Order Code RL30526
CRS Report for Congress
Received through the CRS Web
Medicare Payment Policies
Updated March 17, 2006
Sibyl Tilson, Hinda Chaikind, Jennifer O’Sullivan, Carol
O’Shaughnessy, Paulette C. Morgan, and Julie Stone
Specialists and Analysts in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

---

Medicare Payment Policies
Summary
Medicare is the nation’s health insurance program for the aged, disabled, and
persons with End Stage Renal Disease (ESRD). 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, a new prescription drug benefit that began on 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. Most recently, further modifications were made to Medicare
payments in the Deficit Reduction Act of 2005 (P.L. 109-171, DRA).
This report provides an overview of Medicare payment rules by type of service,
outlining current payment policies and providing 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.

---

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3. IPPS-Exempt Hospitals and Distinct Part Units . . . . . . . . . . . . . . . . . . . 10
4. Skilled Nursing Facility (SNF) Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5. Hospice Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1. Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2. Nonphysician Practitioners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3. Clinical Diagnostic Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . . . 22
4. Preventive Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. Telehealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6. Durable Medical Equipment (DME) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7. Prosthetics and Orthotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8. Surgical Dressings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9. Parenteral and Enteral Nutrition (PEN) . . . . . . . . . . . . . . . . . . . . . . . . . 29
10. Miscellaneous Items and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11. Ambulatory Surgical Centers (ASCs) . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12. Hospital Outpatient Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
13. Rural Health Clinics and Federally Qualified
Health Center (FQHCs) Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
14. Comprehensive Outpatient Rehabilitation Facility (CORF) . . . . . . . . . 34
15. Part B Drugs/Vaccines Covered Incident
to a Physician’s Visit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
16. Blood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
17. Partial Hospitalization Services Connected
to Treatment of Mental Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
18. Ambulance Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1. Home Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2. End-Stage Renal Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Part C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1. Managed Care Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
CRS Reports for Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

---

Medicare Payment Policies
Introduction
Medicare is the nation’s health insurance program for the aged, disabled, and
persons with End Stage Renal Disease (ESRD). 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 provides outpatient prescription drug coverage.
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 are not subject to Medicare payment
rules. Prices are 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.

---

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 $124 deductible in 2006, 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 includes 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.

---

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. Most recently, further
modifications were made to Medicare payments in the Deficit Reduction Act of 2005
(P.L.109-171, DRA).
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.

---

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 FY2005, hospitals that submitted the
inpatient services
prospectively determined payment for
by an update factor that is determined, in
required quality data receive the full MB
provided by acute
each discharge. A hospital’s payment for
part, by the projected increase in the
increase of 3.3%. Hospitals that did not
hospitals (Operating
its operating costs is calculated using a
hospital market basket (MB) index. This
submit the quality data receive a reduced
IPPS)
national standardized amount adjusted by
is a fixed price index that measures the
update of 2.9%. For FY2006, hospitals
a wage index associated with the area
change in the price of goods and services
that submitted the required quality data
where the hospital is located or where it
purchased by hospitals to create one unit
receive the full MB increase of 3.7%.
has been reclassified. Payment also
of output. The update for operating IPPS
Hospitals that did not submit the quality
depends on the relative resource use
is established by statute. Typically,
data receive a reduced update of 3.3%.
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”). Under MMA, for FY2005-
with extraordinary costs (outliers); indirect
FY2007, hospitals that submit required
medical education (IME) (see below); and
quality data will receive the full MB
for hospitals serving a disproportionate
update, those that do not submit the data
share (DSH) of low-income patients (see
will receive MB-0.4 percentage points.
below). IME and DSH payments are made
The reduction would apply for the
through an adjustment within IPPS that
applicable year and would not be taken
results in additional monies being paid for
into account in subsequent years. Under
each Medicare discharge. Additional
DRA, hospitals that do not submit
payments may be made for cases that
required quality data in FY2007 and each
involve qualified new technologies that
subsequent year will have the applicable
have been approved for special add-on
MB percentage reduced by two percentage
payments. Hospitals in Hawaii and Alaska
points.
receive a cost-of-living adjustment

---

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-term
Medicare’s capital IPPS is structured
Updates to the capital IPPS are not
The capital IPPS update for FY2005 is
general hospitals (Capital
similarly to its operating IPPS for short-
established in statute. Capital rates are
0.7%, all of which is attributed to the
IPPS)
term general hospitals. A hospital’s
updated annually by the Centers for
current forecast of the CIPI available when
capital payment is based on a
Medicare and Medicaid (CMS) according
the final rule was published; other
prospectively determined federal payment
to a framework which considers changes
adjustments included in the capital update
rate, which is 3% higher for hospitals in
in the prices associated with capital-related
framework cancelled each other out. The
large urban areas than for hospitals in
costs as measured by the capital input
capital IPPS update for FY2006 is 0.99%.
other areas, depends on the DRG to which
price index (CIPI) and other policy factors,
Most of this increase is caused by the
the patient is assigned, and is adjusted by
including changes in case mix intensity,
current forecast of the CIPI available when
a hospital’s geographic adjustment factor
errors in previous CIPI forecasts, DRG
the final rule was published.
(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 $9.2 billion
discharge based on a formula which
varies by number of Medicare discharges
in FY2005 and $9.45 billion in FY2006 in
incorporates the number of patient days
as well as the type of patient seen in any
its March 2006 baseline.
provided to low-income Medicare
given hospital.
beneficiaries (those who receive
Supplemental Security Income (SSI)) and
Medicaid recipients. A few urban

---

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 $5.8 billion in FY2005
teaching hospitals; different measures of
IPPS; by FY2001, the IME adjustment was
and $6.0 billion in FY2006 in its March
teaching intensity are used in the operating
to be 5.5%. However, the scheduled
2006 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-September 30, 2004; during FY2005
of medical residents as of December 31,
the adjustment is 5.8%; during FY2006 the
1996. As established by BBA 97, teaching
adjustment is 5.55%; and during FY2007
hospitals also receive IME payments for
the adjustment is 5.35%; starting FY2008
their Medicare+Choice discharges.
and subsequently, the adjustment returns
to 5.5%.

