Order Code RL30526
Medicare Payment Policies
Updated January 25, 2007
Sibyl Tilson, Hinda Chaikind,
Jennifer O’Sullivan, and Julie Stone
Specialists in Social Legislation
Domestic Social Policy Division
Paulette C. Morgan
Analyst in Social Legislation
Domestic Social Policy Division

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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, and hospice
services. Part B, the Supplementary Medical Insurance program, covers a broad
range of complementary medical services including physician, laboratory, outpatient
hospital services, and durable medical equipment. Part C provides managed care
options for beneficiaries who are enrolled in both Parts A and B. The Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added Part
D to Medicare, which provided a new outpatient prescription drug benefit starting
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 most durable medical
equipment, are based on fee schedules. Some payments are based, in part, on a
provider’s bid (an estimate of the cost of providing a service) relative to a benchmark
(the maximum amount Medicare is willing to pay). Bids and benchmarks are used
to determine payments in Medicare Part C, and beginning in 2007, some items of
durable medical equipment in specified locations. Many services, however,
including inpatient care provided in acute care hospitals, 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 changes to these policies are of
continuing interest to Congress. The Medicare program has been a major focus of
deficit reduction legislation since 1980. With certain exceptions, reductions in
program spending have been achieved largely through payment reductions to
providers, primarily hospitals and physicians. The Balanced Budget Act of 1997
(P.L. 105-33, BBA 97) modified some existing payment policies, 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 increased Medicare funding to
mitigate the impact of some BBA 97 provisions on providers. MMA, too, modified
payment methods and established payment increases for some providers. Further
modifications were made in the Deficit Reduction Act of 2005 (P.L. 109-171, DRA)
and the Tax Relief and Health Care Act of 2006 (P.L.109-432).
This report provides an overview of Medicare payment rules by type of service,
outlining current payment policies and summarizing the basic rules for program
updates. The report also includes the most recent update for each type of service. At
the end is a listing of CRS reports that provide more in-depth discussions of provider
payment issues. This report will be updated to reflect any legislative activity.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare Payment Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare Payment Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Beneficiary Out-of-Pocket Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Recent Congressional Actions with Respect to Program Payments . . . . . . . . . . . 3
Medicare Payment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1. Inpatient Prospective Payment System (IPPS) for Short-term,
General Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Hospitals Receiving Special Consideration
Under Medicare’s IPPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. IPPS-Exempt Hospitals and Distinct Part Units . . . . . . . . . . . . . . . . . . . 12
4. Skilled Nursing Facility (SNF) Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5. Hospice Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1. Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2. Nonphysician Practitioners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3. Clinical Diagnostic Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . . . 27
4. Preventive Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5. Telehealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6. Durable Medical Equipment (DME) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7. Prosthetics and Orthotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8. Surgical Dressings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9. Parenteral and Enteral Nutrition (PEN) . . . . . . . . . . . . . . . . . . . . . . . . . 35
10. Miscellaneous Items and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11. Ambulatory Surgical Centers (ASCs) . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12. Hospital Outpatient Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
13. Rural Health Clinics and Federally Qualified Health Center
(FQHCs) Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
14. Comprehensive Outpatient Rehabilitation Facility (CORF) . . . . . . . . . 41
15. Part B Drugs/Vaccines Covered Incident
to a Physician’s Visit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
16. Blood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
17. Partial Hospitalization Services Connected to Treatment
of Mental Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
18. Ambulance Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Parts A and B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1. Home Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2. End-Stage Renal Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

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Part C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Managed Care Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Outpatient Prescription Drug Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
CRS Reports for Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

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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. Payments for physician services, clinical
laboratory services, and certain durable medical equipment are made on the basis of
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), Medicaid, 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.

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CRS-2
fee schedules.3 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 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.4 For Part B, beneficiaries are generally responsible for
premiums, which are income-adjusted starting in 2007, a $131 deductible in 2007
(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.5
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
3 The MMA required the Secretary to establish and implement a competitive bidding
program for durable medical equipment. The program would pay for certain durable
medical equipment, prosthetics and orthotics based on the bids of qualified suppliers in
designated areas. The program is to be phased in beginning in 2007. The proposed rule for
the program was published in the Federal Register on May 1, 2006. Certain quality,
accreditation, and contracting provisions have been finalized as discussed in the August 18,
2006 Federal Register.
4 In 2007, for each spell of illness, a beneficiary deductible is $992 to cover day 1 through
60 in a hospital. The daily coinsurance charge is $248 for each day from 61 through 90.
After 90 days in the hospital, a beneficiary may draw down 60 lifetime reserve days with
a daily coinsurance of $496 in 2007.
5 For a complete description of Part D cost-sharing, see CRS Report RL32902, Medicare
Prescription Drug Benefit: Low-Income Provisions, by Jennifer O’Sullivan.

