Order Code RL30526
CRS Report for Congress
Received through the CRS Web
Medicare Payment Policies
Updated February 23, 2005
Sibyl Tilson, Hinda Chaikind, Jennifer O’Sullivan, Paulette C.
Morgan, Diane Justice, and Julie Stone-Axelrad
Specialists and Analyst in Social Legislation
Domestic Social Policy Division
Barbara English
Technical Information Specialist
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare Payment Policies
Summary
Medicare is the nation’s health insurance program for the aged and disabled.
Part A of the program, the Hospital Insurance program, covers hospital services,
post-hospital services provided in skilled nursing facilities and by home health care
agencies, and hospice services. Part B, the Supplementary Medical Insurance
program, covers a broad range of complementary medical services including
physician, laboratory, and outpatient hospital services, and durable medical
equipment. Part C provides managed care options for beneficiaries who are enrolled
in both Parts A and B. The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) added Part D to Medicare, which is a new
prescription drug benefit that begins January 1, 2006.
Medicare has established specific rules for payment of covered benefits under
Parts A, B, and C. Some, such as physician services and durable medical equipment,
are based on fee schedules. Most services, including those provided in inpatient
hospitals, inpatient rehabilitation facilities, long-term care hospitals, psychiatric
hospitals and skilled nursing facilities, are paid under different prospective payment
systems (PPSs). In general, the program provides for annual updates to these
payment amounts. The program also has rules regarding the amount of cost-sharing,
if any, which beneficiaries can be billed in excess of Medicare’s recognized payment
levels.
Medicare payment policies and potential modifications to these policies are of
continuing interest to Congress. The Medicare program has been a major focus of
deficit reduction legislation since 1980. With a few exceptions, reductions in
program spending have been achieved largely through reductions in payments to
providers, primarily hospitals and physicians. The Balanced Budget Act of 1997
(P.L. 105-33, BBA 97) modified some payment policies in place at that time,
including changing underlying payment methodologies and updates to payment
amounts. Subsequently, Congress passed the Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of 1999 (P.L. 106-113, BBRA) and the Benefits
Improvement and Protection Act of 2000 (P.L. 106-554, BIPA 2000), both of which
contained funding increases to mitigate the impact of some BBA 97 provisions on
providers. MMA, too, modified payment methods and established payment increases
for some providers.
This report provides an overview of Medicare payment rules by type of service.
It outlines current payment policies and provides a summary of the basic rules for
updating the payment amounts. The report also includes the most recent update for
each type of service. At the back of the report is a listing of CRS reports providing
more in-depth discussions of provider payment issues. This report will be updated
for any legislative activity.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare Payment Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare Payment Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Beneficiary Out-of-Pocket Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recent Congressional Actions with Respect to Program Payments . . . . . . . 3
Medicare Payment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. Inpatient Prospective Payment System (IPPS) for Short-term,
General Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Hospitals Receiving Special Consideration Under Medicare’s IPPS . . . . 7
3. IPPS-Exempt Hospitals and Distinct Part Units . . . . . . . . . . . . . . . . . . . . 9
4. Skilled Nursing Facility (SNF) Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5. Hospice Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1. Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2. Nonphysician Practitioners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3. Clinical Diagnostic Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . . . 21
4. Preventive Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5. Telehealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6. Durable Medical Equipment (DME) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7. Prosthetics and Orthotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8. Surgical Dressings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9. Parenteral and Enteral Nutrition (PEN) . . . . . . . . . . . . . . . . . . . . . . . . . 27
10. Miscellaneous Items and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11. Ambulatory Surgical Centers (ASCs) . . . . . . . . . . . . . . . . . . . . . . . . . 29
12. Hospital Outpatient Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13. Rural Health Clinics and Federally Qualified Health Center
(FQHCs) Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14. Comprehensive Outpatient Rehabilitation Facility (CORF) . . . . . . . . . 32
15. Part B Drugs/Vaccines Covered Incident to a Physician’s Visit . . . . . 33
16. Blood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
17. Partial Hospitalization Services Connected to Treatment of
Mental Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
18. Ambulance Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1. Home Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2. End-Stage Renal Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Part C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1. Managed Care Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CRS Reports for Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

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Medicare Payment Policies
Introduction
Medicare is the nationwide health insurance program for the aged and disabled.
Part A of the program, the Hospital Insurance program, covers hospital services, up
to 100 days of post-hospital skilled nursing facility services, post-institutional home
health visits, and hospice services. Part B, the Supplementary Medical Insurance
program, covers a broad range of medical services including physician services,
laboratory services, durable medical equipment, and outpatient hospital services.
Part B also covers some home health visits. Part C provides managed care options
for beneficiaries who are enrolled in both Parts A and B. Part D will provide
outpatient prescription drug coverage beginning January 1, 2006.
Medicare Payment Principles
In general, the total payment received by a provider for covered services
provided to a Medicare beneficiary is composed of two parts: a program payment
amount from Medicare plus any beneficiary cost-sharing amount that is required.1
(The required beneficiary out-of-pocket payment may be paid by other insurance if
any.) Medicare has established specific rules governing its program payments for all
covered services as well as beneficiary cost-sharing as described below.
Medicare Payment Rules. Medicare has established specific rules
governing payment for covered services under Parts A, B, and C.2 For example, the
program pays for most acute inpatient and outpatient hospital services, skilled
nursing facility services, and home health care under a prospective payment system
(PPS) established for the particular service; under PPS, a predetermined rate is paid
for each unit of service such as a hospital discharge or payment classification group.
Payment for physician services, clinical laboratory services, and durable medical
equipment are made on the basis of fee schedules. Certain other services are paid on
the basis of reasonable costs or reasonable charges. In general, the program provides
for annual updates of the payment amounts to reflect inflation and other factors. In
some cases, these updates are linked to the consumer price index for all urban
1 Not all services require cost-sharing from a beneficiary. For instance, clinical laboratory
services and home health services do not require payments from a beneficiary or a
beneficiary’s insurance, such as Medicare supplemental insurance (Medigap) or employer
sponsored retiree health insurance.
2 Outpatient prescription drugs covered under Part D will not be subject to Medicare
payment rules. Prices will be determined through negotiation between prescription drug
plans (PDPs), or Medicare Advantage PDPs, and drug manufacturers. The Secretary of
Health and Human Services is statutorily prohibited from intervening in Part D drug price
negotiations.

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CRS-2
consumers (CPI-U) or to a provider-specific market basket (MB) index which
measures the change in the price of goods and services purchased by the provider to
produce a unit of output.
Beneficiary Out-of-Pocket Payments. There are two aspects of
beneficiary payments to providers: required cost-sharing amounts (either coinsurance
or deductibles) and the amounts that beneficiaries may be billed over and above
Medicare’s recognized payment amounts for certain services. For Part A,
coinsurance and deductible amounts are established annually; these payments include
deductibles and coinsurance for hospital services, coinsurance for SNFs, no cost
sharing for home health services, and nominal cost-sharing for hospice care. For Part
B, beneficiaries are generally responsible for a $110 deductible in 2005, updated
annually by the increase in the Part B premium, and a coinsurance payment of 20%
of the established Medicare payment amounts. For Part C, cost-sharing is determined
by the managed care plans. Through 2005, the total of premiums and cost-sharing
amounts charged to a beneficiary by a managed care organization cannot exceed
actuarially-determined levels of cost-sharing for Parts A and B of traditional
Medicare. Beginning in 2006, this restriction will be lifted for Part C, but the
Secretary will have expanded authority to negotiate or reject a bid from a managed
care organization for the coverage of required Medicare benefits and supplemental
benefits. Part D cost-sharing will include a deductible, co-payments, and
catastrophic limits on out-of-pocket spending.3
For most services, there are rules on amounts beneficiaries may be billed over
and above Medicare’s recognized payment amounts. Under Part A, providers agree
to accept Medicare’s payment as payment in full and cannot bill beneficiaries
amounts in excess of the coinsurance and deductibles. Under Part B, most providers
and practitioners are subject to limits on amounts they can bill beneficiaries for
covered services. For example, physicians and some other practitioners may choose
whether or not to accept assignment on a claim. When a physician accepts
assignment, Medicare pays the physician 80% of the approved fee schedule amount.
The physician can only bill the beneficiary the 20% coinsurance plus any unmet
deductible. When a physician agrees to accept assignment of all Medicare claims in
a given year, the physician is referred to as a participating physician. Physicians
who do not agree to accept assignment on all Medicare claims in a given year are
referred to as nonparticipating physicians. Nonparticipating physicians may or
may not accept assignment for a given service. If they do not, they may charge
beneficiaries more than the fee schedule amount on nonassigned claims; for
physicians, these balance billing charges are subject to certain limits.
For some providers such as nurse practitioners, physician assistants, and clinical
laboratories, assignment is mandatory; these providers can only bill the beneficiary
the 20% coinsurance and any unmet deductible. For other Part B services, such as
durable medical equipment, assignment is optional; providers may bill beneficiaries
3 For a complete description of Part D cost-sharing, see CRS Report RL31966, Overview of
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 by Jennifer
O’Sullivan, Hinda Chaikind, Sibyl Tilson, Jennifer Boulanger, and Paulette Morgan.

