MAC does.

None of this is an advanced practice reserved for facilities with extra administrative capacity. It is the baseline standard the eligibility test and collection rules are measured against, and a claim that satisfies every substantive requirement but lacks the paper trail to prove it is a claim that an auditor has no basis to approve.

Reporting bad debt on the Medicare cost report, including changes under the new CMS-2540-24

All of the eligibility, timing, and documentation rules covered so far ultimately feed into a single filing: the annual Medicare cost report. Under the prior form, CMS-2540-10, SNFs reported allowable Medicare bad debt expense on Worksheet D-1. That structure held for years and became familiar enough that billing and finance teams built their internal processes around its specific layout.

CMS replaced CMS-2540-10 with CMS-2540-24 for cost reporting periods ending on or after September 30, 2025, marking the first major redesign of the SNF cost report form in many years. Electronic submission to the facility's MAC is still required by the last day of the fifth month after the reporting period ends, so the filing deadline itself has not moved even as the form's internal structure has.

The Series E worksheets, which calculate the provider's reimbursement settlement whenever bad debt or vaccine activity is involved, carry some of the most consequential changes and have been flagged as a high-risk area under the new form. For facilities accustomed to the old D-1 layout, this is not a cosmetic reshuffling. It changes where bad debt data lives on the form and how it connects to the settlement calculation.

One thing the redesign does not touch: bad debts tied to Medicare Advantage and Medicare HMO claims remain excluded from the cost report's bad debt schedule, just as they were excluded under the eligibility test in 42 CFR 413.89(e). That exclusion holds regardless of which version of the form a facility is using.

The practical risk here is a mapping problem. Getting the eligibility test and documentation right counts for little if the final number lands on the wrong line of the wrong worksheet.

Where SNF bad debt claims fail

The rules described throughout this piece are not theoretical. Federal oversight bodies actively review how MACs handle provider cost reports, and their findings show that bad debt is a recurring source of error on both sides of the transaction, the facility's and the contractor's.

One such review, OIG audit A-04-22-06264, examined all 12 A/B MAC jurisdictions across federal fiscal years 2019 through 2021. The audit found that each of the 12 MAC jurisdictions failed to comply with contract requirements for audit and reimbursement desk review and audit quality in at least one of the three years examined. That finding cuts against the assumption that a cost report, once submitted and settled by a MAC, is beyond further scrutiny. If the contractors responsible for reviewing these claims are themselves falling short of contract requirements in a given year, the burden on the facility to document its own compliance thoroughly only grows heavier, not lighter.

What does this mean for an SNF preparing its own bad debt claim? It means the documentation standards covered earlier, the dated collection records, the Medicaid remittance advice for dual-eligibles, the write-off date matched to the correct cost reporting period, are not bureaucratic overhead to be minimized. They are the facility's own defense in an environment where oversight itself is uneven and the stakes run in both directions: a disallowed claim means lost reimbursement, and an improperly claimed one can mean a repayment demand long after the money has been booked as received. The four-part eligibility test, the 120-day clock, the dual-eligible billing sequence, and the resident file documentation are not separate hurdles to clear one at a time. They are one continuous chain, and a claim is only as strong as its weakest link.