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CRS-3
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
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. Most recently, Medicare’s payments to
managed care organizations were subject to congressional scrutiny. Regardless of
which provider payments may be targeted, past 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 and changed administrative and contracting procedures. Further

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CRS-4
modifications were made to Medicare payments in the Deficit Reduction Act of 2005
(P.L.109-171, DRA) and the Tax Relief and Health Care Act of 2006 (P.L. 109-432).
This report provides a guide to Medicare payment rules by type of benefit, but
does not include the outpatient prescription drug benefit under Part D. This report
includes a summary of current payment policies and basic rules for updating payment
amounts. It also provides the most recent update information for each type of
service.

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CRS-5
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
For FY2006, hospitals that submitted the
inpatient services
prospectively determined payment for
annually by an update factor that is
required quality data receive the full MB
provided by acute
each discharge. A hospital’s payment for
determined, in part, by the projected
increase of 3.7%. Hospitals that did not
hospitals (Operating
its operating costs is calculated using a
increase in the hospital market basket
submit the quality data receive a reduced
IPPS)
national standardized amount adjusted by
(MB) index. This is a fixed price index
update of 3.3%. For FY2007, hospitals
a wage index associated with the area
that measures the change in the price of
that submitted the required quality data
where the hospital is located or where it
goods and services purchased by
receive the full MB increase of 3.4%.
has been reclassified. Payment also
hospitals to create one unit of output.
Hospitals that did not submit the quality
depends on the relative resource use
The update for operating IPPS is
data receive a reduced update of 1.4%.
associated with the diagnosis related
established by statute. Typically,
group (DRG) to which the patient is
hospitals receive less than the MB index
assigned. Additional payments are made
for an update (sometimes referred to as a
for: cases with extraordinary costs
“diet COLA”). Under MMA, for
(outliers); indirect medical education
FY2005- FY2007, hospitals that submit
(IME) (see below); and for hospitals
required quality data will receive the full
serving a disproportionate share (DSH)
MB update, those that do not submit the
of low-income patients (see below).
data will receive MB-0.4 percentage
IME and DSH payments are made
points. 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
into account in subsequent years. Under

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CRS-6
Provider/service
General payment policy
General update policy
Most recent update
for 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
payments. Hospitals in Hawaii and
percentage points.
Alaska receive a cost-of-living
adjustment (COLA). Certain services
are reimbursed on a cost basis outside of
IPPS.
Capital IPPS for short-
Medicare’s capital IPPS is structured
Updates to the capital IPPS are not
The capital IPPS update for FY2006 is
term general hospitals
similarly to its operating IPPS for short-
established in statute. Capital rates are
0.99%. Most of this increase is caused
(Capital IPPS)
term general hospitals. A hospital’s
updated annually by the Centers for
by the current forecast of the CIPI
capital payment is based on a
Medicare and Medicaid (CMS)
available when the final rule was
prospectively determined federal
according to a framework which
published. The capital IPPS update for
payment rate, which is 3% higher for
considers changes in the prices
FY2007 is 1.1%, all of which is
hospitals in large urban areas than for
associated with capital-related costs as
attributed to the current forecast of the
hospitals in other areas, depends on the
measured by the capital input price index
CIPI available when the final rule was
DRG to which the patient is assigned,
(CIPI) and other policy factors, including
published; other adjustments included in
and is adjusted by a hospital’s
changes in case mix intensity, errors in
the capital update framework canceled
geographic adjustment factor (which is
previous CIPI forecasts, DRG
each other out.
calculated from the hospital’s wage
recalibration, and DRG reclassification.
index data). Capital IPPS includes an
Other adjustments include those that
IME and DSH adjustment (see below).
implement budget neutrality with respect
Additional payments are made for
to outlier payments, changes in the
outliers (cases with significantly higher
geographic adjustment factor, and
costs above a certain threshold). Certain
exception payments.