---

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-FY2013 receive an
the basis of updated hospital-specific costs
price index for all urban consumers (CPI-
update of CPI-U. Hospitals above 140%
per resident amount (PRA), the number of
U). As established by BBRA and
of the national average for that time period
weighted full-time equivalent (FTE)
subsequently amended, however, the
will receive no update. CBO estimates
residents, and Medicare’s share of total
update amount that any hospital receives
direct GME payments of $1.7 billion in
patient days in the hospital (including
depends upon the relationship of its PRA
FY2005 and FY2006 in its March 2006
those days attributed to Medicare+Choice
to the national average PRA. Hospitals
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.

---

CRS-8
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 FY2005, hospitals that submitted the
Hospitals (SCHs) —
following payment rates as the basis of
an “applicable percentage increase” which
required quality data receive the full MB
facilities located in
reimbursement: the current IPPS base
is specified by statute and is often
increase of 3.3%. Hospitals that did not
geographically isolated
payment rate, or its hospital-specific per-
comparable to the IPPS update.
submit the quality data receive a reduced
areas and deemed to be
discharge costs from either FY1982, 1987,
update of 2.9%. For FY2006, hospitals
the sole provider of
or 1996, updated to the current year. An
that submitted the required quality data
inpatient acute care
SCH may receive additional payments if
receive the full MB increase of 3.7%.
hospital services in a
the hospital experiences a decrease of
Hospitals that did not submit the quality
geographic area based on
more than 5% in its total inpatient cases
data receive a reduced update of 3.3%.
distance, travel time,
due to circumstances beyond its control.
These updates are also used to increase the
severe weather conditions,
An SCH receives special consideration for
hospital-specific rate applicable to an
and/or market share as
reclassification into a different area.
SCH.
established by specific
Starting for services on January 1, 2006,
criteria set forth in
CMS increased outpatient prospective
regulation (42 CFR
payment system (OPPS) payments to rural
412.92).
SCHs by an additional 7.1%.
Medicare Dependent
BBA 97 reinstated and extended the MDH
Target amounts for MDHs are updated by
For FY1996 and thereafter, the update for
Hospitals (MDHs) —
classification, starting on October 1, 1997
an “applicable percentage increase” which
MDHs is the same as for all IPPS
small rural hospitals with
to October 1, 2001. The sunset date for the
is specified by statute and is often
hospitals. These updates are also used to
a high proportion of
MDH classification was subsequently
comparable to the IPPS update.
increase the hospital-specific rate
patients who are Medicare
extended to September 30, 2011 by DRA.
applicable to an MDH. For FY2005,
beneficiaries (have at least
Until October 1, 2006, an MDH is paid
hospitals that submitted the required
60% of acute inpatient
50% of the amount that the federal rate is
quality data receive the full MB increase
days or discharges
exceeded by the hospital’s target amount
of 3.3%. Hospitals that did not submit the
attributable to Medicare in
based on either its updated FY1982 or
quality data receive a reduced update of
FY1987 or in two of the
FY1987 costs. DRA provided that an
2.9%. For FY2006, hospitals that
three most recently
MDH would be able to elect payments
submitted the required quality data receive
audited cost reporting
based on 50% of its FY2002 hospital-
the full MB increase of 3.7%. Hospitals
periods). As specified in
specific costs starting October 1, 2006. An
that did not submit the quality data

---

CRS-9
Provider/service
General payment policy
General update policy
Most recent update
regulation (42 CFR
MDH’s payments would be based on 75%
receive a reduced update of 3.3%.
412.108), they cannot be
of the adjusted hospital-specific costs
an SCH and must have
starting for discharges on October 1, 2006.
100 or fewer beds.
An MDH may receive additional payments
if its inpatient cases decline more than 5%
due to circumstances beyond its control.
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
RRCs receive a higher DSH adjustment
general hospitals.
hospitals.
rural areas, that provide a
than do other rural hospitals. Also, RRCs
broad array of services
receive preferential consideration for
and treat patients from a
reclassification to a different area.
wide geographic area as
established by specific
criteria set forth in
regulation. (42 CFR
412.96).

