invited you to try Thrizer! Start your free trial and enjoy waived credit card fees for your first in charges.
By Heard
A denied insurance claim is always disappointing.
When you treat a client and then the insurance company refuses to reimburse you, it can throw a wrench in your cash flow.
It’s only natural you would want to recover the cost. You may have heard of writing off “bad debt.” Does that mean you can write off the cost of denied claims?
Here’s what you need to know.
There are several reasons insurance payers may deny a claim. These include:
In most cases, problems with denied claims can be cleared up by contacting the insurance payer or your client directly.
But depending on your bookkeeping or accounting system (more or that below), a denied claim could lead to inaccurate financial records for your practice.
The term “bad debt” can be confusing, because it’s used to refer to two different concepts:
Some companies buy debt in the form of customer credit, Accounts Receivable, or unpaid invoices. For the most part, these companies are in the financial services sector.
If a company buys a debt, but then finds they can’t collect it, they can write off the value of that debt on their tax return.
For example, invoice factoring companies buy unpaid invoices from vendors. The vendor receives less than the total invoice amount, but in exchange, they get paid immediately. The invoice factoring company then collects on the debt and makes a profit.
If an invoice company buys an invoice but can’t collect it, then the debt they have purchased is worth nothing outstanding. In that case, they can write the debt off their taxes.
This type of bad debt is typically not an issue for therapy practices, since most therapy practices aren’t in the habit of purchasing debt.
The second type of bad debt has to do with day-to-day accounting or bookkeeping. And it’s only an issue if you use the accrual method of accounting.
There are two types of accounting: Cash basis and accrual.
With cash basis accounting, you record transactions on the books when you earn or spend money. For instance, if you treat a client, and then bill their insurance company, you only enter the earnings once you have received payment from the company.
With accrual basis accounting, you record transactions on the books when they are incurred regardless of whether or not you have the cash on hand. For instance, if you treat a client and then bill their insurance company, you would record the insurance company’s payment—as Accounts Receivable—on the books. Once the insurance company paid you, you would move the value from Accounts Receivable to Cash.
If you use the accrual method, a denied insurance claim may show up as bad debt on the books. In that case, you have billed the insurance payer and recorded the amount you’re owed under Accounts Receivable.
Once the claim is denied, you have income listed on the books which will never turn into real cash by moving from the Accounts Receivable account to the Cash account. There is a discrepancy between how much income you have earned and how much income you have on the books.
This type of bad debt is not tax deductible. It’s an accounting error, and it is usually easy to fix. More on that below.
In a word: No.
If you file an insurance claim and it’s denied, and you use the accrual method of accounting, you may have bad debt on the books.
But it’s not the type of bad debt that the IRS allows you to deduct from your taxes.
It’s up to you to communicate with your client and with the insurance payer to receive payment. And if you can’t collect payment, you’re out of luck. The most you can do is collect any bookkeeping inaccuracies that result.
If you’ve entered income from a bad insurance claim in your Accounts Receivable, but the claim is denied, writing it off the books is relatively straightforward.
First, credit Accounts Receivable the amount owing. Then debit a separate account, Bad Debt Expenses, the same amount. You then pay the expense with your revenues, reducing your total income.
In this case, the “total income” you’re reducing isn’t actual cash in hand. For instance, you may have recorded a bad claim of $100 in Accounts Receivable, bringing your total revenue for the month to $2,100. But that’s incorrect—your real revenue is $2,000, since you never collected the $100.
By paying down your Bad Debt Expenses account with your recorded revenues, you’re reducing them back down to $2,000 and bringing them in line with how much money you actually have.
Heard has partnered with Thrizer to help more therapists run effective practices.
If you want to skip denied claims entirely, Thrizer can help with your out-of-network clients.
Here’s the simple process:
If you’d like to try Thrizer for free, click here or sign up with promo code HEARD.
—
Heard is the only financial management software built for therapists that enables you to manage your business and personal finances, all in one place. Schedule a free consultation to learn more here.
This blog post is provided for informational purposes only and is not intended as legal, business, medical, or insurance advice. Laws relating to health insurance and coverage are complex, and their application can vary widely depending on individual circumstances and state laws. Similarly, decisions regarding mental health care should be made with the guidance of qualified health care providers. We strongly recommend consulting with a qualified attorney or legal advisor, insurance representative, and/or medical professional to discuss your specific situation and how the laws apply to you or your situation.
