On November 24, 2008, the United States District Court for the Southern District of California issued a decision in El Centro Regional Medical Center v. Leavitt affirming the Centers for Medicare & Medicaid Services' (CMS) denial of the hospital's Medicare bad debt because it failed to put "similar effort" into the collection of non-Medicare and Medicare accounts. Like a number of hospitals, El Centro sent its bad debts (both Medicare and non-Medicare) to outside collection agencies for pursuit of payment. The hospital's intermediary disallowed the hospital's Medicare bad debt reimbursement because, once at the outside collection agency, a different process for collection was applied to Medicare versus non-Medicare accounts. The hospital argued, and the Provider Reimbursement Review Board (PRRB) agreed, that by sending both Medicare and non-Medicare accounts to a collection agency it was pursuing reasonable collection efforts as required by the regulation, that its efforts were similar for both sets of accounts, and that Medicare manual provisions do not dictate the particulars of the efforts once the accounts are sent to a collection agency. According to the PRRB, "the manual provision [governing reasonable collection efforts] is a [Medicare] program guideline that is applicable to Medicare providers, and it cannot be applied to ... contracted collection agencies."

The CMS Administrator disagreed with the PRRB and imposed the "similar collection effort" requirement to activities conducted by the collection agency as well.

The district court found that it was not arbitrary and capricious for CMS to interpret its manual provisions on bad debt as being applicable to both in-house and outside collection efforts. Based on this finding, the court held that there was enough evidence in the record for CMS to determine that the collection efforts that occurred at the outside collection agency were less rigorous for Medicare accounts compared to non-Medicare accounts (e.g., the tone of collection letters were less threatening for Medicare accounts, the non-Medicare accounts were retained longer for additional collection efforts, etc.). The decision did not address the "Bad Debt Moratorium" that was central to the Foothill Hospital v. Leavitt decision issued by the D.C. district court in May of 2008 that found in favor of a hospital's claim for Medicare bad debt even though the claims were still in collection. Moreover, the Foothill court used the moratorium to issue a decision directly contrary to the Battle Creek Health Sys. v. Leavitt case in the Sixth Circuit in 2007.

These recent cases raise questions with respect to the legal landscape for Medicare bad debt claims. CMS (through its fiscal intermediaries) has taken a far more aggressive approach to denying bad debt claims in recent years. Hospitals facing these denials should preserve their appeal rights, as some of the approaches taken by CMS appear to be inconsistent with the Medicare regulations or prior agency policy governing reimbursement for Medicare bad debt. Additional cases involving collection activities and the appropriate timing of "write-offs" are working their way through the appellate system that may ultimately clarify the limits of CMS actions.