---

CRS-10
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
Starting in FY2006, the IRF-PPS update is
The update for FY2005 is 3.1%. The
Facilities (IRFs) —
payments to a rehabilitation facility are
based on the MB reflecting 2002 cost
update for FY2006 is 3.6%. In FY2006,
freestanding hospitals and
based on a fully implemented IRF-PPS
structures from rehabilitation, long-term
the IRF-IPPS included a one-time
hospital-based distinct
and 100% of the federal rate which is a
care, and psychiatric hospitals (RLP-MB).
reduction of 1.9% to account for coding
part units that meet the
fixed amount per discharge. This PPS
The RLP-MB includes an update estimate
changes.
modified “75% rule” and
encompasses both capital and operating
for capital as well as operating costs.
certain specified
payments to IRFs, but does not cover the
conditions of
costs of approved educational programs,
participation. The rule,
bad debt expenses, or blood clotting
which was to become
factors, which are paid for separately. The
effective July 1, 2004, has
IRF-PPS payment for any Medicare
a tiered three-year phase
discharge will vary depending on the
in period; for the first
patient’s impairment level, functional
year, at least 50% of an
status, comorbidity conditions, and age.
IRF’s inpatient population
These factors determine which of the 380
must have at least one of
Case Mix Groups (CMGs) is assigned to
the qualifying medical
the inpatient stay. Five other CMGs are
conditions. Enforcement
used for patients discharged before the
of the modified 75% rule
fourth day (short stay outliers) and for
was initially delayed by
those who die in the facility. Generally,
legislative action. Most
IRF payments are reduced or increased for
recently, DRA established
certain case level adjustments, such as
the IRF threshold at 60%
early transfers, short-stay outliers, patients
through June 30, 2007, at
who die before transfer, and high cost
65% starting July 1, 2007,
outliers. Payments also depend upon
and at 75% beginning on
f a c i l i t y-s p eci f i c adj ust ment s t o
July 1, 2008, and
accommodate variations in area wages,
subsequently. A patient
percentage of low income patients (LIP)
must receive rehabilitation
served by the hospital (a DSH adjustment),
services for one of 13
and rural location (rural IRFs receive

---

CRS-11
Provider/service
General payment policy
General update policy
Most recent update
conditions including
increased payments, about 19% more than
stroke, spinal cord injury,
urban IRFs.) Starting in FY2006, an IME
brain injury, neurological
adjustment is included; IRFs in Alaska and
disorder, burns, and
Hawaii do not receive a COLA
certain arthritis related
adjustment. The IRF-PPS is not required
conditions.
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
Effective October 1, 2002, LTCHs are paid
Presently, the LTCH-PPS update is based
The increase to the LTCH federal rate
Hospitals and satellite or
on a discharge basis under a DRG-based
upon the MB for excluded hospitals (those
beginning July 1, 2004 is 3.1%. For
onsite providers (LTCHs)
PPS, subject to a five-year transition
paid under IPPS). This MB is based on
discharges starting in July 1, 2005, the
— acute general hospitals
period. A LTCH may opt to be paid based
cost report data from Medicare
update is 3.4%.
that are excluded from
on 100% of the federal prospective rate. A
participating IRFs, psychiatric facilities,
IPPS with a Medicare
new LTCH must be paid on 100% of the
and long term, children’s, and changer
inpatient average length
federal rate. The LTCH-PPS encompasses
hospitals, which were subject to the
of stay (ALOS) greater
payments for both operating and capital-
limitations and incentives established in
than 25 days.
related costs of inpatient care but does not
the Tax Equity and Fiscal Responsibility
cover the costs of approved educational
Act of 1982 (TEFRA). TEFRA MB
programs, bad debt expenses, or blood
payment only includes operating costs, so
clotting factors which are paid for
the update is based on a modified TEFRA
separately. The LTCH-PPS payment for
MB that reflects capital costs. The
any Medicare discharge will vary
Medicare LTCH update incorporates a
depending on the patient’s assignment into
budget-neutrality factor as well. CMS has
one of 510 LTCH-DRGs, which are based
changed the effective date of the annual
on reweighted IPPS DRGs. Payments for
update from October 1 to July 1 of each
specific patients may be increased or
year, starting July 2003. During the five-
reduced because of case-level adjustments.
year transition period, CMS calculates a
Payments also depend upon facility-
budget-neutrality offset to account for the
specific adjustments such as variations in
ability of LTCHs to elect payment based
area wages (implemented over a five-year
on the transition blend methodology or on
transition period) and include a COLA for
100% of the federal payment amount,

---

CRS-12
Provider/service
General payment policy
General update policy
Most recent update
hospitals in Alaska and Hawaii. No
whichever results in greater Medicare
adjustments are made for the percentage of
payments. The election option offset for
low income patients served by the hospital
the 2005 rate year was estimated at $15
(DSH), rural location, or IME. The
million, causing a reduction in LTCH
LTCH-PPS is required to be budget
payments of 0.5% (0.995). No such
neutral; total payments must equal the
reduction occurred in the following rate
amount that would have been paid if PPS
year (RY2006).
had not been implemented.
Psychiatric hospitals and
Until January 1, 2005, services provided in
Initially, the IPF-PPS update in future
The IPF-PPS system was implemented for
distinct part units —
inpatient psychiatric facilities (IPF) had
years was to be based on the modified
discharges beginning on January 1, 2005.
include those primarily
been paid on a reasonable cost basis,
TEFRA MB that reflects capital costs
The first update to the new system is
engaged in providing, by
subject to modified TEFRA payment
described previously. However, the
scheduled for July 1, 2006.
or under the supervision
limitations and incentives. As directed by
proposed rule issued in January 2006
of a psychiatrist,
BBRA, a budget-neutral per-diem-based
announced that, subject to public
psychiatric services for
PPS for inpatient psychiatric services was
comment, the update will incorporate the
the diagnosis and
implemented for these hospitals and units.
RPL-MB as well. The IPF-PPS payments
treatment of people with
Established with a three-year transition
must be projected to equal the amount of
mental illness.
period, the IPF-PPS incorporates patient-
total payments that would have been made
level adjustments for specified DRGs,
under the prior payment system. The
selected comorbidies, and in certain cases,
initial calculation of the per diem payment
age of the patient. Facility-level
included a 16.33% reduction to account for
adjustments for relative wages, teaching
outlier payments, the stop-loss provision
status and rural location are also included.
and a behavioral offset (to account for
IPFs in Hawaii and Alaska will receive a
changing utilization under the new
COLA adjustment. Medicare per diem
payment system).
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

