[Federal Register Volume 68, Number 27 (Monday, February 10, 2003)]
[Proposed Rules]
[Pages 6682-6687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2974]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 413

[CMS-1126-P]
RIN 0938-AK02


Medicare Program; Provider Bad Debt Payment

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would remove the cap on allowable Medicare 
bad debt for end-stage renal disease (ESRD) facilities and expand the 
application of a 30 percent reduction in bad debt reimbursement for 
hospitals to other Medicare providers or entities currently eligible to 
receive bad debt reimbursement. In addition, this proposed rule would 
clarify that bad debts are not allowable for entities paid under 
reasonable-charge or fee schedule methodologies. The goal of this 
proposal, with respect to bad debt payment, is to achieve a consistent 
bad debt reimbursement policy for hospitals and other providers or 
entities currently eligible to receive payments from Medicare for bad 
debt.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on April 11, 2003.

ADDRESSES: In commenting, please refer to file code CMS-1126-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. Mail written comments (one original and 
three copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services,Attention: 
CMS-1126-P, PO Box 8017, Baltimore, MD 21244-8017.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses: Room 443-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201, or Room C5-14-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Katie Walker, (410) 786-7278.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments 
received timely will be available for public inspection as they are 
received, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule 
an appointment to view public comments, phone (410) 786-7195 or (410) 
786-7201. We must be contacted at least 72 hours in advance.
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, PO Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order

[[Page 6683]]

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I. Background

A. Bad Debt Reimbursement

    In 1966, the Health Insurance Benefits Advisory Committee (HIBAC) 
(authorized by section 1867 of the Social Security Act, repealed 1984) 
recommended that Medicare cover the unpaid deductible and coinsurance 
amounts that arose in connection with the provision of covered services 
to beneficiaries (herein referred to as Medicare bad debt). This 
recommendation was meant to avoid cross-subsidization that might occur 
if hospitals or other entities tried to recoup Medicare bad debt from 
other payers. The HIBAC believed that under the statute, the Congress 
had intended to avoid cross-subsidization by meeting the cost of the 
bad debts that accrued to a provider where these amounts were otherwise 
uncollectible. The reasoning behind this view flowed from section 
1861(v)(1)(A)(i) of the Act, which states that the costs for 
individuals covered by the Medicare program must not be borne by 
individuals not covered by the program, and the costs for individuals 
not covered by the program must not be borne by Medicare. We refer to 
this statutory provision as the prohibition on cross-subsidization. The 
Secretary agreed with the HIBAC recommendation and the bad debt policy 
was adopted in 1966. This anti-cross subsidization principle is now 
part of the definition of ``reasonable cost'' as defined in section 
1861(v) of the Act.
    Under section 2145 of the Omnibus Budget Reconciliation Act (OBRA) 
of 1981 (Pub. L. 97-35), the Congress mandated a prospective payment 
system (PPS) for paying providers of various services covered by 
Medicare. Hospitals became the first provider-type to receive Medicare 
reimbursement under this law with the establishment of a PPS for 
inpatient hospital services in 1983. PPS replaced the retrospective 
cost-based reimbursement methodology previously in effect. Under this 
reimbursement system, Medicare payment for Part A inpatient operating 
costs is made on the basis of a prospectively determined rate per type 
of discharge, as determined by the classification of each patient case 
into a diagnosis-related group (DRG).
    Shortly after implementation of PPS, in a Priority Audit Memorandum 
dated July 9, 1985, the Office of Inspector General (OIG) recommended 
that, in light of this new payment system, we should discontinue the 
reimbursement of inpatient hospital bad debts. After a thorough 
evaluation, we rejected the OIG's recommendation to discontinue paying 
bad debt for hospitals, concluding that the payments continued to be 
appropriate for the reasons discussed below. We also evaluated and 
rejected a second option suggested by the OIG to include a bad debt 
component in the DRG rates. We decided that this proposal would limit a 
hospital's incentive to collect the deductible and coinsurance amounts 
from the beneficiary and would address only the inpatient side. We also 
felt that because every facility incurred varying amounts of bad debt, 
the inclusion of bad debt in the DRG rates would be inequitable.
    Therefore, in accordance with our regulations, we have continued to 
recognize bad debt for entities receiving payment under a PPS, such as 
for inpatient hospital services (42 CFR 412.115(a)), where Medicare 
payment policy, before PPS, recognized payment of those bad debts and 
where the prospective payments were derived from costs that did not 
reflect base period Medicare bad debts. That is, the prospective rates 
used to reimburse entities for services furnished to Medicare patients 
have basis in cost and are calculated using cost data reported by the 
entities on a base year cost report. They are then updated for 
inflation to the year in which payments are to be made. However, the 
bad debts incurred during that base period were not included in the 
calculation of the prospective rates. The bad debts for these entities 
are claimed at the end of each fiscal year, and allowable amounts are 
reimbursed separately.
    Entities currently eligible to receive bad debt payments include 
hospitals, skilled nursing facilities (SNFs), critical access 
hospitals, rural health clinics, end-stage renal disease (ESRD) 
facilities, federally qualified health clinics, community mental health 
clinics, health maintenance organizations (HMOs) reimbursed on a cost 
basis, competitive medical plans (CMPs) and health care pre-payment 
plans.
    The general bad debt policy is set forth in regulations at Sec.  
413.80 and the Provider Reimbursement Manual (PRM) (CMS Pub. 1501), 
Part 1, Chapter 3). Bad debt policy for ESRD Facilities is set forth in 
a separate regulation at Sec.  413.178 and is further discussed below.