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CRS-3
for amounts above Medicare’s recognized payment level and may do so without
limit.
Recent Congressional Actions with Respect to Program
Payments
Because of its rapid growth, both in terms of aggregate dollars and as a share of
the federal budget, the Medicare program has been a major focus of deficit reduction
legislation considered by Congress in recent years. With a few exceptions,
reductions in program spending have been achieved largely through reductions in
payments to providers, primarily hospitals and physicians that together represent
about 63% of total program payments. These reductions stemmed, but did not
eliminate year-to-year payment increases or overall program growth.
The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) achieved significant
savings to the Medicare program by slowing the rate of growth in payments to
providers and by enacting structural changes to the program. A number of health
care provider groups stated that actual Medicare benefit payment reductions resulting
from BBA 97 were larger than were intended, leading to facility closings and other
limits on beneficiary access to care. In November 1999, Congress passed a package
of funding increases to mitigate the impact of some BBA 97 provisions on providers.
This measure, the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act
of 1999 (BBRA), is part of a larger measure known as the Consolidated
Appropriations Act for 2000 (P.L. 106-113). Further adjustments were made by the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA),
part of the larger Consolidated Appropriations Act, 2001 (P.L. 106-554). In addition
to increasing Medicare payment rates, the subsequent legislation mandated the
development or refinement of PPSs for different Medicare covered services. The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L.
108-173, or MMA) contained a major benefit expansion in adding prescription drug
coverage; Congress included a number of provisions that affected payments to
providers, certain provisions that focused on constraining Medicare’s spending, and
changes to administrative and contracting procedures.
This report provides a guide to Medicare payment rules by type of benefit, but
does not include the outpatient prescription drug benefit under Part D. This report
includes a summary of current payment policies and basic rules for updating payment
amounts. It also provides the most recent update information for each type of
service.

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CRS-4
Medicare Payment Policies
Part A
1. Inpatient Prospective Payment System (IPPS) for Short-term, General Hospitals
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Operating PPS for
Medicare pays acute hospitals using a
IPPS payment rates are increased annually
For FY2004, hospitals received a full
Inpatient Services
prospectively determined payment for
by an update factor that is determined, in
market basket update (a 3.4% increase).
Provided by Acute
each discharge. A hospital’s payment for
part, by the projected increase in the
For FY2005, hospitals that submitted the
Hospitals (Operating
its operating costs is calculated using a
hospital market basket (MB) index. This
required quality data receive the full MBI
IPPS)
national standardized amount adjusted by
is a fixed price index that measures the
increase of 3.3%. Hospitals that did not
a wage index associated with the area
change in the price of goods and services
submit the quality data receive a reduced
where the hospital is located or where it
purchased by hospitals to create one unit
update of 2.9%.
has been reclassified. Payment also
of output. The update for operating IPPS
depends on the relative resource use
is established by statute. Typically,
associated with the diagnosis related group
hospitals receive less than the MB index
(DRG) to which the patient is assigned.
for an update (sometimes referred to as a
Additional payments are made for: cases
“diet COLA”). For example, as an update
with extraordinary costs (outliers); indirect
for FY2003, hospitals received the MB
medical education (IME) (see below); and
minus 0.55 percentage points. For
for hospitals serving a disproportionate
FY2004, hospitals receive a full MB
share (DSH) of low-income patients (see
increase as their update. Under MMA, for
below). IME and DSH payments are made
FY2005 through FY2007, hospitals that
through an adjustment within IPPS that
submit required quality data will receive
results in additional monies being paid for
the full MB update, those that do not
each Medicare discharge. Additional
submit the data will receive MB-0.4
payments may be made for cases that
percentage points. The reduction would
involve qualified new technologies that
apply for the applicable year and would
have been approved for special add-on
not be taken into account in subsequent
payments. Hospitals in Hawaii and Alaska
years. The operating update will be the
receive a cost-of-living adjustment
MB in FY2008 and in subsequent years.

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CRS-5
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
(COLA). Certain services are reimbursed
on a cost basis outside of IPPS.
Capital IPPS for Short-
Medicare’s capital IPPS is structured
Updates to the capital IPPS are not
The capital IPPS update for FY2005 is
term General Hospitals
similarly to its operating IPPS for short-
established in statute. Capital rates are
0.7%, all of which is attributed the current
(Capital IPPS)
term general hospitals. A hospital’s
updated annually by the Centers for
forecast of the CIPI available when the
capital payment is based on a
Medicare and Medicaid (CMS) according
final rule was published; other adjustments
prospectively determined federal payment
to a framework which considers changes
included in the capital update framework
rate, which is 3% higher for hospitals in
in the prices associated with capital-related
cancelled each other out.
large urban areas than for hospitals in
costs as measured by the capital input
other areas, depends on the DRG to which
price index (CIPI) and other policy factors,
the patient is assigned, and is adjusted by
including changes in case mix intensity,
a hospital’s geographic adjustment factor
errors in previous CIPI forecasts, DRG
(which is calculated from the hospital’s
recalibration, and DRG reclassification.
wage index data). Capital IPPS includes
Other adjustments include those that
an IME and DSH adjustment (see below).
implement budget neutrality with respect
Additional payments are made for outliers
to outlier payments, changes in the
(cases with significantly higher costs
geographic adjustment factor, and
above a certain threshold). Certain
exception payments.
hospitals may also qualify for additional
payments under an exceptions process. A
new hospital is paid 85% of its allowable
Medicare inpatient hospital capital-related
costs for its first two years of operation.
Disproportionate Share
Approximately 2,800 hospitals receive the
No specific update. The amount of DSH
CBO estimates DSH spending (in both
Hospital Adjustment
additional payments for each Medicare
spending in any year is open-ended and
operating and capital IPPS) at $6.8 billion
discharge based on a formula which
varies by number of Medicare discharges
in FY2003 and $7.6 billion in FY2004 in
incorporates the number of patient days
as well as the type of patient seen in any
its March 2004 baseline.
provided to low-income Medicare
given hospital.
beneficiaries (those who receive
Supplemental Security Income (SSI)) and
Medicaid recipients. A few urban

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CRS-6
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
hospitals, known as “Pickle Hospitals,”
receive DSH payments under an
alternative formula that considers the
proportion of a hospital’s patient care
revenues that are received from state and
local indigent care funds. The percentage
add-on for which a hospital will qualify
varies according to the hospital’s bed size
or urban or rural location. Certain
hospitals, such as sole community
hospitals (SCHs, see below) and rural
referral centers (RRC, see below) may
qualify for special DSH treatment.
Indirect Medical
The indirect medical education adjustment
The IME adjustment is not subject to an
No specific update. The amount spent on
Education (IME)
(IME) is one of two types of payments to
annual update. BBA 97 reduced the IME
IME depends in part on the number of
Adjustment
teaching hospitals for graduate medical
adjustment in operating IPPS from a 7.7%
Medicare discharges in teaching hospitals
education (GME) costs (see also direct
increase for each 10% increase in a
in any given year. CBO estimates the IME
GME below). Medicare increases both its
hospital’s ratio of interns to beds (IRB), a
payments (for both capital and operating
operating and capital IPPS payments to
measure of teaching intensity in operating
IPPS) to be about $6.1 billion in FY2003
teaching hospitals; different measures of
IPPS; by FY2001, the IME adjustment was
and $7.1 billion in FY2004 in its March
teaching intensity are used in the operating
to be 5.5%. However, the scheduled
2004 baseline.
and capital IPPS. For both IPPS
decreases were delayed by subsequent
payments, however, the number of medical
legislation. MMA provides an increased
residents who can be counted for the IME
IME adjustment to 6.0% from April 1,
adjustment is capped, based on the number
2004, through September 30, 2004; during
of medical residents as of December 31,
FY2005 the adjustment is 5.8%; during
1996. As established by BBA 97, teaching
FY2006 the adjustment is 5.55%; and
hospitals also receive IME payments for
during FY2007 the adjustment is 5.35%;
their Medicare+Choice discharges.
starting FY2008 and subsequently, the
adjustment returns to 5.5%.

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CRS-7
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Direct Graduate Medical
Direct GME costs are excluded from IPPS
In general, direct GME payments are
Hospitals below 140% of the national
Education Payments
and paid outside of the DRG payment on
updated by the increase in the consumer
average from FY2004 through FY2013
the basis of updated hospital-specific costs
price index for all urban consumers (CPI-
receive an update of CPI-U. Hospitals
per resident amount (PRA), the number of
U). As established by BBRA and
above 140% of the national average for
weighted full-time equivalent (FTE)
subsequently amended, however, the
that time period will receive no update.
residents, and Medicare’s share of total
update amount that any hospital receives
CBO estimates direct GME payments as
patient days in the hospital (including
depends upon the relationship of its PRA
$1.9 billion in FY2003 and FY2004 in its
those days attributed to Medicare+Choice
to the national average PRA. Hospitals
March 2004 baseline.
enrollees). There is a hospital-specific cap
with PRAs below the floor (85% of the
on the number of residents in the hospital
locality-adjusted, updated, and weighted
for direct GME payments. Also, the
national PRA) are raised to the floor
hospital’s FTE count is based on a
amount. Teaching hospitals with PRAs
three-year rolling average; a specific
above the ceiling amount (140% of the
resident may count as half of a FTE,
national average, adjusted for geographic
depending on the number of years spent as
location) will receive a lower update than
a resident and the length of the initial
other hospitals (CPI-U minus two
training associated with the specialty.
percentage points) for FY2003- FY2013.
Certain combined primary care residency
Hospitals that have PRAs between the
programs receive special recognition in
floor and ceiling receive the CPI-U.
this count. Depending upon the
circumstances, direct GME payments can
be made to nonhospital providers.
2. Hospitals Receiving Special Consideration Under Medicare’s IPPS
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Sole Community
An SCH receives the higher of the
Target amounts for SCHs are updated by
For FY2004, hospitals received a full
Hospitals (SCHs) —
following payment rates as the basis of
an “applicable percentage increase” which
market basket update (a 3.4% increase).
facilities located in
reimbursement: the current IPPS base
is specified by statute and is often
For FY2005, hospitals that submitted the
geographically isolated
payment rate, or its hospital-specific per-
comparable to the IPPS update.
required quality data receive the full MBI