---

CRS-13
Provider/service
General payment policy
General update policy
Most recent update
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.
Children’s and cancer
Children’s and cancer hospitals are paid
An update factor for reimbursement of
The update for FY2005 is 3.3%. The
hospitals:
on a reasonable cost basis, subject to
operating costs is established by statute.
update for FY2006 is 3.7%.
TEFRA payment limitations and
Starting in FY2006, IPPS operating 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
increase is used to update the target
those engaged in
reimbursement is subject to a ceiling or
amounts. The amount of increase received
furnishing services to
target amount that serves as an upper limit
by any specific hospital will depend upon
inpatients who are
on operating costs. Depending upon the
the relationship of the hospital’s costs to
predominantly individuals
relationship of the hospital’s actual costs
its target amount. There is no specific
under the age of 18.
to its target amount, these hospitals may
update for capital costs.
Cancer hospitals
receive relief or bonus payments as well as
generally are recognized
additional bonus payments for continuous
by the National Cancer
improvement; i.e., facilities whose costs
Institute as either a
have been consistently less than their
comprehensive or clinical
limits may receive additional money.
cancer research center; are
Newly established hospitals receive
primarily organized for
special treatment. Providers that can
the treatment of and
demonstrate that there has been a
research on cancer (not as
significant change in services and/or
a subunit of another
patients may receive exceptions payments.
entity); and have at least
The capital costs for these hospitals are
50% of their discharges
reimbursed on a reasonable cost basis.
with a diagnosis of
neoplastic disease. See 42

---

CRS-14
Provider/service
General payment policy
General update policy
Most recent update
CFR 412.23(f).
Critical Access Hospitals
Medicare pays CAHs on the basis of the
No specific update policy.
No specific update policy.
(CAHs) are limited-
reasonable costs of the facility for
service facilities that are
inpatient and outpatient services. CAHs
located more than 35
may elect either a cost-based hospital
miles from another
outpatient service payment or an all-
hospital (15 miles in
inclusive rate which is equal to a
certain circumstances) or
reasonable cost payment for facility
designated by the state as
services plus 115% of the fee schedule
a necessary provider of
payment for professional services.
health care; offer 24-hour
Ambulance services that are owned and
emergency care; have no
operated by CAHs are reimbursed on a
more than 25 acute care
reasonable cost basis if these ambulance
inpatient beds and have a
services are 35 miles from another
96-hour average length of
ambulance system. MMA provided that
stay. Beds in distinct-part
inpatient, outpatient, and swing bed
skilled nursing facility,
services provided by CAHs will be paid at
psychiatric or
101% of reasonable costs for cost
rehabilitation units
reporting periods beginning January 1,
operated by a CAH do not
2004.
count toward the bed
limit.

---

CRS-15
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 FY2006, SNFs received the full
from a cost-based retrospective
payment rates are increased annually by an
market basket increase of 3.1 percentage
reimbursement system to a PPS. The PPS
update factor that is determined, in part, by
points. The net effect of all SNF
payments are based on a daily (“per-
the projected increase in the SNF market
fee-for-service payment changes (see
diem”) urban or rural base payment
basket index. This index measures
General Update Policy column), however,
amount that is adjusted for case mix and
changes in the costs of goods and services
will likely result in a total net increase of
area wages.
purchased by SNFs.
0.1 percentage points for FY2006 (Medpac
2006, Report to Congress: Medicare
The federal per diem payment covers all
BIPA 2000 provided for the following
Payment Policy).
the services provided to the beneficiary
updates:
that day including room and board,
For FY2005, the SNF market basket
nursing, therapy, and prescription drugs.
FY2001 = MB
estimated update was 3.1 percentage
Some care costs are excluded from PPS
FY2002 = MB - 0.5
points, while the actual increase was 3.3
and paid separately such as physician
FY2003 = MB - 0.5
percentage points. Since the difference
visits, dialysis and certain high cost
FY2004 and subsequent years = MB
between the estimated and actual amounts
prosthetics and orthotics.
of change did not exceed the 0.25
The MB level increase in the update was
percentage point threshold, the payment
The case-mix adjustment to the federal per
unchanged by MMA.
rates for FY2005 do not include a forecast
diem rate adjusts payments for the
error adjustment and remain at 3.1
treatment and care needs of Medicare
At the end of FY2002, two temporary add-
percentage points.
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
For FY2004, the update was 3.0%. For
The RUGs system uses patient
FY2001 and FY2002 from BBRA and a
FY2004, SNFs received an additional
assessments to assign a beneficiary to one
16.66% increase in the nursing component
3.26% increase to account for cumulative
of 44 categories and to determine the
of the payment rates that was in effect
forecast error since SNF PPS began on
payment for the beneficiary’s care. Patient
from April 1, 2001 until September 30,
July 1, 1998.
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

---

CRS-16
Provider/service
General payment policy
General update policy
Most recent update
condition; the daily SNF PPS payment will
Another temporary increase in 26 RUGs
change as well.
also expired. This add-on increased
payments by about $1 billion per year and
The final adjustment to the daily payment
was scheduled to expire upon the
rate is to account for variations in area
implementation of a refined RUG system
wages and uses the hospital wage index.
by the Secretary of DHHS. This refined
RUG system was finalized in the Final
MMA increased payments for AIDS
Rule (70 FR 45026) and began
patients in SNFs by 128% starting October
implementation in FY2006. The new
1, 2004.
system added nine new RUGS to the
patient classification systems and
Unlike other PPSs, the SNF PPS statute
increased nursing weights associated with
does not provide for an adjustment for
all RUG groups. Combined, CMS
extraordinarily costly cases (an “outlier”
estimates that hospital-based SNFs in
adjustment).
aggregate will experience payment
increases, while freestanding SNFs in
aggregate will experience payment
reductions.