B. Reasonable Charge/Fee Schedules

    The concept of Medicare bad debt payments applies only to services 
reimbursed on the basis of reasonable cost. Medicare has never made 
payments to account for bad debts for services paid under a fee 
schedule or reasonable charge methodology, such as services of 
physicians or suppliers. Under a fee schedule or reasonable charge 
methodology, Medicare reimbursement is not based on costs and, 
therefore, the concept of unrecovered costs is not relevant. Fee 
schedules, which are either charge-based or resource-based, relate 
payments to the price the entity charges. Historically, these prices 
have reflected the entities cost of doing business, including expenses 
such as bad debt.

C. End-Stage Renal Disease Bad Debt Reimbursement

    Medicare pays ESRD facilities a prospectively determined composite 
rate. Under the payment rules authorized by sections 1881(b)(2) and 
(b)(7) of the Act as amended by OBRA of 1981, we pay 80 percent of a 
prospectively set rate for outpatient dialysis services. The Medicare 
beneficiary is responsible for the remaining 20 percent as a copayment, 
as well as any applicable deductible amounts set forth in Sec.  
413.176. If the ESRD facility makes reasonable collection efforts, as 
described in the PRM (CMS, pub. 15-1) Part I, (Section 310) but is 
unable to collect the coinsurance or deductible, we consider the 
uncollected amount to be a ``bad debt'' as described in Sec. Sec.  
413.178(b) and 413.80(b)(1) and (e).
    At the end of the year, Medicare recognizes a facility's Medicare 
bad debts. However, under our current regulations, bad debt payments 
are capped so that total Medicare reimbursement (composite rate plus 
bad debt payments) does not exceed the total cost to serve Medicare 
patients.
    Although section 1881 of the Act does not require Medicare to pay 
for an ESRD facility's Medicare bad debt, Medicare for many years 
(before the composite payment rate system) paid hospital-based ESRD 
facilities for their Medicare