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CRS-8
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
areas and deemed to be
discharge costs from either FY1982, 1987,
increase of 3.3%. Hospitals that did not
the sole provider of
or 1996, updated to the current year. An
submit the quality data receive a reduced
inpatient acute care
SCH may receive additional payments if
update of 2.9%. These updates are also
hospital services in a
the hospital experiences a decrease of
used to increase the hospital-specific rate
geographic area based on
more than 5% in its total inpatient cases
applicable to an SCH.
distance, travel time,
due to circumstances beyond its control.
severe weather conditions,
An SCH receives special consideration for
and/or market share as
reclassification into a different area.
established by specific
criteria set forth in
regulation (42 CFR
412.92)
M e d i c a r e Depende n t
BBA 97 reinstated and extended the MDH
Target amounts for MDHs are updated by
For FY1996 and thereafter, the update for
Hospitals (MDHs) — small
classification, starting on October 1, 1997
an “applicable percentage increase” which
MDHs is the same as for all IPPS
rural hospitals with a high
to October 1, 2001. The sunset date for
is specified by statute and is often
hospitals. These updates are also used to
proportion of patients who
the MDH classification was subsequently
comparable to the IPPS update.
increase the hospital-specific rate
are Medicare beneficiaries
extended to September 30, 2006 by
applicable to an MDH. For FY2004,
(have at least 60% of acute
BBRA. During that time period, an MDH
hospitals received a full market basket
i n p a t i e n t d a y s o r
is paid 50% of the amount that the federal
update (a 3.4% increase). For FY2005,
discharges attributable to
rate is exceeded by the hospital’s target
hospitals that submitted the required
Medicare in FY1987 or in
amount based on either its updated
quality data receive the full MBI increase
two of the three most
FY1982 or FY1987 costs. An MDH may
of 3.3%. Hospitals that did not submit the
recently audited cost
receive additional payments if its total
quality data receive a reduced update of
reporting periods). As
number of inpatient cases decreases more
2.9%.
specified in regulation (42
than 5% due to circumstances beyond its
CFR 412.108) , they cannot
control.
be an SCH and must have
100 or fewer beds.

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CRS-9
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Rural Referral Centers
RRCs payments are based on the IPPS for
RRCs receive the operating and capital
See updates specified for operating and
(RRCs) — relatively large
short-term general hospitals. Qualifying
IPPS updates specified for short-term
capital IPPS for short-term general
hospitals, generally in rural
RRCs receive a higher DSH adjustment
general hospitals.
hospitals.
areas, that provide a broad
than do other rural hospitals. Also, RRCs
array of services and treat
receive preferential consideration for
patients from a wide
reclassification to a different area.
g e o g r a p h i c a r e a a s
established by specific
criteria set forth in
regulation (42 CFR
412.96).
3. IPPS-Exempt Hospitals and Distinct Part Units
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Inpatient Rehabilitation
As of January 1, 2002, Medicare’s
The IRF-PPS update is based on the MB
The update for FY2004 is 3.2%. The
Facili t i e s (IRFs) —
payments to a rehabilitation facility are
for excluded hospitals (those not paid
update for FY2005 is 3.1%
freestanding hospitals and
based on a fully implemented IRF-PPS
under IPPS). This MB is based on cost
hospital-based distinct part
and 100% of the federal rate (also called
report data from Medicare participating
units that meet the
the budget-neutral conversion factor)
inpatient rehabilitation and psychiatric
modified “75% rule” and
which is a fixed amount per discharge.
facilities as well as long-term, children’s,
certain specified conditions
This PPS encompasses both capital and
and cancer hospitals which were subject to
of participation. The
operating payments to IRFs, but does not
the payment limitations and incentives
modified 75% rule, which
cover the costs of approved educational
established in the Tax Equity and Fiscal
becomes effective July 1,
programs, bad debt expenses, or blood
Responsibility Act of 1982 (TEFRA). The
2004, has a t i er ed
clotting factors, which are paid for
TEFRA MB only includes operating costs,
three-year phase in period;
separately. The IRF-PPS payment for any
so the IRF-PPS update is based on a
for the first year, at least
Medicare discharge will vary depending
modified TEFRA MB that reflects capital
50% of an IRF’s inpatient
on the patient’s impairment level,
costs as well. CMS revised and rebased
population must have at
functional status, comorbidity conditions,
the excluded hospitals with capital MB to

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CRS-10
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
least one of the qualifying
and age. These factors determine which of
a 1997 base year (to incorporate 1997 cost
medical conditions. The
the 380 Case Mix Groups (CMGs) is
report data) starting in FY2004.
percentage increases to
assigned to the inpatient stay. Five other
60% in the second year and
CMGs are used for patients discharged
to 65% in the third year. If
before the fourth day (short stay outliers)
at the end of the three-year
and for those who die in the facility.
period and CMS does not
Generally, IRF payments are reduced or
take further action, then
increased for certain case level
7 5 % w i l l b e t h e
adjustments, such as early transfers, short-
compliance percentage for
stay outliers, patients who die before
cost reporting periods on or
transfer, and high cost outliers. Payments
after July 1, 2007. A
also depend upon facility-specific
patient must receive
adjustments to accommodate variations in
rehabilitation services for
area wages, percentage of low income
one of 13 conditions
patients (LIP) served by the hospital (a
including stroke, spinal
DSH adjustment), and rural location (rural
cord injury, brain injury,
IRFs receive increased payments, about
neurological disorder,
19% more than urban IRFs.) No IME
burns, and certain arthritis
adjustment is included; IRFs in Alaska and
related conditions.
Hawaii do not receive a COLA
adjustment. The IRF-PPS is not required
to be budget neutral; total payments can
exceed the amount that would have been
paid if this PPS had not been implemented.
Long-term Care Hospitals
Effective October 1, 2002, LTCHs are paid
The LTCH-PPS update is based upon the
The increase to the LTCH federal rate for
and Satellite or Onsite
on a discharge basis under a DRG-based
modified TEFRA MB (that reflects capital
discharges starting in July 1, 2003, is
Providers (LTCHs) —
PPS, subject to a 5-year transition period.
costs) described previously, but the
2.2%. The increase is calculated based on
acute general hospitals that
A LTCH may opt to be paid based on
Medicare update for these providers
estimates of a 3.3% modified TEFRA MB
are excluded from IPPS
100% of the federal prospective rate. A
incorporates a budget-neutrality factor as
decreased by 0.8% to accommodate the
with a Medicare inpatient
new LTCH must be paid on 100% of the
well. CMS has changed the effective date
proposed change in the update cycle (from
average length of stay
federal rate. The LTCH-PPS encompasses
of the annual update from October 1 to
October 1st to July 1st) and then reduced by

---

CRS-11
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
(ALOS) greater than 25
payments for both operating and capital-
July 1 of each year, starting July 2003.
a 0.3% budget-neutrality factor (3.3-0.8-
days.
related costs of inpatient care but does not
During the five-year transition period,
0.3 = 2.2). The update for discharges
cover the costs of approved educational
CMS calculates a budget-neutrality offset
beginning July 1, 2004 is 3.1%.
programs, bad debt expenses, or blood
to account for the ability of LTCHs to
clotting factors which are paid for
elect payment based on the transition
separately. The LTCH-PPS payment for
blend methodology or on 100% of the
any Medicare discharge will vary
federal payment amount, whichever results
depending on the patient’s assignment into
in greater Medicare payments. CMS
one of 510 LTCH-DRGs, which are based
estimated that the election option to be
on reweighted IPPS DRGs. Payments for
paid 100% of the federal rate would cost
specific patients may be increased or
$50 million more than under the prior
reduced because of case-level adjustments.
system in FY2003 and applied a 6.6%
Payments also depend upon facility-
reduction (0.934) to all LTCH payments.
specific adjustments such as variations in
CMS reduced LTCH payments by 5.7%
area wages (implemented over a five-year
(0.943) for all discharges occurring on or
transition period) and include a COLA for
after July 1, 2003, and through June 30,
hospitals in Alaska and Hawaii. No
2004, to account for the estimated election
adjustments are made for the percentage of
cost of $120 million in the 2004 rate year.
low income patients served by the hospital
The election option offset for the 2005 rate
(DSH), rural location, or IME. The
year was a reduction in LTCH payments of
LTCH-PPS is required to be budget
0.5% (0.995)
neutral; total payments must equal the
amount that would have been paid if PPS
had not been implemented.
Psychiatric Hospitals and
Until January 1, 2005, services provided in
The IPF-PPS update in future years will be
The IPF-PPS system was implemented for
Distinct Part Units —
inpatient psychiatric facilities (IPF) had
based upon the modified TEFRA MB (that
discharges beginning on January 1, 2005.
include those primarily
been paid on a reasonable cost basis,
reflects capital costs) described previously.
The first update to the new system is
engaged in providing, by
subject to modified TEFRA payment
However, IPF-PPS payments must be
scheduled for July 1, 2005.
or under the supervision
limitations and incentives. As directed by
projected to equal the amount of total
of a psychiatrist,
BBRA, a budget-neutral per-diem-based
payments that would have been made
psychiatric services for
PPS for inpatient psychiatric services was
under the prior payment system. The

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CRS-12
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
the diagnosis and
implemented for these hospitals and units.
initial calculation of the per diem payment
treatment of people with
Established with a three-year transition
included a 16.33% reduction to account for
mental illness
period, the IPF-PPS incorporates patient-
outlier payments, the stop-loss provision
level adjustments for specified DRGs,
and a behavioral offset (to account for
selected comorbidies, and in certain cases,
changing utilization under the new
age of the patient. Facility-level
payment system).
adjustments for relative wages, teaching
status and rural location are also included.
IPFs in Hawaii and Alaska will receive a
COLA adjustment. Medicare per diem
payments are higher in the earlier days of
the psychiatric stay. Also, the per diem
payment for the first day of each stay is
higher in IPFs with qualifying (full-
service) emergency departments than in
other IPFs. An outlier policy for high-cost
cases is included. Patients who are
discharged from an IPF and return within
three days are considered readmissions of
the same case. Finally, under the stop-loss
provision, during the three-year transition
period, an IPF is guaranteed at least 70%
of the aggregate payments that would
made under the prior payment system.

