District Court Finds That Lack of Asset Test for Indigence Does Not Preclude Bad Debt Reimbursement

26 August 2009 Publication
Authors: Judith A. Waltz

American Health Lawyers Association

In a decision dated August 18, 2009, a district court distinguished between the terms must and should, and concluded that section 312 of the Medicare Provider Reimbursement Manual (PRM) did not require that a provider perform an asset test in order to determine if a Medicare beneficiary is indigent for purposes of bad debt reimbursement to an acute-care hospital.2 Rather, the Court concluded that the use of the term should in paragraphs B (referencing an analysis of assets) and D (referencing documentation of the method by which indigence was determined) of Section 312 are best construed as "strong but noncompulsory recommendations."

As pertinent here, Medicare reimburses hospitals under Medicare Part A based upon the reasonable and necessary costs incurred in caring for Medicare beneficiaries. Reasonable costs are defined by regulation as those costs—direct and indirect—related to the treatment of Medicare beneficiaries.3 Medicare reimburses providers for costs associated with uncollectible beneficiary deductibles and co-insurance to avoid the possibility that costs of Medicare-covered services might be borne by others than Medicare beneficiaries (sometimes referenced as "cross-subsidization").4

The hospital required patients with debts greater than a specified limit to complete a financial disclosure form detailing both income and assets. For those with a balance below that limit, patients were asked only about income. In addition, the hospital determined that some of its patients were "indigent" through an upfront screening process, either by completion of a pre-admission financial aid worksheet or by virtue of residence in a certain "catchment area." The hospital's claim for bad debt reimbursement was denied based upon the finding by the fiscal intermediary that Section 312 of the PRM required that, in making a determination of indigence, the provider should take into account the patient's total resources, including assets, liabilities, and income.

At issue were the cost-reporting years 1999-2001. The court rejected the Secretary's final decision (that of the CMS Administrator), which in turn had overturned the ruling of the Provider Reimbursement Review Board (PRRB), which reversed the denial by the fiscal intermediary. After citing several cases that distinguish between should and must, the court concluded as follows:

The Secretary has the discretion to change the language of the PRM so that each paragraph uses the auxiliary verb must, but for some reason she has chosen not to. In order to preclude courts from reaching the same conclusion in future decisions, the Secretary should amend Section 312 of the PRM.


2 Baptist Healthcare Sys. v. Sebelius, No. AW-08-0677, 2009 WL 2514065 D.D.C. (August 19, 2009).
3 42 C.F.R. § 413.9(b)(1).
4 42 C.F.R. § 413.89(d).


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