Bad Debt Loss

A bad debt loss arises when a health care provider is unable to fully, or partially, collect amounts rightfully due it, as a result of the failure of a patient or third party to fulfill payment obligation. Generally, bad debt losses are associated with accounts receivables generated in the normal course of business. A common example is the failure of an individual to pay for services provided and billed. In the health care environment, a bad debt loss is different from a contractual adjustment or charity care. A contractual adjustment is the difference between normal or standard charges and amounts that are contractually due the health care provider under various contracts (such as with commercial insurance carriers, Medicare, or Medicaid). Charity care represents amounts that are not collected but for which there was never an expectation of payment, because of the patient's financial resource limitations.

Bad debt losses, in contrast, are amounts the organization has a right to collect and for which it fully expects payment at the time services are rendered. If the patient or third party (such as an HMO or a commercial insurance company) does not make the payment, these amounts are recorded as bad debt losses. Bad debt losses are shown as an operating expense in the health care provider's income statement, similar to other types of expenses, and may be the actual write-offs during a period or an estimate based on historical expense. Any future recoveries of amounts written off as bad debt losses may be recognized as income when received.