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CRS-13
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Children’s and Cancer
Children’s and cancer hospitals are paid
An update factor for reimbursement of
The FY2004 update is 3.4%. The update
Hospitals
on a reasonable cost basis, subject to
operating costs is established by statute
for FY2005 is 3.3%.
TEFRA payment limitations and
and is generally pegged to the TEFRA MB
Children’s hospitals are
i n c e n t i v e s . E a c h p r o v i d e r ’ s
described above. The amount of increase
those engaged in furnishing
reimbursement is subject to a ceiling or
received by any specific hospital will
services to inpatients who
target amount that serves as an upper limit
depend upon the relationship of the
a r e p r e d o m i n a n t l y
on operating costs. Depending upon the
hospital’s costs to its target amount. There
individuals under the age
relationship of the hospital’s actual costs
is no specific update for capital costs.
of 18. Cancer hospitals
to its target amount, these hospitals may
generally are recognized by
receive relief or bonus payments as well as
the National Cancer
additional bonus payments for continuous
Institute as either a
improvement; i.e., facilities whose costs
comprehensive or clinical
have been consistently less than their
cancer research center; are
limits may receive additional money.
primarily organized for the
Newly established hospitals receive
treatment of and research
special treatment. Providers that can
on cancer (not as a subunit
demonstrate that there has been a
of another entity); and have
significant change in services and/or
at least 50% of their
patients may receive exceptions payments.
discharges with a diagnosis
The capital costs for these hospitals are
of neoplastic disease. See
reimbursed on a reasonable cost basis.
42 CFR 412.23(f).

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CRS-14
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Critical Access Hospitals
Medicare pays CAHs on the basis of the
No specific update policy.
No specific update policy.
(CAHs) are limited-service
reasonable costs of the facility for
facilities that are located
inpatient and outpatient services. CAHs
more than 35 miles from
may elect either a cost-based hospital
another hospital (15 miles
outpatient service payment or an all-
in certain circumstances) or
inclusive rate which is equal to a
designated by the state as a
reasonable cost payment for facility
necessary provider of
services plus 115% of the fee schedule
health care; offer 24-hour
payment for professional services.
emergency care; have no
Ambulance services that are owned and
more than 25 acute care
operated by CAHs are reimbursed on a
inpatient beds and have a
reasonable cost basis if these ambulance
96-hour average length of
services are 35 miles from another
stay. Beds in distinct-part
ambulance system. MMA provided that
skilled nursing facility,
inpatient, outpatient, and swing bed
psychiatric or rehabilitation
services provided by CAHs will be paid at
units operated by a CAH
101% of reasonable costs for cost
do not count toward the
reporting periods beginning January 1,
bed limit.
2004.
4. Skilled Nursing Facility (SNF) Care
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
SNF Care
BBA 97 changed payment for SNF care
The urban and rural federal per diem
For FY2005, the SNF market basket
from a cost-based retrospective
payment rates are increased annually by an
estimated update was 3.1 percentage
reimbursement system to a PPS. The PPS
update factor that is determined, in part, by
points, while the actual increase was 3.3
payments are based on a daily (“per-
the projected increase in the SNF market
percentage points. Since the difference
diem”) urban or rural base payment
basket index. This index measures
between the estimated and actual amounts
amount that is adjusted for case mix and
changes in the costs of goods and services
of change did not exceed the 0.25
area wages.
purchased by SNFs.
percentage point threshold, the payment

---

CRS-15
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
The federal per diem payment covers all
BIPA 2000 provided for the following
rates for FY2005 do not include a forecast
the services provided to the beneficiary
updates:
error adjustment and remain at 3.1
that day including room and board,
percentage points.
nursing, therapy, and prescription drugs.
FY2001 = MB
Some care costs are excluded from PPS
FY2002 = MB - 0.5
For FY2004, the update was 3.0%. For
and paid separately such as physician
FY2003 = MB - 0.5
FY2004, SNFs received an additional
visits, dialysis and certain high cost
FY2004 and subsequent years = MB
3.26% increase to account for cumulative
prosthetics and orthotics.
forecast error since SNF PPS began on
The MB level increase in the update was
July 1, 1998.
The case-mix adjustment to the federal per
unchanged by MMA.
diem rate adjusts payments for the
treatment and care needs of Medicare
At the end of FY2002, two temporary add-
beneficiaries and is made using a system
ons expired: a 4% increase in base
called resource utilization groups (RUGs).
payment rates that was in effect for
The RUGs system uses patient
FY2001 and FY2002 from BBRA and a
assessments to assign a beneficiary to one
16.66% increase in the nursing component
of 44 categories and to determine the
of the payment rates that was in effect
payment for the beneficiary’s care. Patient
from April 1, 2001, until September 30,
assessments are done at various times
2002, from BIPA. The expiration of these
during a patient’s stay and the RUG
add-on resulted in a decrease in payments
category a beneficiary is placed in can
of $1.4 billion.
change with changes in the beneficiary’s
condition; the daily SNF PPS payment will
One add-on remains in effect: a temporary
change as well.
increase in 26 RUGs that will continue
until the Secretary of HHS implements
The final adjustment to the daily payment
refinements to the RUGs. This add-on
rate is to account for variations in area
increases payments about $1 billion per
wages and uses the hospital wage index.
year.
MMA increased payments for AIDS
patients in SNFs by 128% starting October
1, 2004.

---

CRS-16
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Unlike other PPSs, the SNF PPS statute
does not provide for an adjustment for
extraordinarily costly cases (an “outlier”
adjustment).
5. Hospice Care
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Hospice Care
Payment for hospice care is based on one
The prospective payment rates are updated
National hospice payment rates for care
of four prospectively determined rates,
annually by the increase in the hospital
furnished during FY2005 are as follows:
which correspond to four different levels
market basket. The hospice cap amount is
of care, for each day a beneficiary is under
adjusted annually by the percentage
Routine home care — $121.98
the care of the hospice. The four rate
change in the medical care expenditure
per day
categories are: routine home care,
category of the CPI-U. However, BBA 97
Continuous home care —
continuous home care, inpatient respite
reduced the hospice payment update to the
$711.92 full rate = 24 hours of care, or
care, and general inpatient care. Payment
market basket minus 1.0 percentage point
$29.66 per hour;
rates are adjusted to reflect differences in
each year from FY1998 through FY2002.
Inpatient respite care —
area wage levels using the hospital wage
BBRA increased the hospice payments
$126.18 per day;
index. Payments to a hospice are subject
0.5% for FY2001 and 0.85% for FY2002.
General inpatient care
to an aggregate cap that is determined by
This increase was not included in the base
$542.61per day.
multiplying the cap amount for a given
for updating the payment rate in
year by the number of Medicare
subsequent years. BIPA increased
The hospice cap for the period November
beneficiaries who receive hospice services
payment rates by five percentage points
1, 2004 through October 31, 2005 is
during the year. Limited cost-sharing
beginning April 1, 2001, through
$19,635.67 per beneficiary per year.
applies to outpatient drugs and respite
September 30, 2001. This increase was
care.
included in the base for subsequent
updates. Since FY2003 updates have
been at the full hospital market basket
percentage increase.