[[Page 6684]]

bad debts, as it has long paid Medicare bad debts of other types of 
providers or entities that were paid on a reasonable-cost basis. By 
contrast, ``free-standing'' or independent ESRD facilities were paid on 
a reasonable charge basis and were expected to absorb any Medicare bad 
debt as part of that charge. When we developed the composite payment 
rate system, which is used to pay both hospital-based and free-standing 
ESRD facilities, we based payment on the results of audits of ESRD 
facilities' reported costs, exclusive of Medicare bad debts. For this 
reason, we decided it was appropriate to separately recognize these bad 
debts at the end of the facility's fiscal year. Under the authority 
granted us in section 1881(b)(7) of the Act, we considered two options 
for paying these bad debts. One option was to include the bad debt 
allowance in the calculation of the composite rate. The other option 
was to reimburse an ESRD facility's bad debts in a special payment at 
the end of the facility's cost accounting period. We decided that this 
latter option was preferable because it would allow us to pay each 
facility the exact amount of its allowable bad debts. We concluded 
that, under the statute, we could pay an ESRD facility for its bad 
debts incurred from providing services to Medicare beneficiaries, and 
thereby avoid indirectly passing on these bad debts to individuals not 
covered by Medicare. Similarly, we determined that it would be 
appropriate to cap the total bad debt payment at a facility's 
unrecovered costs. In this way, the combination of the composite rate 
payments and our payment, if any, for Medicare bad debts would not 
exceed the facility's total allowable cost of providing services to 
Medicare beneficiaries.
    In 1994, a group of providers of outpatient renal dialysis services 
challenged our regulation at Sec.  413.178(a), which caps reimbursement 
for an ESRD facility's bad debt at costs. The plaintiffs argued, among 
other things, that we had provided inadequate justification for the 
reimbursement cap and were unable to demonstrate that the cap was 
consistent with the statute, as required by the Administrative 
Procedure Act (APA) (5 U.S.C., 706(2)(A)). The U.S. District Court for 
the District of Columbia upheld our regulation as an acceptable 
exercise of our discretion under the APA. On appeal, however, the D.C. 
Circuit Court overturned the District Court's ruling and found that our 
explanation, relying on the statutory provisions relating to cross-
subsidization discussed above, was inadequate justification for the 
rule and inconsistent with a prospective rate scheme (Kidney Center of 
Hollywood et al. v. Shalala, 133 F.3d 78,88 (D.C. Circuit 1998)). The 
Circuit Court ordered that the final rule be vacated and remanded the 
case to us with the instruction that we either more adequately justify 
the rule or jettison it altogether.

D. Legislation Affecting Bad Debt Reimbursement for Hospitals

1. Omnibus Reconciliation Act of 1987
    In 1987, the Congress enacted section 4008(c) of the OBRA of 1987 
and later amended it in sections 8402 of the Technical and 
Miscellaneous Revenue Act of 1988 and section 6023 of OBRA of 1989. The 
provision, as amended, prohibits us from making ``any change in the 
policy in effect on August 1, 1987, regarding reimbursement to 
hospitals for Medicare bad debts.'' This legislation is collectively 
referred to as the moratorium on changes to the Medicare bad debt 
policy for hospitals. Since its enactment, the moratorium has precluded 
us from making any changes to bad debt policy for hospitals, although 
the Congress has authorized subsequent changes through legislation. The 
moratorium does not apply to entities other than hospitals. Since the 
inception of the Medicare program, bad debt reimbursement for entities 
other than hospitals has been and continues to be at our discretion. 
According to Kidney Center of Hollywood, et al. v. Shalala, the 
Secretary's discretion on this matter is broad as long as it is 
authorized by statute and is rationally justified. Therefore, we 
believe any changes made to bad debt policy for these other entities 
can be implemented by regulation.
2. Balanced Budget Act of 1997
    From 1989 to 1996, provider and entity cost report data showed an 
alarming growth in bad debt payments in the Medicare program. For 
hospitals alone, from 1990 to 1994, total Medicare bad debt payments 
grew 165 percent, from $415 million to $1.1 billion. During this 
period, the inpatient bad debts grew 140 percent, from $270 to $650 
million, and Part B (primarily outpatient) bad debts tripled, from $140 
to $430 million. In 1997, with increasing concern over the rapidly 
expanding payout for bad debts under Medicare, the Congress responded 
with section 4451 of the Balanced Budget Act (BBA) of 1997 (Pub. L. 
105-33). Section 4451 of the BBA amended section 1861(v)(1) of the Act 
by adding section 1861(v)(1)(T). The legislation required that, in 
determining reasonable costs for hospitals, the amount of bad debts 
otherwise treated as allowable costs (attributable to deductibles and 
coinsurance amounts) should be reduced by 25 percent for fiscal year 
(FY) 1998, by 40 percent for FY 1999, and by 45 percent for subsequent 
years.
3. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    As a response to concerns from Medicare hospitals that the fiscal 
impact of this provision of the BBA was too harsh, the Congress enacted 
section 541 of the Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (Pub. L. 106-554) (BIPA). This eased the 
reduction in hospital bad debt reimbursement from 45 percent to 30 
percent. Although the Congress decreased the reduction of bad debt 
reimbursement for hospitals, the BIPA did not address the issue for 
other providers.

