Each year, hospitals and healthcare organizations undertake the complex process of preparing and filing their Medicare cost reports. While the process itself has become routine, the Centers for Medicare & Medicaid Services (CMS) continues to introduce updates that affect how data must be documented, classified, and reviewed. The FY 2026 IPPS Final Rule, released in August 2025, brings additional reporting clarifications and audit focus areas that will directly impact cost reports filed in the coming year. Below is a summary of the most significant developments affecting cost reporting. 

Medicare Bad Debts  

CMD reaffirmed in the FY 2026 Final Rule that the existing framework for Medicare bad debts (MBDs) remains unchanged, but clarified documentation and classification standards.  

• 120-Day Rule Clarification: Medicare administrative contractors (MACs) are instructed to verify that each payment restarts the 120-day collection period. Providers should ensure their systems capture payment activity in detail. 
• Dual-Eligible Accounts: CMS reiterated that a valid Medicaid Remittance Advice remains mandatory to support bad-debt claims. 
• Electronic Logs: Electronic documentation is permitted, but MACs expect consistent cross-referencing between the bad-debt log, collection history, and general ledger. 
• Charity Care vs. Bad Debt: The 2026 rule emphasizes continued separation and re-states that charity and courtesy allowances reduce revenue, not bad debt expense. 

CMS also noted that future audits will place a focus on provider policies, ensuring the written collection procedures align with actual practice. 

Uncompensated Care Reporting (Worksheet S-10) 

Starting with cost reports that began on or after October 1, 2025, CMS will now fully base hospital reimbursement for uncompensated care on the data hospitals report in Worksheet S-10 of the Medicare cost report. In other words, the numbers your organization reports for charity care, self-pay write-offs, and other uncompensated services will directly determine how much federal support your hospital receives through the Disproportionate Share Hospital (DSH) and Uncompensated Care (UC) payment programs. 

This makes accuracy and documentation especially important. Hospitals will need to: 

• Match charity-care totals in S-10 to their audited financial statements. 
• Clearly document any patient discounts that qualify as charity care under their financial assistance policy. 
• Be prepared for more pre-submission reviews by Medicare’s regional contractors before the cost report is accepted. 
  
  

Provider-Based Physicians  

CMS and the MACs continue to emphasize proper cost allocation for provider-based physicians under Worksheet A-8-2. The FY 2026 rule reiterates that: 

• Contemporaneous time records or time studies are required for the cost-reporting period. 
• Electronic time-tracking systems are acceptable if supported by signed certifications. 
• Agreements must clearly separate provider vs. physician components. 
• Lack of current-year documentation remains a top reason for full cost disallowance during audit. 
  
  

Rural Health Clinics and Community Health Centers 

The latest CMS updates also affect rural and community health clinics that bill Medicare for patient visits. 

• Updated RHC Payment Limits: CMS Transmittal MM12185 updated the All-Inclusive Rate (AIR) and Upper Payment Limit (UPL) for CY 2026 to $165. 
• These amounts apply on a calendar-year basis, regardless of the clinic’s fiscal year. 
• Telehealth Services: Clinics can continue to receive Medicare payment for virtual visits through December 31, 2026, under the current federal extension. However, these telehealth encounters must be tracked separately from in-person visits when reporting cost data. 
• Productivity Standards: CMS suspended the RHC productivity standard requirement for cost-reporting periods ending on or after January 1, 2025, meaning productivity no longer reduces reimbursement during settlement.
  
  

Connect with Lutz for Expert Guidance 

From Medicare cost report preparation and review to reimbursement analysis and operational consulting, our healthcare accounting services provide the insight and expertise hospitals and clinics need to stay compliant and financially sound. Contact us today to learn more about how our experts can help.