---

CRS-17
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 FY2006 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 — $126.49 per day
the care of the hospice. The four rate
change in the medical care expenditure
Continuous home care — $738.26,
categories are: routine home care,
category of the CPI-U. However, BBA 97
full rate = 24 hours of care, or
continuous home care, inpatient respite
reduced the hospice payment update to the
$30.76 per hour;
care, and general inpatient care. Payment
market basket minus 1.0 percentage point
Inpatient respite care — $130.85 per day;
rates are adjusted to reflect differences in
each year from FY1998-FY2002. BBRA
General inpatient care — $5642.69 per
area wage levels using the hospital wage
increased the hospice payments 0.5% for
day.
index. Payments to a hospice are subject
FY2001 and 0.85% for FY2002. This
to an aggregate cap that is determined by
increase was not included in the base for
The hospice cap for the period November
multiplying the cap amount for a given
updating the payment rate in subsequent
1, 2004-October 31, 2005 was $19,635.67
year by the number of Medicare
years. BIPA increased payment rates by
per beneficiary per year.
beneficiaries who receive hospice services
five percentage points beginning April 1,
during the year. Limited cost-sharing
2001-September 30, 2001. This increase
applies to outpatient drugs and respite
was included in the base for subsequent
care.
updates. Since FY2003 updates have been
at the full hospital market basket
percentage increase.

---

CRS-18
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 2006 conversion factor is $37.8975
on the basis of a fee schedule. The fee
by a formula specified in law. The update
(the same as 2005).
schedule assigns relative values to
percentage equals the Medicare Economic
services. These relative values reflect
Index (MEI, which measures inflation)
The 2006 anesthesia conversion factor is
physician work (based on time, skill, and
subject to an adjustment to match spending
$17.7594 (the same as 2005).
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
services are paid 16% of the fee schedule
case can the conversion factor update be
amount.
more than three percentage points above
nor more than seven percentage points
Anesthesia services are paid under a
below the MEI. Application of the SGR
separate fee schedule (based on base and
system led to a 5.4% reduction in the
time units) with a separate conversion
conversion factor in 2002. An additional
factor.
4.4% reduction was slated to take effect in
2003. However, P.L. 108-7 allowed for
Payments equal 80% of the fee schedule
revisions in previous estimates used for the
amount; patients are liable for the
SGR calculation, thereby permitting an
remaining 20%. (Payments for certain
update of 1.6% effective March 1, 2003.
mental health services equal 50% of the
MMA provided that the update to the
fee schedule amounts; patients are liable
conversion factor for 2004 and 2005 could
for the other 50%). Assignment is
not be less than 1.5% and would be
optional; balance billing limits apply on
exempt from the budget-neutrality

---

CRS-19
Provider/service
General payment policy
General update policy
Most recent update
non-assigned claims.
adjustment. DRA froze the 2006 rate at
the 2005 level.
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.

---

CRS-20
Provider/service
General payment policy
General update policy
Most recent update
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.
(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.
Nurse Anesthetists
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-21
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.
and Clinical Social
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
limits were to be increased by the increase
limit applied to all outpatient physical
in the MEI beginning in 2002; however,
therapy services (including speech-
application of the limits was suspended
language pathology services), except for
until September 1, 2003. At that time the
those furnished by a hospital outpatient
limits were $1,590. MMA suspended the
department. A separate $1,500 limit
application of the limits beginning
applied to all outpatient occupational
December 8, 2003-December 31, 2005.
therapy services except for those furnished
The limits were restored January 1, 2006;
by hospital outpatient departments.
the 2006 limits are $1,740. DRA requires
Therapy services furnished as incident to
the Secretary to establish an exceptions
physicians professional services were
process for certain medically necessary
included in these limits.
services.

---

CRS-22
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- 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,
schedule amounts are periodically
annually by the percentage change in the
2005, or 2006.
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-
2008.

---

CRS-23
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 2006
years; annual coverage is authorized for
applies for pap smears.
is $14.76 (the same as 2005).
women at high risk. Payment is based on
the clinical diagnostic laboratory fee
schedule. Assignment is mandatory. No
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
sigmoidoscopy; and (4) barium enemas (as

---

CRS-24
Provider/service
General payment policy
General update policy
Most recent update
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. DRA
specified that the Part B deductible does
not apply for screenings, effective January
1, 2007. 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.
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

---

CRS-25
Provider/service
General payment policy
General update policy
Most recent update
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 therapy
Coverage is authorized for certain
See physician fee schedule.
See physician fee schedule.
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.
Ultrasound screenings for
Effective January 1, 2007, ultrasound
See physician fee schedule.
See physician fee schedule.
abdominal aortic
screenings for abdominal aortic aneurysms
aneurysms
are covered for individuals who: (1)
receive a referral for such screening during
the initial preventive services exam; (2)
have not had such a screeening paid for by
Medicare; and (3) have a family history of
abdominal aortic aneurysm or manifest
certain risk factors.

---

CRS-26
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 2006
telecommunications system by a physician
fee equals the amount established for the
facility fee is $22.47 (compared to $21.86
or practitioner, notwithstanding the fact
preceding year, increased by the
in 2504).
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, 2005, and 2006.
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
2008.
frequent and substantial servicing; (3)
customized items; (4) oxygen and oxygen
equipment; and (5) other items referred to

---

CRS-27
Provider/service
General payment policy
General update policy
Most recent update
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
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.