E. Impact Using Prospective Payment Systems on the Role of Bad Debt in 
Medicare Payment Systems

    The introduction of the PPS has changed the context for Medicare's 
bad debt policy. The PPS for inpatient hospital services was introduced 
in 1983 out of a notion that cost reimbursement systems provided an 
incentive for providers to incur costs. The costs were passed along to 
Medicare automatically and provided no incentive for prudent and 
efficient management of hospital resources. This methodology provided 
no opportunity for hospitals to earn profit through efficiency. The DRG 
payments were intended to provide a context in which the hospitals that 
achieved savings through efficiency and innovative practices could 
profit from their efforts. In fact, the result of this change in 
payment system was that hospital Medicare margins (a rough measure of 
the extent to which payments exceeded actual costs) rose immediately 
and have continued to exceed pre-PPS levels.
    In this context, making separate payments for uncollected Medicare 
deductible and coinsurance amounts is no longer an appropriate 
expression of Medicare's responsibility for reimbursement, especially 
in a marketplace where commercial insurers do not make similar 
adjustments in their payments. In fact, the availability of additional 
payment when debts are not collected provides an incentive to the 
provider to forego effective collection efforts in return for the 
certainty of Medicare payments. If Medicare did not recognize these 
payments, there would be a greater incentive for the hospitals

[[Page 6685]]

to attempt to collect from the beneficiary. We believe that the 
percentage reduction in bad debt reimbursement would be a step toward 
fostering this incentive for nonhospital entities.
    Fiscal responsibility to the Medicare program is an important 
factor in implementing this rule. We believe that reducing the amount 
of Medicare bad debt reimbursement by 30 percent will encourage 
accountability and foster an incentive to be more efficient in bad debt 
collection efforts. We also believe strongly that Medicare bad debt 
policy should be applied consistently and fairly among all providers 
eligible to receive bad debt reimbursement. Currently, hospitals are 
the only entities experiencing a reduction in bad debt reimbursement. 
Furthermore, ESRD facilities are the only entities whose bad debt 
claims are capped at the facilities costs.
    After considering the action of the Congress in setting the 
reduction in bad debt reimbursement at 30 percent for hospitals, we 
decided that the number used by the Congress in this action was an 
equitable and reasonable policy choice with respect to entities other 
than hospitals. Subsequently, we decided to draft a regulation that 
would advance a consistent bad debt reimbursement policy for all 
Medicare entities. To implement this rule, we propose to remove the cap 
on allowable bad debt for ESRD facilities and apply the 30 percent 
reduction in bad debt reimbursement that was legislated for hospitals 
to all Medicare providers or entities eligible to receive payments in 
recognition of Medicare bad debts. We propose to implement the 
reduction in bad debt incrementally (as the Congress chose to do to 
implement the BBA reduction for hospitals) over a 3-year period to 
mitigate the impact on entities. Again, as discussed above, we believe 
that the percentage reduction in bad debt reimbursement would be a step 
toward fostering an incentive for nonhospital entities to make 
conscientious, effective collection efforts on their unpaid Medicare 
patient accounts.