---

CRS-17
Part B
1. Physicians
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Physicians
Payments for physicians services are made
The conversion factor is updated each year
The 2005 conversion factor is $37.8975
on the basis of a fee schedule. The fee
by a formula specified in law. The update
(compared to $37.3374 for 2004).
schedule assigns relative values to
percentage equals the Medicare Economic
services. These relative values reflect
Index (MEI, which measures inflation)
The 2005 anesthesia conversion factor is
physician work (based on time, skill, and
subject to an adjustment to match spending
$17.7594 (compared to $17.4969 in 2004).
intensity involved), practice expenses, and
under the cumulative sustainable growth
malpractice expenses. The relative values
rate (SGR) system. (The SGR is linked, in
are adjusted for geographic variations in
part, to changes in the gross domestic
the costs of practicing medicine. These
product.) The adjustment sets the
geographically adjusted relative values are
conversion factor so that projected
converted into a dollar payment amount by
spending for the year will equal allowed
a conversion factor. Assistants-at-surgery
spending by the end of the year. In no case
services are paid 16% of the fee schedule
can the conversion factor update be more
amount.
than three percentage points above nor
more than seven percentage points below
Anesthesia services are paid under a
the MEI. Application of the SGR system
separate fee schedule (based on base and
led to a 5.4% reduction in the conversion
time units) with a separate conversion
factor in 2002. An additional 4.4%
factor.
reduction was slated to take effect in 2003.
However, enactment of P.L.108-7 allowed
Payments equal 80% of the fee schedule
for revisions in previous estimates used for
amount; patients are liable for the
the SGR calculation, thereby permitting an
remaining 20%. (Payments for certain
update for 2003 of 1.6% effective March
mental health services equal 50% of the
1, 2003. MMA provided that the update to
fee schedule amounts; patients are liable
the conversion factor for 2004 and 2005
for the other 50%). Assignment is
could not be less than 1.5% and would be
optional; balance billing limits apply on
exempt from the budget-neutrality
non-assigned claims.
adjustment.

---

CRS-18
2. Nonphysician Practitioners
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
(a) Physician Assistants
Separate payments are made for physician
See physician fee schedule.
See physician fee schedule.
assistant (PA) services, when provided
under the supervision of a physician, but
only if no facility or other provider charge
is paid. Payment is made to the employer
(such as a physician). The PA may be in
an independent contractor relationship
with the employer.
The recognized payment amount equals
85% of the physician fee schedule amount
(or, for assistant-at-surgery services, 85%
of the amount that would be paid to a
physician serving as an assistant-at-
surgery). Medicare payments equal 80%
of this amount; patients are liable for the
remaining 20%. Assignment is mandatory
for PA services.
(b) Nurse Practitioners
Separate payments are made for NP or
See physician fee schedule.
See physician fee schedule.
(NPs) and Clinical Nurse
CNS services, provided in collaboration
Specialists (CNSs)
with a physician, but only if no other
facility or other provider charge is paid.
The recognized payment amount equals
85% of the physician fee schedule amount
(or, for assistant-at-surgery services, 85%
of the amount that would be paid to a
physician serving as an assistant-at-
surgery). Medicare payments equal 80%
of this amount; patients are liable for the

---

CRS-19
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
remaining 20%. Assignment is
mandatory.
(c) Nurse Midwives
The recognized payment amount for
See physician fee schedule.
See physician fee schedule.
certified nurse midwife services equals
65% of the physician fee schedule amount.
Nurse midwives can be paid directly.
Medicare payments equal 80% of this
amount; patients are liable for the
remaining 20%. Assignment is
mandatory.
(d) Certified Registered
CRNAs are paid under the same fee
See physician fee schedule.
See physician fee schedule.
N u r s e A n e s t h e t i s t s
schedule used for anesthesiologists.
(CRNAs)
Payments furnished by an anesthesia care
team composed of an anesthesiologist and
a CRNA are capped at 100% of the
amount that would be paid if the
anesthesiologist was practicing alone. The
payments are evenly split between each
practitioner. CRNAs can be paid directly.
Assignment is mandatory for services
provided by CRNAs. Regular Part B cost-
sharing applies.

---

CRS-20
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
(e) Clinical Psychologists
The recognized payment amount for
See physician fee schedule.
See physician fee schedule.
a nd Clinical Socia l
services provided by a clinical social
Workers
worker is equal to 75% of the physician
fee schedule amount.
Services in connection with the treatment
of mental, psychoneurotic, and personality
disorders of a patient who is not a hospital
inpatient are subject to the mental health
services limitation. In these cases
Medicare pays 50% of incurred expenses
and the patient is liable for the remaining
50%. Otherwise, regular Part B cost-
sharing applies. Assignment is mandatory
for services provided by clinical
psychologists and clinical social workers.
(f) Outpatient Physical or
Payments are made under the physician
Updates in fee schedule payments are
See physician fee schedule.
Occupational Therapy
fee schedule.
dependent on the update applicable under
Services
the physician fee schedule. The $1,500
In 1999, an annual $1,500 per beneficiary
limit was to be increased by the increase in
limit applied to all outpatient physical
the MEI beginning in 2002; however,
therapy services (including speech-
application of the limit was suspended
language pathology services), except for
until September 1, 2003. At that time the
those furnished by a hospital outpatient
limit was $1,590. MMA suspended the
department. A separate $1,500 limit
application of the limits beginning
applied to all outpatient occupational
December 8, 2003, through December 31,
therapy services except for those furnished
2005.
by hospital outpatient departments.
Therapy services furnished as incident to
physicians professional services were
included in these limits.

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CRS-21
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
The $1,500 limits were to apply each year.
However, no limits applied in 2000, 2001,
and 2002. These applied again from
September 2003 through December 8,
2003.
Regular Part B cost-sharing applies.
Assignment is optional for services
provided by therapists in independent
practice; balance billing limits apply for
non-assigned claims. Assignment is
mandatory for other therapy services.
3. Clinical Diagnostic Laboratory Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Clinical Diagnostic
Clinical lab services are paid on the basis
Generally, the Secretary of HHS is
The fee schedules were updated by 1.1%
Laboratory Services
of areawide fee schedules. The fee
required to adjust the payment amounts
in 2003. No update was made for 2004 or
schedule amounts are periodically
annually by the percentage change in the
2005.
updated. There is a ceiling on payment
CPI, together with such other adjustments
amounts equal to 74% of the median of all
as the Secretary deems appropriate.
fee schedules for the test. Assignment is
Updates were eliminated for 1998 through
mandatory. No cost-sharing is imposed.
2002. MMA eliminated updates for 2004
through 2008.

---

CRS-22
4. Preventive Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Pap Smears; Pelvic exams
Medicare covers screening pap smears and See clinical laboratory fee schedule. A
See clinical laboratory fee schedule.
screening pelvic exams once every two
national minimum payment amount
Minimum payment for pap smears in 2003
years; annual coverage is authorized for
applies for pap smears.
is $14.76. For 2004, the minimum
women at high risk. Payment is based on
payment was $15.14. For 2005 the
the clinical diagnostic laboratory fee
minimum payment is $14.76 ($14.76 plus
schedule. Assignment is mandatory. No
0% update
cost-sharing is imposed.
Screening Mammograms
Coverage is authorized for an annual
See physician fee schedule.
See physician fee schedule.
screening mammogram. Payment is made
under the physician fee schedule. The
deductible is waived; regular Part B
coinsurance applies. Assignment is
optional. Balance billing limits apply on
non-assigned claims.
Colorectal Screening
Coverage is provided for the following
See physician fee schedule and lab fee
See physician fee schedule and lab fee
procedures for the early detection of colon
schedule.
schedule.
cancer: (1) screening fecal occult blood
tests (for persons over 50, no more than
annually); (2) screening flexible
sigmoidoscopy (for persons over 50, no
more than once every four years and 10
years after a screening colonoscopy for
those not at high risk for colon cancer); (3)
screening flexible colonoscopy for high-
risk individuals (limited to one every two
years) and for those not at high risk, every
10 years or four years after a screening

---

CRS-23
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
sigmoidoscopy; and (4) barium enemas (as
an alternative to either a screening flexible
sigmoidoscopy or screening colonoscopy
in accordance with the same screening
parameters established for those tests).
Payments are based on rates paid for the
same procedure when done for a
diagnostic purpose. Fecal occult blood
tests are paid under the lab fee schedule;
other tests are paid under physician fee
schedule. If a sigmoidoscopy or
colonoscopy results in a biopsy or removal
of a lesion, it would be classified and paid
as the procedure with such biopsy or
removal, rather than as a diagnostic test.
Assignment is mandatory for fecal occult
blood tests and no cost-sharing applies.
A s s i g n m e n t i s o p t i o n a l f o r
sigmoidoscopies and colonoscopies.
Regular Part B cost-sharing applies;
balance billing limits apply on non-
assigned claims.
Prostate Cancer Screening
Medicare covers an annual prostate cancer
See physician fee schedule.
See physician fee schedule.
screening test. Payment is made under the
physician fee schedule.

---

CRS-24
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Glaucoma
Screening
Medicare covers an annual glaucoma
See physician fee schedule.
See physician fee schedule.
screening for persons with diabetes,
persons with a family history of glaucoma
and African-Americans age 50 and over.
Payment is made under the physician fee
schedule.
Diabetes Outpatient Self-
Medicare covers services furnished by a
See physician fee schedule.
See physician fee schedule.
Management Training
certified provider. Payment is made under
the physician fee schedule.
Medical Nutrition
Coverage is authorized for certain
See physician fee schedule.
See physician fee schedule.
Therapy Services
individuals with diabetes or renal disease.
Payment equals 85% of the amount
established under the physician fee
schedule for the service if it had been
furnished by a physician.
Bone Mass Measurements
Bone mass measurements are covered for
See physician fee schedule.
See physician fee schedule.
certain high-risk individuals. Payments
are made under the physician fee schedule.
In general, services are covered if they are
provided no more frequently than once
every two years.
5. Telehealth
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Telehealth Services
Medicare pays for services furnished via a
See physician fee schedule. The facility
See physician fee schedule. The 2005
telecommunications system by a physician
fee equals the amount established for the
facility fee is $21.86 compared to $21.20
or practitioner, notwithstanding the fact
preceding year, increased by the
in 2004).

