What is considered bad debt in medical billing?
Bad debt in healthcare represents an estimate for a bill that the patient or other payor cannot, or will not, pay. Bad debt is also referred to as uncompensated care. Some healthcare providers will report a bad debt as the difference between what a patient was billed and the amount of the bill that was paid.
A hospital incurs bad debt when it cannot obtain reimbursem*nt for care provided; this happens when patients are unable to pay their bills, but do not apply for charity care, or are unwilling to pay their bills. Uncompensated care excludes other unfunded costs of care, such as underpayment from Medicaid and Medicare.
Bad Debt Write-off
Bad debt allowance represents an estimated amount a patient can't or won't pay from his portion of the bill. These bad debt write-offs in medical billing exist to adjust the difference between the entire patient portion of the bill and the actual amount the patient paid.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Bad Debt Percentage Benchmark
The industry standard benchmark for Bad Debt Percentage is typically around 2-3% of net patient revenue. This means that for every $100 in net patient revenue, a healthcare organization should aim to write off no more than $2-$3 as bad debt.
Examples include debts with high or variable interest rates, especially when used for discretionary expenses or things that lose value. Sometimes, bad debts are just good debts gone awry. Credit card debt is an example of this: If you have a high-interest credit card and pay off your balance each month, no problem.
Technically, "bad debt" is classified as an expense. It is reported along with other selling, general, and administrative costs. In either case, bad debt represents a reduction in net income, so in many ways, bad debt has characteristics of both an expense and a loss account.
A debt becomes worthless when the surrounding facts and circ*mstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt.
Typically, a business writes off a bad debt when: The debt has remained unpaid for more than 90 days. The debtor has shown no willingness to establish a payment plan. The debtor has filed for bankruptcy.
If there's a true financial need or if the patient says flat out, 'I can't pay and don't intend to pay,' then write it off at that point.” Notably, if a physician wants to provide a discount to a patient, one legal way to do so is to simply not charge at all.
What is classed as bad debt?
Bad debt refers to loans or outstanding balances owed that are no longer deemed recoverable and must be written off. Incurring bad debt is part of the cost of doing business with customers, as there is always some default risk associated with extending credit.
What is the bad debt expense formula? To calculate bad debt expenses, divide your historical average for total bad credit by your historical average for total credit sales. This formula gives you the percentage of bad debt, which represents the estimated portion of sales deemed uncollectible.
IDEAL – . 2% (. 002 x Total Sales)
Bad debt in healthcare represents an estimate for a bill that the patient or other payor cannot, or will not, pay. Bad debt is also referred to as uncompensated care. Some healthcare providers will report a bad debt as the difference between what a patient was billed and the amount of the bill that was paid.
Source: California Health Interview Survey (2017-2021). In 2021, 30.2% of adults burdened with medical debt owed less than $1,000 and 11.3% owed more than $8,000 (Figure 3).
A reasonable revenue cycle can be maintained with a 90% or above net collection rate, though the American Academy of Family Physicians said the minimum should be 95%, with the industry average being 95–99%.
If it's between 43% to 50%, take action to reduce your debt load; consulting a nonprofit credit counseling agency may be helpful. If it's 50% or more, your debt load is high risk; consider getting advice from a bankruptcy attorney.
The difference between good debt and bad debt is that good debt offers long-term financial benefits to you, whereas bad debt hurts your finances. Examples of good debt include mortgages that provide a home and a valuable asset and student loans that provide job skills.
Examples of good debt are taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt. Each may put you in a hole initially, but you'll be better off in the long run for having borrowed the money.
You are still legally responsible for the unpaid debt, and it will take time for your credit score to fully bounce back from a charged-off account. However, addressing a charge-off as quickly as possible can help lessen the impact on your credit score in the future.
What type of expense is bad debt?
Bad debt expense (BDE) is an accounting entry that lists the dollar amount of receivables your company does not expect to collect. It reduces the receivables on your balance sheet. Accountants record bad debt as an expense under Sales, General, and Administrative expenses (SG&A) on the income statement.
When a business does not expect to recover a debt, the debt becomes bad and is written off. To assume a more attractive position and reduce its tax liability, banks often write off toxic loans, the most common form of bad debt for a bank.
Business bad debt is an account or note receivable that will remain unpaid and uncollectible. It usually stems from a customer or debtor failing to pay an amount they owe – because they either dispute the amount due, become insolvent, or go out of business.
This involves taking the total amount of outstanding invoices and dividing it by your average monthly sales, from which you can calculate an estimated bad debt expense.
In other words, you know that the debt is irrecoverable. In the bad debt write-off method, you'll debit the bad debt expense for the amount of the write-off and credit the accounts receivable asset account for the same amount. Note that the bad debt write-off is used primarily by UK-based businesses using IFRS.
