After understanding the difference between Gross Charges and Contractual Allowances, we jump to a new EMS Finance scenario. As similar as they may seem, Contractual Allowance and Bad Debt Allowance are distinct write-off policies that affect reimbursement for EMS providers.
While both signify an unrecoverable reimbursement amount, Contractual Allowances happen due to a contractual agreement between parties. Conversely, Bad Debt occurs because of high deductible rates, uninsured or underinsured patients, and misunderstandings about what insurance will pay.
Most EMS providers are not contracted with commercial insurances, causing ambulance responses to be classified as out-of-network services. That usually means a patient must reach the out-of-network deductible rate before insurance pays for a percentage of the service.
Understanding Bad Debt Allowance
Maria has health insurance coverage with Company A. While at work, she had a severe medical condition, was treated with ALS1 interventions, and transported to the nearest hospital. The ambulance crew responding to the call drove 20 miles from Maria’s office to the hospital. With a fee bundling system, this particular EMS agency prices ground mileage at $25 and ALS1 treatment at $2,000. The final gross charge for this emergency run is $2,500.
However, Maria still needs to meet her $10,000 annual out-of-network deductible. So, Company A observes that Maria is responsible for paying the total of the ambulance bill.
There are many ways to determine a Bad Debt Allowance. A common industry practice is through previous patients’ historical cash collection trends. In this scenario, the EMS agency’s billing partner estimated that 40% of outstanding patient balances are uncollectible. This results in $1,000 ($2,500 x 40%) representing a Bad Debt Allowance. While the service provided by the ambulance crew costs $2,500, the estimated collection of cash is only $1,500.
Our Recommendations for Bad Debt Write-off
Bad Debt Allowances are deductible for tax purposes once the related account receivable is written off from the taxpayer’s books. After collection efforts, the record must show the allowance as uncollectible. These efforts must be exhausted both internally and by a third-party collection agency.
As a financial advisor for EMS agencies, EMERGICON recommends that agencies who partner with third-party collection agencies send accounts to collections after 180 days of no activity. The recommendation for EMS providers who don’t utilize a third-party collections company is to write off accounts with no activity for 12 months.
The IRS requires Bad Debt Allowances to be clearly reported. When compiling financial information, EMS providers should create separate entries for gross revenue, contractual allowances, and bad debt allowances to ensure proper tax return reporting.
If you have questions about Bad Debt Allowance, contact EMERGICON’s teams through our EMS & Client Hotline: 866-839-3671 | firstname.lastname@example.org.