---

CRS-25
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
that the individual providing the service is
percentage increase in the MEI.
not at the same location as the beneficiary.
Payment is equal to the amount that would
be paid under the physician fee schedule if
the service had been furnished without a
telecommunications system. A facility fee
is paid to the originating site (the site
where the beneficiary is when the service
is provided).
6. Durable Medical Equipment (DME)
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Durable Medical
DME is paid on the basis of a fee
In general, fee schedule amounts are
The update for 2003 was 1.1%. As
Equipment (DME)
schedule. Items are classified into five
updated annually by the CPI-U.
required by MMA, there were no updates
groups for purposes of determining the fee
for 2004 and 2005.
schedules and making payments: (1)
Updates were eliminated for 1998-2000;
inexpensive or other routinely purchased
payments were increased by the CPI-U for
equipment (defined as items costing less
2001; and payments were frozen for 2002.
than $150 or which are purchased at least
MMA eliminated the updates for 2004
75% of the times; (2) items requiring
through 2008.
frequent and substantial servicing; (3)
customized items; (4) oxygen and oxygen
equipment; and (5) other items referred to
as capped rental items. In general, fee
schedule rates are established locally and
are subject to national limits. The national
limits have floors and ceilings. The floor
is equal to 85% of the weighted average of
all local payment amounts and the ceiling

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CRS-26
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
is equal to 100% of the weighted average
of all local payment amounts. Assignment
is optional. Balance billing limits do not
apply on non-assigned claims. Regular
Part B cost-sharing applies.
MMA requires that, beginning in 2007, the
Secretary begin a program of competitive
acquisition for DME. Competitive
acquisition is to begin in 10 metropolitan
statistical areas (MSAs) in 2007, expand to
80 MSAs in 2008, and expand to
additional areas in 2009. The Secretary is
authorized to phase in competitive
acquisition among the highest cost and
highest volume items and services or those
items and services that the Secretary
determines have the largest savings
potential.
7. Prosthetics and Orthotics
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Prosthetics and Orthotics
Prosthetics and orthotics are paid on the
Fee schedule amounts are updated
The update for 2003 was 1.1%. As
basis of a fee schedule. These rates are
annually by the CPI-U. MMA eliminated
required by MMA, there were no
established regionally and are subject to
the updates for 2004 through 2006.
updates for 2004 and 2005.
national limits which have floors and
ceilings. The floor is equal to 90% of the
weighted average of all regional payment

---

CRS-27
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
amounts and the ceiling is equal to 120%
of the weighted average of all regional
payment amounts. Assignment is
optional; balance billing limits do not
apply on non-assigned claims. Regular
Part B cost-sharing applies.
8. Surgical Dressings
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Surgical Dressings
Surgical dressings are paid on the basis of
See durable medical equipment fee
The update for 2003 was 1.1%. There was
a fee schedule. Payment levels are
schedule.
no update for 2004 and 2005.
computed using the same methodology as
the durable medical equipment fee
schedule (see above). Assignment is
optional; balance billing limits do not
apply to non-assigned claims. Regular
Part B cost-sharing applies.
9. Parenteral and Enteral Nutrition (PEN)
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Parenteral and Enteral
Parenteral and enteral nutrients,
Fee schedule amounts are updated
The update for 2004 was 2.1%. The
Nutrition (PEN)
equipment, and supplies are paid on the
annually by the CPI-U.
update for 2005 is 3.3%, the inflation
basis of the PEN fee schedule. Prior to
indexed charge.
2002, PEN was paid on a reasonable
charge basis (see below under
Miscellaneous Items and Services). The

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CRS-28
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
fee schedule amounts are based on
payment amounts made on a national basis
to PEN suppliers under the reasonable
charge system. Assignment is optional;
balance billing limits do not apply on non-
assigned claims. Regular Part B cost-
sharing applies.
10. Miscellaneous Items and Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Miscellaneous Services
Miscellaneous items and services here
Payments for reasonable charge items are
The update to the inflation-indexed charge
refers to those services still paid on a
calculated annually. Carriers determine a
for 2005 is 3.3% (compared to 2.1% for
reasonable charge basis. Included are such
supplier’s customary charge level.
2004).
items as splints, casts, home dialysis
Prevailing charges may not be higher than
supplies and equipment, therapeutic shoes,
75% of the customary charges made for
certain intraocular lenses, blood products,
similar items and services in the locality
and transfusion medicine. These charges
during the 12-month period of July 1
may not exceed any of the following fee
through June 30 of the previous calendar
screens: (1) the supplier’s customary
year. The inflation-indexed charge is
charge for the item, (2) the prevailing
updated by the CPI-U.
charge for the item in the locality, (3) the
charges made to the carrier’s policyholders
or subscribers for comparable items, (4)
the inflation-indexed charge. Assignment
is optional; balance billing limits do not
apply on non-assigned claims. Regular
Part B cost-sharing applies.

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CRS-29
11. Ambulatory Surgical Centers (ASCs)
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Medicare Certified
Medicare uses a fee schedule to pay for the
The Secretary is required to update ASC
As mandated by MMA, ASCs received an
Ambulatory Surgical
facility services related to a surgery
rates based on a survey of the actual
0% update in FY2005, and the last quarter
Centers (ASCs)
provided in an ASC. The associated
audited costs incurred by a representative
of calendar year 2005.
physician services (surgery and anesthesia)
sample of ASCs every five years
are reimbursed under the physician fee
beginning no later than January 1, 1995.
Effective for services on and after April 1,
schedule. CMS maintains the list of
Between revisions, the rates are to be
2004, the FY2005 base rates (prior to
approved ASC procedures which is
updated annually using the CPI-U. MMA
geographic adjustments) are:
required to be updated every two years.
established that in FY2004, starting April
Presently over 2,500 procedures are
1, 2004, the ASC update is the CPI-U
Payment Group 1 — $333
approved for ASC payment and
(estimated as of March 31, 2003) minus
Payment Group 2 — $446
categorized into one of nine payment
3.0 percentage points. In FY2005, the last
Payment Group 3 — $510
groups that comprise the ASC facility fee
quarter of calendar year 2005, and each of
Payment Group 4 — $630
schedule. The nine ASC payment rates
the calendar years 2006 through 2009 the
Payment Group 5 — $717
reflect the national median cost of
update will be 0%. MMA also established
Payment Group 6 — $826
procedures in that group; these rates are
that a revised payment system for surgical
($676 + $150 for an intraocular lens)
adjusted to reflect geographic price
services furnished in an ASC will be
Payment Group 7 — $995
variation using a hospital wage index.
implemented on or after January 1, 2006,
Payment Group 8 — $973
Payments are also adjusted when multiple
and not later than January 1, 2008.
($823 + $150 for an intraocular lens)
surgical procedures are performed at the
Payment Group 9 — $1,339
same time. Generally, the ASC will
receive full payment for the most
expensive procedure and will receive 50%
payment for the other procedures.

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CRS-30
12. Hospital Outpatient Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Hospital Outpatient
U n d e r H O P D -P P S , w hi ch was
The conversion factor is updated on a
For CY2004, the IPPS MB was 3.5%.
Departments (HOPDs)
implemented in August 2000, the unit of
calendar year schedule. These annual
This increase was adjusted by the required
payment is the individual service or
updates are based on the hospital MB.
wage index and pass-through budget-
procedure as assigned to one of about 570
neutrality factors. The final CY2004
ambulatory payment classifications
conversion factor was $54.561. For
(APCs). To the extent possible, integral
CY2005, the IPPS MB was 3.3%. This
services and items are bundled within each
increase was adjusted by the required
APC, Specified new technologies are
wage index and pass-through budget-
assigned to new technology APCs until
neutrality factors. The final CY2005
clinical and cost data is available to permit
conversion factor is $56.983.
assignment into a clinical APC.
Medicare’s payment for HOPD services is
calculated by multiplying the relative
weight associated with an APC by a
conversion factor. For most APC s, 60%
of the conversion factor is geographically
adjusted by the IPPS wage index. Except
for new technology APCs, each APC has
a relative weight that is based on the
median cost of services in that APC.
Certain APCs with significant fluctuations
in their relative weights will have the
calculated change dampened. The HOPD-
PPS also includes budget-neutral pass-
through payments for new technology and
budget-neutral outlier payments. Cancer
and children’s hospitals have a permanent
hold harmless protection from the HOPD-
PPS. HOPDs in rural hospitals with 100
or fewer beds have this protection through

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CRS-31
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
CY2006. Rural SCHs are held harmless
starting for cost reporting periods on and
after January 1, 2004, and ending for
services furnished before January 1, 2006.
Over time, under Medicare’s prior
payment system, beneficiaries’ share of
total outpatient payments grew to 50%.
HOPD-PPS sl owl y reduces the
beneficiary’s copayment for these
services. Copayments will be frozen at
20% of the national median charge for the
service in 1996, updated to 1999. Over
time, as PPS amounts rise, the frozen
beneficiary copayments will decline as a
share of the total payment until the
beneficiary share is 20% of the Medicare
fee schedule amount. A beneficiary
copayment amount for a procedure is
limited to the inpatient deductible amount
established for that year. Balance billing
is prohibited.