---

CRS-28
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 updates
established regionally and are subject to
the updates for 2004-2006.
for 2004, 2005 and 2006.
national limits which have floors and
ceilings. The floor is equal to 90% of the
weighted average of all regional payment
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, 2005, and 2006.
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.

---

CRS-29
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 2006 rate increased by the CPI-U,
Nutrition (PEN)
equipment, and supplies are paid on the
annually by the CPI-U.
2.5%.
basis of the PEN fee schedule. Prior to
2002, PEN was paid on a reasonable
charge basis (see below under
Miscellaneous Items and Services). The
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 2006 is 2.5% (compared to 3.3% for
reasonable charge basis. Included are such
supplier’s customary charge level.
2005).
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- June
may not exceed any of the following fee
30 of the previous calendar year. The
screens: (1) the supplier’s customary
inflation-indexed charge is updated by the
charge for the item, (2) the prevailing
CPI-U.

---

CRS-30
Provider/service
General payment policy
General update policy
Most recent update
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.
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
MMA established that in FY2004, starting
As mandated by MMA, ASCs received an
Ambulatory Surgical
facility services related to a surgery
April 1, 2004, the ASC update is the CPI-
0% update in FY2005, and the last quarter
Centers (ASCs)
provided in an ASC. The associated
U (estimated as of March 31, 2003) minus
of calendar year 2005 and in CY2006.
physician services (surgery and anesthesia)
3.0 percentage points. MMA eliminated
are reimbursed under the physician fee
the payment update for FY2005, changed
Effective for services on and after April 1,
schedule. CMS maintains the list of
the update cycle to a calendar year from a
2004, the base rates (prior to geographic
approved ASC procedures which is
fiscal year, and eliminated the updates for
adjustments) are:
required to be updated every two years.
calendar years 2006-2009. MMA also
Presently over 2,500 procedures are
established that a revised payment system
Payment Group 1 — $333
approved for ASC payment and
for surgical services furnished in an ASC
Payment Group 2 — $446
categorized into one of nine payment
will be implemented on or after January 1,
Payment Group 3 — $510
groups that comprise the ASC facility fee
2006, and not later than January 1, 2008.
Payment Group 4 — $630
schedule. The nine ASC payment rates
Total payments under the new system
Payment Group 5 — $717
reflect the national median cost of
should be equal to the total projected
Payment Group 6 — $826
procedures in that group; these rates are
payments under the old system.
($676 + $150 for an intraocular lens)
adjusted to reflect geographic price
Payment Group 7 — $995
variation using a hospital wage index.
Payment Group 8 — $973
Payments are also adjusted when multiple
($823 + $150 for an intraocular lens)

---

CRS-31
Provider/service
General Payment policy
General update policy
Most recent update
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.
12. Hospital Outpatient Services
Provider/service
General payment policy
General update policy
Most recent update
Hospital Outpatient
U n d e r HOPD-PP S , w h i c h w a s
The conversion factor is updated on a
For CY2005, the IPPS MB was 3.3%.
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 CY2005
ambulatory payment classifications
conversion factor is $56.983. For
(APCs). To the extent possible, integral
CY2006, the IPPS MB was 3.7%. 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, including one to account
clinical and cost data is available to permit
for the rural SCH payment adjustment.
assignment into a clinical APC.
The final CY2006 conversion factor was
Medicare’s payment for HOPD services is
$59.511.
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.

---

CRS-32
Provider/service
General payment policy
General update policy
Most recent update
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 (that are not SCHs) will
receive at least 95% of the payment it
would have received under the prior
payment system during CY2006. The
percentage will be reduced to 90% during
2007 and 85% during 2008. Starting for
services on January 1, 2006, rural SCHs
will receive a 7.1% payment increase.
Over time, under Medicare’s prior
payment system, beneficiaries’ share of
total outpatient payments grew to 50%.
HOPD-PPS slowly reduces t he
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

---

CRS-33
Provider/service
General payment policy
General update policy
Most recent update
limited to the inpatient deductible amount
established for that year. Balance billing
is prohibited.
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 CY2006, the RHC upper payment
(RHCs) and Federally
an all-inclusive rate for each beneficiary
of each year by the Medicare economic
limit is $72.76 (compared to $70.78 in
Qualified Health Center
visit for covered services. An interim
index (MEI) which measures inflation for
2005), the urban FQHC limit is $112.96
(FQHCs) services
payment is made to the RHC or FQHC
certain medical services.
(compared to $109.88 in 2005), and the
based on estimates of allowable costs and
rural FQHC limit is $97.13 (compared to
number of visits; a reconciliation is made
$94.48 in 2005).
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.