II. Provisions of the Proposed Rule

A. Removal of Cap on End-Stage Renal Disease Bad Debt Reimbursement

    In accordance with the DC Circuit Court ruling discussed above and 
in order to be consistent with other entities as mandated in the 
President's 2003 budget, the cap on ESRD bad debt reimbursement should 
be removed.
    This proposed rule would, therefore, remove the cap on ESRD bad 
debts and allow ESRD facilities to claim bad debts at an amount 
exceeding unrecovered costs.

B. Adjustment in Allowable Bad Debt Reimbursement to Hospital Levels

    As discussed above, we propose to reduce the amount of allowable 
bad debt for entities other than hospitals by 10 percent for cost 
reporting periods beginning October 1, 2003, by 20 percent for cost 
reporting periods beginning October 1, 2004, and by 30 percent for cost 
reporting periods beginning October 1, 2005 and thereafter. The 
entities currently included in this proposal are SNFs, ESRD facilities, 
rural health clinics, critical access hospitals, community mental 
health clinics, and federally qualified health clinics. Cost HMOs/CMPs 
and health care pre-payment plans are excluded from the proposed 30 
percent reduction as the bad debt reimbursement for these entities is 
already limited according to Sec.  417.536. The unpaid deductible and 
coinsurance amounts for services rendered by these entities is limited 
to no more than 3 months of the premium (portion related to deductible 
and coinsurance) for any one individual. To be reimbursable, the 
deductible and coinsurance must relate to what is covered under 
Medicare and under our contract with the HMO/CMP. As discussed above, 
the incremental reduction over a 3-year period is intended to mitigate 
the impact on entities.

C. Confirmation of Bad Debt Policy for Services Paid Under a Charge-
Based Methodology or Fee Schedule

    This proposed rule would amend language in the existing bad debt 
regulations to clarify that bad debts are not recognized or reimbursed 
for any services paid under a reasonable charge-based methodology or a 
fee schedule. This clarification is not a change in policy.

III. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C.A. section 3506(c)(2)(A)).

IV. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the ``DATES'' 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the major comments in the preamble to that 
document.

V. Regulatory Impact Statement

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), 
section 1102(b) of the Act, the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), and Executive Order 13132. We believe that this 
regulation would qualify as a major rule.
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year). We believe 
that this regulation would qualify as a major rule and that the impact 
would be economically significant.
    Most ESRD facilities would benefit from this proposed rule, as they 
would be allowed to claim and receive reimbursement for more of their 
Medicare bad debts, allowing them to claim bad debts over their 
unrecovered costs.
    Some entities, such as SNFs and rural health clinics, may 
experience a reduction in their bad debt reimbursement as a result of 
this rule. Data from SNF cost reports show bad debt totals of 
$8,244,192 for FYE 1996, $13,070,786 for FYE 1997 and $12,501,755 for 
1998 (only settled cost report data was used and fewer cost reports 
were settled for 1998). Bad debt data for independent rural health 
clinics, federally qualified health centers and community mental health 
clinics is not captured because the independent facilities, which make 
up the majority of these entities, do not file electronic cost reports. 
The reduction in reimbursement would also affect critical access 
hospitals, which are defined under section 1820 of the Act and were not 
subject to the reduction in bad debt reimbursement imposed by the BBA 
on hospitals defined in section 1861(v)(1). Cost report data for 
critical access hospitals was badly skewed because of systems problems 
after November 1,

[[Page 6686]]