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CRS-32
13. Rural Health Clinics and Federally Qualified Health Center (FQHCs) Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Rural Health Clinics
RHCs and FQHCs are paid on the basis of
Payment limits are updated on January 1
For CY2005, the RHC upper payment
(RHCs) and Federally
an all-inclusive rate for each beneficiary
of each year by the Medicare economic
limit is $70.78 (compared to $68.65 in
Qualified Health Center
visit for covered services. An interim
index (MEI) which measures inflation for
2004), the urban FQHC limit is $$109.88
(FQHCs) Services
payment is made to the RHC or FQHC
certain medical services.
(compared to $106.58 in 2004) and the
based on estimates of allowable costs and
rural FQHC limit is $94.48 (compared to
number of visits; a reconciliation is made
$91.64 in 2004).
at the end of the year based on actual costs
and visits. Per-visit payment limits are
established for all RHCs (other than those
in hospitals with fewer than 50 beds) and
FHQCs. Assignment is mandatory; no
deductible applies for FHQC services.
14. Comprehensive Outpatient Rehabilitation Facility (CORF)
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Comprehensive
CORFs provide (by or under the
See physician fee schedule and outpatient
See physician fee schedule and outpatient
Outpatient Rehabilitation
supervision of physicians) outpatient
physical and occupational therapy
physical and occupational therapy
Facility (CORF)
diagnostic, therapeutic and restorative
services.
services.
services. Payments for services are made
on the basis of the physician fee schedule.
Therapy services are subject to the therapy
limits (described above for physical and
occupational therapy providers).

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CRS-33
15. Part B Drugs/Vaccines Covered Incident to a Physician’s Visit
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Drugs/Vaccines. Medicare
Beginning in 2005, drug products, except
For 2005 and subsequent years, the ASP
No specific provision.
covers approximately 450
for pneumococcal, influenza, and
will be updated quarterly by the Secretary.
outpati ent drugs and
hepatitis B vaccines, those associated
Widely available market prices will be
biologicals under the Part B
with certain renal dialysis services, blood
audited. Payments under the ASP method
program that are authorized
products and clotting factors and
will be lowered if the ASP exceeds the
by statute, including those:
radiopharmaceuticals, will be paid using
widely available market price or average
(1) that are covered if they
the average sales price (ASP)
manufacturer price by a specified
are usually not self-
methodology. Alternatively, beginning in
percentage (5% in 2005, determined by
administered and are
2006, payment may be made through the
the Secretary is subsequent years). Where
provided incident to a
competitive acquisition program.
the percentage is exceeded, the Secretary
physician’s services; (2)
Medicare’s payment under the ASP
will adjust the payment amount; the
those that are necessary for
methodology will equal 106% of the
payment would equal the lesser of the
the effective use of covered
applicable price for a multiple source
widely available market price or 103% of
DME; (3) certain self-
drug or single source drug subject to
the average manufacturer price.
administered oral cancer and
beneficiary deductible and coinsurance
anti-nausea drugs (those
amounts. Regular Part B cost-sharing
with injectable equivalents);
applies, except for pneumococcal and
(4) erythropoietin (used to
influenza virus vaccines. Assignment is
t r e a t a n e m i a ) ; ( 5 )
mandatory.
immunosuppressive drugs
after covered Medicare
organ transplants; (6)
hemophilia clotting factors;
and (7) vaccines for
influenza, pneumonia, and
hepatitis B.

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CRS-34
16. Blood
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Blood
Medicare pays the reasonable cost for
There is no specific update for the
No specific update.
pints of blood, starting with the fourth
reimbursement of Part B blood costs. The
pint, and blood components that are
outpatient facility is paid 100% of its
provided to a hospital outpatient as part of
reasonable costs as reported on its cost-
other services. (Blood that is received in
reports. See the section on IPPS hospitals
an IPPS hospital is bundled in the DRG
for updates for blood included as part of
payment.) For IPPS-excluded hospitals,
these hospitals.
Medicare pays allowable costs for blood.
Beneficiary pays for first three pints of
blood in a year, after which regular Part B
cost-sharing applies.
17. Partial Hospitalization Services Connected to Treatment of Mental Illness
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Partial Hospitalization
Medicare provides Part B hospital
See physician fee schedule and hospital
See physician fee schedule and hospital
Services Connected to
outpatient care payments for “partial
outpatient services.
outpatient services.
Treatment of Mental
hospitalization” mental health care. The
Illness
services are covered only if the individual
would otherwise require inpatient
psychiatric care. Services must be
provided under a program which is
hospital-based or hospital-affiliated and
must be a distinct and organized intensive
ambulatory treatment service offering less
than 24-hour daily care. The program may
also be covered when provided in a
community mental health center. Payment

---

CRS-35
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
for professional services is made under the
physician fee schedule. Other services are
paid under the hospital outpatient
prospective payment system. Regular Part
B cost-sharing applies; balance billing is
prohibited.
18. Ambulance Services
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Ambulance Services
Medicare pays for ambulance services on
The fee schedule amounts are updated
The update for 2005 is 3.3% (compared to
the basis of a national fee schedule which
each year by the CPI-U. MMA provided
2.1% in 2004). Other MMA changes will
is being phased in over a transition period.
an additional 2% payment increase for
change the applicable rate.
Prior to July 2004, a gradually increasing
rural ambulance services and 1% payment
portion of the payment was based on the
increase for urban ambulance services for
fee schedule and a decreasing portion on
July 1, 2004, through December 31, 2006.
the former payment methodology (costs or
charges). MMA established a new
methodology beginning July 2004 with
payments through 2009 equal to the
greater of the national fee schedule or a
blend of the national and regional fee
schedule amounts. For July through
December 2004, the blend was 20% of the
national fee schedule rates and 80% of the
regional rates. The portion of the blend
based on national rates increases each
year. In CY2010 and subsequently, the
payments in all areas will be based on the
national fee schedule amount.

---

CRS-36
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
The fee schedule establishes seven
categories of ground ambulance services
and two categories of air ambulance
services. The ground ambulance
categories are: basic life support (BLS),
both emergency and nonemergency;
advanced life support Level 1 (ALS1),
both emergency and nonemergency;
advanced life support Level 2 (ALS2);
speciality care transport (SCT); and
paramedic ALS intercept (PI). The air
ambulance categories are: fixed wing air
ambulance (FW) and rotary wing air
ambulance (RW).
The fee schedule payment for an
ambulance service equals a base rate for
the level of service plus payment for
mileage. Geographic adjustments are
made to a portion of the base rate to reflect
the relative costs of providing services in
various areas of the country. Additionally,
the base rate is increased for air ambulance
trips originating in rural areas and mileage
payments are increased for all trips
originating in rural areas. MMA
establishes a 25% bonus on the mileage
rate for trips of 51 miles and more from
July 2004-December 2008. Regular Part B
cost-sharing applies. Assignment is
mandatory.

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CRS-37
Parts A and B
1. Home Health
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Home health services
Home health agencies (HHAs) are paid
The base payment amount, or national
Home health agencies received a full
under a prospective payment system that
standardized 60-day episode rate, is
market basket increase update for the last
began with FY2001. Payment is based on
increased annually by an update factor that
quarter of calendar year 2003 and the first
60-day episodes of care for beneficiaries,
is determined, in part, by the projected
quarter of calendar year 2004. Beginning
subject to several adjustments, with
increase in the home health market basket
April 1, 2004, and continuing for calendar
unlimited episodes of care in a year. The
index. This index measures changes in the
2005, the update is the market basket
payment covers skilled nursing, therapy,
costs of goods and services purchased by
minus 0.8 percentage points
medical social services, and aide visits and
HHAs.
medical supplies. Durable medical
MMA provided a temporary 5% increase
equipment is not included in the HH PPS.
The Omnibus Consolidated and
in payments for HHAs serving rural
Emergency Supplemental Appropriations
beneficiaries until March 31, 2005.
The base payment amount is adjusted for:
Act (OCESA) of 1999 and BIPA provide
(1) differences in area wages using the
for the following updates:
hospital wage index; (2) differences in the
care needs of patients (case mix) using
FY2001 = MB
“home health resource groups” (HHRGs);
FY2002 = MB - 1.1
(3) outlier visits (for the extraordinarily
FY2003 = MB - 1.1
costly patients); (4) a significant change in
FY2004 and subsequent years = MB
a beneficiary’s condition (SCIC) when the
care needs of a beneficiary increase
MMA changed the update cycle for HHA
substantially; (5) a partial episode for
from a federal fiscal year basis to a
when a beneficiary transfers from one
calendar year basis with the following
HHA to another during a 60-day episode;
updates:
(6) budget neutrality; and (7) a low
utilization payment adjustment (LUPA)
CY2004 (last 3 quarters only) = MB - 0.8
for beneficiaries who receive four or fewer
CY2005 = MB - 0.8
visits. There is not a distinction between
CY2006 = MB - 0.8

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CRS-38
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
urban and rural base payment amounts.

The HHRG applicable to a beneficiary is
determined following an assessment of the
patient’s condition and care needs using
the Outcome and Assessment Information
Set (OASIS). After the assessment a
beneficiary is categorized in one of 80
HHRGs that reflect the beneficiary’s
clinical severity, functional status, and
service requirements.
HHAs are paid 60% of the case-mix and
wage-adjusted payment after submitting a
request for anticipated payment (RAP).
The RAP may be submitted at the
beginning of a beneficiary’s care once the
HHA has received verbal orders from the
beneficiary’s physician and the assessment
is completed. The remaining payment is
made when the beneficiary’s care is
completed or the 60-day episode ends.