---

CRS-34
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).
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
Drug products, except for pneumococcal,
The ASP is updated quarterly by the
No specific provision.
covers approximately 450
influenza, and hepatitis B vaccines, those
Secretary. Widely available market prices
outpatient drugs and
associated with certain renal dialysis
are audited. Payments under the ASP
biologicals under the Part
services, blood products and clotting
method will be lowered if the ASP
B program that are
factors and radiopharmaceuticals, are
exceeds the widely available market price
authorized by statute,
paid using the average sales price (ASP)
or average manufacturer price by a
including those: (1) that
methodology. Alternatively, beginning in
specified percentage (5% in 2006,
are covered if they are
2006, payment may be made through the
determined by the Secretary in subsequent
usually not self-
competitive acquisition program which is
years). Where the percentage is exceeded,
administered and are
currently under development. Medicare’s
the Secretary will adjust the payment
provided incident to a
payment under the ASP methodology
amount; in such cases, the payment would
physician’s services; (2)
equals 106% of the applicable price for a
equal the lesser of the widely available
those that are necessary for
multiple source drug or single source
market price or 103% of the average
the effective use of covered
drug subject to beneficiary deductible and
manufacturer price.
DME; (3) certain self-
coinsurance amounts. Regular Part B

---

CRS-35
Provider/service
General payment policy
General update policy
Most recent update
administered oral cancer
cost-sharing applies, except for
and anti-nausea drugs
pneumococcal and influenza virus
(those with injectable
vaccines. Assignment is mandatory.
equivalents); (4)
erythropoietin (used to
treat anemia); (5)
immunosuppressive drugs
after covered Medicare
organ transplants; (6)
hemophilia clotting factors;
and (7) vaccines for
influenza, pneumonia, and
hepatitis B.
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.

---

CRS-36
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 illness
hospitalization” mental health care. The
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
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.

---

CRS-37
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 2006 is 2.5% (compared to
the basis of a national fee schedule which
each year by the CPI-U. MMA provided
3.3% in 2005). 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-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.
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);

---

CRS-38
Provider/service
General payment policy
General update policy
Most recent update
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.

---

CRS-39
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
Because DRA eliminated the update for
under a prospective payment system that
standardized 60-day episode rate, is
CY2006, the increase for CY2006 is 0.
began with FY2001. Payment is based on
increased annually by an update factor that
For CY2005 the update for home health
60-day episodes of care for beneficiaries,
is determined, in part, by the projected
was 2.3%.
subject to several adjustments, with
increase in the home health market basket
unlimited episodes of care in a year. The
index. This index measures changes in the
MMA provided a temporary 5% increase
payment covers skilled nursing, therapy,
costs of goods and services purchased by
in payments for HHAs serving rural
medical social services, and aide visits and
HHAs.
beneficiaries until March 31, 2005. DRA
medical supplies. Durable medical
extended the payments for rural home
equipment is not included in the HH PPS.
The Omnibus Consolidated and
health episodes or visits beginning on or
Emergency Supplemental Appropriations
after January 1, 2006 and before January 1,
The base payment amount is adjusted for:
Act (OCESA) of 1999 and BIPA made the
2007.
(1) differences in area wages using 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 = MB - 0.8
a beneficiary’s condition (SCIC) when the
care needs of a beneficiary increase
The MMA changed the update cycle for
substantially; (5) a partial episode for
HHA 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 three quarters only) =
for beneficiaries who receive four or fewer
MB - 0.8
visits. There is not a distinction between
CY2005 = MB - 0.8

---

CRS-40
Provider/service
General payment policy
General update policy
Most recent update
urban and rural base payment amounts.
CY2006 = MB - 0.8
CY2007 = MB
The HHRG applicable to a beneficiary is
determined following an assessment of the
DRA eliminated the update for home
patient’s condition and care needs using
health payments for CY2006.
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-41
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 Medicare Prescription Drug,
The DRA increased the composite rate
outpatient settings: hospital-based
Improvement, and Modernization Act of
component of the basic case-mix adjusted
facilities, independent facilities, and the
2003 (MMA) required the Secretary to
system for services beginning January 1,
patient’s home. There are two methods for
establish a basic case-mix adjusted
2006 by 1.6%.
payment. Under Method I, facilities are
prospective payment system for dialysis
paid a prospectively set amount, known as
services furnished either at a facility or in
For 2006, the base composite rate is
the composite rate, for each dialysis
a patient’s home, for services furnished
$130.40 for independent ESRD facilities
session, regardless of whether services are
beginning on January 1, 2005. The basic
and $134.53 for hospital-based ESRD
provided at the facility or in the patient’s
case-mix adjusted system has two
facilities. The total drug add-on
home. The composite rate is derived from
components: (1) the composite rate,
adjustment, with inflation, is 14.5%.
audited cost data and adjusted for the
which covers services, including dialysis;
national proportion of patients dialyzing at
and (2) a drug add-on adjustment for the
home versus in a facility, and for area
difference between the payment amounts
wage differences. Adjustments are made
for separately billable drugs and
to the composite rate for hospital-based
biologicals and their acquisition costs, as
dialysis facilities to reflect higher
determined by Inspector General Reports.
overhead costs. Beneficiaries electing

home dialysis may choose not to be
The Secretary is required to update
associated with a facility and may make
the basic case-mix adjusted payment
independent arrangements with a supplier
amounts annually beginning with 2006,
for equipment, supplies, and support
but only for that portion of the case-mix
services. Payment to these suppliers,
adjusted system that is represented by the
known as Method II, is made on the basis
add-on adjustment and not for the portion
of reasonable charges, limited to 100% of
represented by the composite rate.
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.