1997. Lab and outpatient services (which one Intermediary reports 
accounts for 30 to 40 percent of the revenue for critical access 
hospitals) for some of these entities were reimbursed on a cost basis 
with applicable coinsurance and deductible amounts, while some of these 
entities were paid under a fee schedule with no reimbursement for bad 
debts. As of November 29, 1999, coinsurance and deductibles were 
eliminated from lab services for critical access hospitals. We expect 
that this action will significantly reduce the amount of bad debt 
incurred by these facilities.
    The following is the individual estimate of the economic impact of 
this rule between provider types (in $millions):

------------------------------------------------------------------------
                                                                  Net
              Fiscal year                   SNF        ESRD      impact
------------------------------------------------------------------------
2003...................................        -20         20          0
2004...................................        -30         20         10
2005...................................        -70         20         50
2006...................................        -90         20         70
2007...................................       -100         20         80
------------------------------------------------------------------------

The impact on all other provider types would round to $0. For both SNF 
and ESRD facilities, these savings or costs represent only a small 
portion (about 0.5%) of the total Medicare payments for those 
facilities.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis (RIA) if a rule may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. Although this rule would 
impact some small rural hospitals, including critical access hospitals, 
most hospitals have already been subject to the 30 percent reduction 
implemented by statute. We believe this rule would not have a 
significant impact on the operations of a substantial number of small 
rural hospitals and the impact would be mitigated by implementing the 
rule gradually over a 3-year period.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and governmental agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million annually. Intermediaries and carriers are not 
considered to be small entities.
    Small rural hospitals of fewer than 100 beds, rural health clinics, 
community mental health centers, free-standing ESRD facilities, and 
hospital-based ESRD facilities would be affected by this rule. There 
are approximately 352 critical access hospitals, and all of these 
facilities would be small rural hospitals. To the extent that they 
incur bad debts, they would be affected. It is very difficult to assess 
the impact on these facilities because the impact, if any, on a 
facility would be influenced by the amount of bad debts the facility 
incurs. However, the elimination of coinsurance and deductible amounts 
for lab services rendered by critical access hospitals should 
substantially reduce the amount of bad debt that these small hospitals 
incur. Any Medicare participants that are currently receiving full 
(that is, uncapped) reimbursement for their bad debts would see a 
reduction in payment.
    Based on current data, there are approximately 3,528 freestanding 
and 787 hospital-based ESRD facilities. Although we are not certain how 
many of these facilities are small rural hospital-based, most ESRD 
facilities would benefit from this rule as they would be allowed to 
claim and receive reimbursement for more of their Medicare bad debts, 
allowing them to claim bad debts over their unrecovered costs. Costs 
are difficult to estimate because, as discussed above, not all uncapped 
ESRD bad debts were reported. We welcome all comments that would assist 
us in determining the possible impact of this rule on any of the above-
mentioned entities.
    Specific provisions of this proposed rule have already been applied 
in part to those ESRD facilities affected by the above-mentioned Kidney 
Center court settlement. These provisions, whether implemented as a 
result of the court settlement or the rule, were achieved through 
modifications made to the bad debt settlement portion of the cost 
report.
    We do not believe that the changes made in a final rule will affect 
beneficiary access to care, as affected providers will continue to be 
reimbursed for services provided to Medicare beneficiaries, including, 
where allowable, for Medicare bad debt. By reducing the amount of bad 
debt reimbursement from 100 percent to 70 percent, this rule will 
fairly compensate providers, while providing an incentive for them to 
make reasonable efforts to collect unpaid deductibles and coinsurance.
    The analysis indicates that some small, rural providers may 
experience an additional burden in the form of reduced payments for bad 
debts. However, our analysis points out that a number of factors will 
mitigate the impact on small rural hospitals and that payments to ESRD 
facilities will increase because of the removal of the cap on allowable 
bad debts claimed. It is impossible to determine the significance of 
the impact or the number of entities that may be adversely affected. We 
invite comments on our analysis.
    The Unfunded Mandates Reform Act of 1995 also requires (in section 
202) that agencies perform an assessment of anticipated costs and 
benefits before proposing any rule that may result in an annual 
expenditure in any 1 year by State, local, or Tribal governments, in 
the aggregate, or by the private sector, of $110 million. This rule 
does not impose any mandates on State, local or Tribal governments, or 
on the private sector, as defined by section 202. Entities such as 
hospitals, SNFs and ESRD facilities will continue to receive Medicare 
reimbursement for services provided to beneficiaries, including, where 
allowable, bad debt reimbursement.
    For purpose of analysis, we considered two alternatives to this 
policy, (1) maintaining the existing Medicare bad debt policy, or (2) 
eliminating bad debt reimbursement, where we had authority to do so. 
However, we believe that the Medicare bad debt policy proposed in this 
rule is equitable across provider types and ensures that providers have 
the incentive to make reasonable efforts to collect bad debts without 
affecting beneficiary access to care. In addition, the removal of the 
cap on bad debt reimbursement for ESRD facilities is also in accordance 
with the ruling in The Kidney Center of Hollywood, et al. v. Shalala.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. This rule would not have a substantial effect on State or 
local governments.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and record-keeping requirements.