---

CRS-39
2. End-Stage Renal Disease
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
End-Stage Renal Disease
Dialysis services are offered in three
The composite rate is not routinely
Section 623 of the MMA mandates that the
outpatient settings: hospital-based
updated (although the MMA provides an
composite payment rate be increased by
facilities, independent facilities, and the
update in 2005), nor are Method II
1.6% and it must also include a drug add-
patient’s home. There are two methods for
reasonable charge payments. There is no
on adjustment in the amount of 8.7% for
payment. Under Method I, facilities are
specific update policy for reasonable costs
the difference between the payment
paid a prospectively set amount, known as
of kidney acquisition.
amounts for separately billable drugs and
the composite rate, for each dialysis
biologicals and their acquisition costs, as
session, regardless of whether services are
determined by Inspector General Reports.
provided at the facility or in the patient’s
Additionally, beginning April 2005, the
home. The composite rate is derived from
composite rate will be budget-neutrally
audited cost data and adjusted for the
adj ust ed f or i ndividual patient
national proportion of patients dialyzing at
characteristics, that is case-mix adjusted.
home versus in a facility, and for area
wage differences. Adjustments are made
The maximum composite rate cap
to the composite rate for hospital-based
(maximum allowed payment per
dialysis facilities to reflect higher
treatment) beginning January 2005 is
overhead costs. Beneficiaries electing
$159.08.
home dialysis may choose not to be
associated with a facility and may make
independent arrangements with a supplier
for equipment, supplies, and support
services. Payment to these suppliers,
known as Method II, is made on the basis
of reasonable charges, limited to 100% of
the median hospital composite rate, except
for patients on continuous cycling
peritoneal dialysis, when the limit is 130%
of the median hospital composite rate.
Assignment is mandatory; regular Part B
cost-sharing applies.

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CRS-40
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
MMA provides for update to the
composite rate beginning January 1, 2005.
Beginning April 1, 2005 the composite
rate will be case-mixed adjusted, budget
neutrally.
Kidney transplantation services, to the
extent they are inpatient hospital services,
are subject to the PPS. However, kidney
acquisition costs are paid on a reasonable
cost basis.
Part C
1. Managed Care Organizations
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
(a) Medicare Advantage
In general, Medicare makes a monthly
The MA rates are recalculated annually by
Contracts (formerly
payment in advance to participating
the method described under “General
Medicare+Choice
Medicare Advantage (MA) health plans
Payment Policy.”
Contracts)
for each enrolled beneficiary in a payment
area. In exchange, the plans agree to
furnish all Medicare-covered items and
Beginning in 2005, payments to local
services to each enrollee.
plans are annually updated by the greater
of (1) a 2% increase over the prior year’s
For 2004 (effective March 1), plans were
rate, (2) by the growth in the national
paid the highest of the floor, minimum
growth percentage increases, or (3) in
percent increase, the blend, or 100% of
years as specified by the Secretary, 100%
fee-for-service (FFS) payments made for
of FFS. The national growth percentage is

---

CRS-41
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
persons enrolled in traditional Medicare.
equal to the projected increase in Medicare
Also, in 2004, there was no adjustment for
per capita expenditures.
budget neutrality. For 2004 and beyond,
the minimum percentage increase is the
Furthermore, the national growth
greater of a 2% increase over the previous
percentage is adjusted each year to correct
year’s payment rate (as under prior law) or
for errors in prior years’ rates. The MMA
the previous year’s payment increased by
allows for adjustments beginning in 2004.
the national growth percentage. Beginning
in 2005, payments to local MA plans are
The annual increase for regional plans and
updated by the highest of the minimum
local plans in CCA areas will have both a
percentage increase or, in years in which
statutory increase and a competitive
the Secretary specifies (but not less than
increase. The statutory component is
once every three years), 100% of FFS.
similar to the local update and the
competitive component is based on a
Beginning in 2006, the Secretary will
weighted average of plan bids. Congress
determine local MA payment rates by
made substantial changes to the
comparing plan bids to a benchmark.
Medicare+Choice program with the
Plans will submit bids representing their
passage of the MMA. The Act created the
estimated premium for providing required
Medicare Advantage (MA) program which
Parts A and B benefits. The benchmark
replaced the M+C program and introduced
will be calculated, according to statute, by
several enhancements designed to increase
updating the previous year’s payment in a
the availability of private plans for
local area by the minimum percentage
Medicare beneficiaries. In addition to the
increase or 100% of FFS. If a plan’s bid is
immediate payment increases to plans,
less than the benchmark, its payment will
beginning in 2006 the MA program will
equal its bid plus a rebate of 75% of the
change the payment structure and
difference and the remaining 25% of
introduce regional plans that operate like
difference will be retained by the federal
Preferred Provider Organizations.
government. If a plan’s bid is equal to or
Additionally, in 2006 beneficiaries will
above the benchmark, its payment will be
have access to a drug plan whether they
the benchmark.
are in FFS Medicare or enrolled in
managed care. Finally, beginning in 2010

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CRS-42
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
Also beginning in 2006, the MA program
a limited number of geographic areas will
will offer MA regional plans covering both
be selected to examine enhanced
in- and out-of-network required services.
competition between local MA plans and
MA organizations will submit bids. The
competition between private plans and
regional benchmark, unlike the local
FFS Medicare.
benchmark, includes two components; a
statutorily determined increase, and a
weighted average of plan bids. Rebates
for regional plans will be similar to rebates
for local plans.
Additional financial incentives will be
provided for regional plans. A
stabilization fund, with initial funding of
$10 billion, will provide incentives for
plans to enter into and to remain in the
MA program. For 2006 and 2007,
Medicare will share risk with MA regional
plans if plan costs fall above or below a
statutorily-specified risk corridor. Finally,
there will be $25 million available
beginning in 2006 (with an increased
amount each year) for additional payments
to certain hospitals in regional areas that
demonstrate that they have high costs.
Also beginning in 2006, at least one plan
offered by an MA organization is required
to be an MA-PD plan, one that offers Part
D prescription drug coverage. MA
organizations offering prescription drug
coverage will receive a direct subsidy for

---

CRS-43
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
each enrollee in their MA-PD plan, equal
to the plan’s risk adjusted standardized bid
amount (reduced by the base beneficiary
premium). The plan will also receive the
reinsurance payment amount for the
federal share. Finally, an MA-PD plan
will receive reimbursement for the
premium and cost-sharing reduction for its
qualifying low-income enrollees.
A six-year program will begin in 2010 to
examine comparative cost adjustment
(CCA) in designated CCA areas.
Payments to local MA plans in CCA areas
will, in part, be based on competitive bids
(similar to payments for regional MA
plans), and Part B premiums for
individuals enrolled in traditional
Medicare may be adjusted, either up of
down. This program will be phased-in and
there is also a 5% annual limit on the
adjustment, so that the amount of the
adjustment to the beneficiary’s premium
for a year can not exceed 5% of the
amount of the monthly Part B premium, in
non-CCA areas.
(b) Cost Contracts
Medicare pays cost contract health
No specific update. Cost-based HMOs are
No specific update. (However MMA
maintenance organizations (HMOs) and
paid 100% of their actual costs.
extends or renews reasonable cost
competitive medical plans (CMPs) the
contracts indefinitely. Beginning January
actual costs they incur for furnishing
1, 2008, cost contracts may not be
Medicare-covered services (less the
extended or renewed in a service area if,

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CRS-44
Provider/Service
General Payment Policy
General Update Policy
Most Recent Update
estimated value of required Medicare cost-
during the entire previous year, the service
sharing), subject to a test of
area had two or more MA regional plans
“reasonableness.” Interim payment is
or two or more MA local plans meeting
made to the HMO/CMP on a monthly per
the following minimum enrollment
capita basis; final payment reconciles
requirements: (1) at least 5,000 enrollees
interim payments to actual costs.
for the portion of the area that is within a
metropolitan statistical area having more
than 250,000 people and counties
contiguous to such an area, and (2) at least
1,500 enrollees for any other portion of
such area.

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CRS-45
CRS Reports for Additional Information
CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, by Jennifer O’Sullivan, Hinda Chaikind, Sibyl
Tilson, Jennifer Boulanger, and Paulette Morgan
CRS Report RL32005, Medicare Fee-for-Service Modifications and Medicaid
Provisions of H.R. 1 as Enacted, by Sibyl Tilson, Jennifer Boulanger, Jean
Hearne, Steve Redhead, Evelyne Baumrucker, Julie Stone, Bernadette
Fernandez, and Karen Tritz.
CRS Report RL31419, Medicare: Payments for Covered Prescription Drugs, by
Jennifer O’Sullivan.
CRS Report RL31199, Medicare: Payments to Physicians, by Jennifer O’Sullivan.
CRS Report RL30702, Medicare+Choice, by Hinda Ripps Chaikind and Paulette C.
Morgan.
CRS Report RL32618, Medicare Advantage Payments, by Hinda Ripps Chaikind and
Paulette C. Morgan.
CRS Report RL31341, Medicare’s Durable Medical Equipment and Prosthetics and
Orthotics Benefit, by Heidi G. Yacker and Jennifer Boulanger.
CRS Report RS21814, Medicare Home Health — Benefits and Payments, by Jennifer
Boulanger.
CRS Report RS21465, Medicare’s Skilled Nursing Facility Payment, by Jennifer
Boulanger.
CRS Report RL32640, Medicare Payment Issues Affecting Inpatient Rehabilitation
Facilities (IRFs), by Sibyl Tilson

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