---

CRS-42
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
For 2006, the Secretary did not recalculate
contracts
payment in advance to participating
the method described under “General
FFS, so that 100% FFS was not used to
Medicare Advantage (MA) health plans
Payment Policy.”
determine 2006 MA local rates. The
for each enrolled beneficiary in a payment
national growth percentage increase
area. In exchange, the plans agree to
Beginning in 2005, payments to local
adjusted for prior years’ errors is 4.8% for
furnish all Medicare-covered items and
plans are annually updated by the greater
2006.
services to each enrollee.
of (1) a 2% increase over the prior year’s
rate, (2) by the growth in the national
Beginning in 2005, payments to local MA
growth percentage increases, or (3) in
plans are updated by the highest of the
years as specified by the Secretary, 100%
minimum percentage increase or, in years
of FFS. The national growth percentage is
in which the Secretary specifies (but not
equal to the projected increase in Medicare

---

CRS-43
Provider/service
General payment policy
General update policy
Most recent update
less than once every three years), 100% of
per capita expenditures.
FFS. The minimum percentage increase is
the greater of a 2% increase over the
Furthermore, the national growth
previous year’s payment rate or the
percentage is adjusted each year to correct
previous year’s payment increased by the
for errors in prior years’ rates. The MMA
national growth percentage.
allows for adjustments beginning in 2004.
Beginning in 2006, the Secretary will
The annual increase for regional plans and
determine local MA payment rates by
local plans in CCA areas will have both a
comparing plan bids to a benchmark. Plans
statutory increase and a competitive
will submit bids representing their
increase. The statutory component is
estimated premium for providing required
similar to the local update and the
Parts A and B benefits. The benchmark
competitive component is based on a
will be calculated, according to statute, by
weighted average of plan bids. Congress
updating the previous year’s payment in a
made substantial changes to the
local area by the minimum percentage
Medicare+Choice program with the
increase or 100% of FFS, in years in which
passage of the MMA. The act created the
it is specified. If a plan’s bid is less than
Medicare Advantage (MA) program which
the benchmark, its payment will equal its
replaced the M+C program and introduced
bid plus a rebate of 75% of the difference
several enhancements designed to increase
and the remaining 25% of difference will
the availability of private plans for
be retained by the federal government. If
Medicare beneficiaries. In addition to the
a plan’s bid is equal to or above the
immediate payment increases to plans,
benchmark, its payment will be the
beginning in 2006 the MA program will
benchmark.
change the payment structure and
introduce regional plans that operate like
Also beginning in 2006, the MA program
Preferred Provider Organizations.
will offer MA regional plans covering both
Additionally, in 2006 beneficiaries will
in- and out-of-network required services.
have access to a drug plan whether they
MA organizations will submit bids. The
are in FFS Medicare or enrolled in
regional benchmark, unlike the local
managed care. Finally, beginning in 2010
benchmark, includes two components; a
a limited number of geographic areas will

---

CRS-44
Provider/service
General payment policy
General update policy
Most recent update
statutorily determined increase, and a
be selected to examine enhanced
weighted average of plan bids. Rebates
competition between local MA plans and
for regional plans will be similar to rebates
competition between private plans and
for local plans.
FFS Medicare.
Additional financial incentives will be
provided for regional plans. A
stabilization fund, with initial funding of
$10 billion in 2007, will provide
incentives for plans to enter into and to
remain in the MA program. Additional
amounts may be added to the fund. The
stabilization fund will be available through
December 2013. 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
each enrollee in their MA-PD plan, equal
to the plan’s risk adjusted standardized bid
amount (reduced by the base beneficiary

---

CRS-45
Provider/service
General payment policy
General update policy
Most recent update
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.
Most recently, the DRA made changes to
the calculation of the statutory benchmark.
In 2007, MA payments will be calculated
by updating the previous year’s payment
by the minimum percentage increase or if
the Secretary rebases FFS, 100% of FFS.
Beginning in 2007, as specified under
current law, benchmarks will continue to

---

CRS-46
Provider/service
General payment policy
General update policy
Most recent update
be updated by the minimum percentage
increase with corrections prior year’s
errors after 2004. In addition there will be
two new adjustments made in calculating
the benchmark: (1) exclude any national
adjustment factors for coding intensity,
and (2) exclude budget neutrality in risk
adjustment (will actually be phased out
over four years). After 2007, if the
Secretary does not rebase rates in a given
year, the MA benchmarks would be the
previous year’s benchmark (prior to the
application of the phase-out percentage for
risk adjustment) increased by the national
per capita MA growth percentage with
adjustments for prior year errors beginning
in 2004. If the Secretary rebases rates in a
given year, then the benchmark would be
equal to the greater of th minimum
percentage increase or 100% FFS.
For purposes of calculating the phase-out
of budget neutrality in risk adjustment, the
Secretary would be required to conduct a
study of the difference between treatment
and coding patterns between MA plans
and providers under Parts A and B of
Medicare using data starting in 2004. The
findings would be incorporated into
calculations of MA benchmarks, but only
in 2008, 2009, and 2010.

---

CRS-47
Provider/service
General payment policy
General update policy
Most recent update
Eliminating budget neutrality for risk
adjustment would not occur in any year if
it would increase payments.
(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,
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.

---

CRS-48
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 L. Boulanger, and Paulette C. Morgan.
CRS Report RL32005, Medicare Fee-for-Service Modifications and Medicaid
Provisions of H.R. 1 as Enacted, by Sibyl Tilson, Jennifer L. Boulanger, Jean
Hearne, C. Stephen Redhead, Evelyne P. 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 Chaikind and Paulette C.
Morgan.
CRS Report RL32618, Medicare Advantage Payments, by Hinda Chaikind and
Paulette C. Morgan.
CRS Report RL31341, Medicare’s Durable Medical Equipment and Prosthetics and
Orthotics Benefit, by Heidi G. Yacker and Jennifer L. Boulanger.
CRS Report RS21814, Medicare Home Health — Benefits and Payments, by Jennifer
L. Boulanger.
CRS Report RS21465, Medicare’s Skilled Nursing Facility Payment, by Jennifer L.
Boulanger.
CRS Report RL32640, Medicare Payment Issues Affecting Inpatient Rehabilitation
Facilities (IRFs), by Sibyl Tilson.
crsphpgw

---