    For the reasons set forth in the preamble, CMS proposes to amend 42

[[Page 6687]]

CFR chapter IV part 413 as set forth below:

PART 413--PRINCIPLE OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT 
RATES FOR SKILLED NURSING FACILITIES

Subpart F--Specific Categories of Cost

    1. The authority citation for part 413 continues to read as 
follows:

    Authority: Sections 1102, 1812(d), 1814(b), 1815, 1833(a), (i), 
and (n), 1871, 1881, 1883, and 1886 of the Social Security Act (42 
U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395hh, 1395rr, 1395tt, and 1395ww).

    2. In Sec.  413.80, paragraphs (h) and (i) are revised to read as 
follows:


Sec.  413.80  Bad debts, charity, and courtesy allowances.

* * * * *
    (h)(1) Limitations on bad debts for hospitals. The amount of bad 
debts otherwise treated as allowable costs (as defined in paragraph (e) 
of this section) is reduced as follows for cost reporting periods 
beginning during:
    (i) Fiscal year 1998, by 25 percent.
    (ii) Fiscal year 1999, by 40 percent.
    (iii) Fiscal year 2000, by 45 percent.
    (iv) All subsequent fiscal years, by 30 percent.
    (2) Limitations on bad debts for other entities. Except as provided 
in Sec.  417.536 of this title, the amount of bad debts otherwise 
treated as allowable costs (as defined in paragraph (e) of this 
section) is reduced as follows for cost reporting periods beginning on 
or after:
    (i) October 1, 2003, by 10 percent.
    (ii) October 1, 2004, by 20 percent.
    (iii) October 1, 2005 and all subsequent years, by 30 percent.
    (i) Exception. Bad debts arising from services paid under a 
reasonable charge-based methodology or a fee schedule are not 
reimbursable under the program.

Subpart H--Payment for End-Stage Renal Disease (ESRD) Services and 
Organ Procurement Costs

    3. In Sec.  413.178, paragraph (a) is revised to read as follows:


Sec.  413.178  Bad debts.

    (a) CMS will reimburse each facility its allowable Medicare bad 
debts, as defined in Sec.  413.80(b)(1), as determined under Medicare 
principles, in a single lump sum payment at the end of the facility's 
cost reporting period. The amount of allowable bad debt is reduced in 
accordance with Sec.  413.80(h)(2).
* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.774, 
Medicare--Supplementary Medical Insurance Program)

    Dated: September 3, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: January 2, 2003.
Tommy G. Thompson,
Secretary.
[FR Doc. 03-2974 Filed 2-3-03; 4:31 pm]
BILLING CODE 4120-01-P