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CRS-7
Provider/service
General payment policy
General update policy
Most recent update
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
No specific update. The amount of DSH
CBO estimates DSH spending (in both
hospital adjustment
the additional payments for each
spending in any year is open-ended and
operating and capital IPPS) at $9.2
Medicare discharge based on a formula
varies by number of Medicare discharges
billion in FY2005 and $9.45 billion in
which incorporates the number of patient
as well as the type of patient seen in any
FY2006 in its March 2006 baseline.
days provided to low-income Medicare
given hospital.
beneficiaries (those who receive
Supplemental Security Income (SSI))
and Medicaid recipients. A few urban
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. The DSH
adjustment for most categories of
hospitals is capped at 12%. Urban
hospitals with more than 100 beds, rural

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CRS-8
Provider/service
General payment policy
General update policy
Most recent update
hospitals with more than 500 beds,
Medicare dependent hospitals (MDHs,
see below) and rural referral centers
(RRC, see below) are exempt from the
12% DSH adjustment cap.
Indirect Medical
The indirect medical education
The IME adjustment is not subject to an
No specific update. The amount spent on
Education (IME)
adjustment (IME) is one of two types of
annual update. BBA 97 reduced the IME
IME depends in part on the number of
adjustment
payments to teaching hospitals for
adjustment in operating IPPS from a
Medicare discharges in teaching
graduate medical education (GME) costs
7.7% increase for each 10% increase in a
hospitals in any given year. CBO
(see also direct GME below). Medicare
hospital’s ratio of interns to beds (IRB),
estimates the IME payments (for both
increases both its operating and capital
a measure of teaching intensity in
capital and operating IPPS) to be about
IPPS payments to teaching hospitals;
operating IPPS; by FY2001, the IME
$5.8 billion in FY2005 and $6.0 billion
different measures of teaching intensity
adjustment was to be 5.5%. However,
in FY2006 in its March 2006 baseline.
are used in the operating and capital
the scheduled decreases were delayed by
IPPS. For both IPPS payments,
subsequent legislation. MMA provides
however, the number of medical
an increased IME adjustment to 6.0%
residents who can be counted for the
from April 1, 2004-September 30, 2004;
IME adjustment is capped, based on the
during FY2005 the adjustment is 5.8%;
number of medical residents as of
during FY2006 the adjustment is 5.55%;
December 31, 1996. As established by
and during FY2007 the adjustment is
BBA 97, teaching hospitals also receive
5.35%; starting FY2008 and
IME payments for their Medicare
subsequently, the adjustment returns to
managed care discharges.
5.5%.

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CRS-9
Provider/service
General payment policy
General update policy
Most recent update
Direct graduate medical
Direct GME costs are excluded from
In general, direct GME payments are
Hospitals below 140% of the national
education payments
IPPS and paid outside of the DRG
updated by the increase in the consumer
average from FY2004-FY2013 receive
payment on the basis of updated
price index for all urban consumers
an update of CPI-U. Hospitals above
hospital-specific costs per resident
(CPI-U). As established by BBRA and
140% of the national average for that
amount (PRA), the number of weighted
subsequently amended, however, the
time period will receive no update. CBO
full-time equivalent (FTE) residents, and
update amount that any hospital receives
estimates direct GME payments of $1.7
Medicare’s share of total patient days in
depends upon the relationship of its PRA
billion in FY2005 and FY2006 in its
the hospital (including those days
to the national average PRA. Hospitals
March 2006 baseline.
attributed to Medicare manged care
with PRAs below the floor (85% of the
enrollees). There is a hospital-specific
locality-adjusted, updated, and weighted
cap on the number of residents in the
national PRA) are raised to the floor
hospital for direct GME payments. Also,
amount. Teaching hospitals with PRAs
the hospital’s FTE count is based on a
above the ceiling amount (140% of the
three-year rolling average; a specific
national average, adjusted for geographic
resident may count as half of a FTE,
location) will receive a lower update than
depending on the number of years spent
other hospitals (CPI-U minus two
as a resident and the length of the initial
percentage points) for FY2003-FY2013.
training associated with the specialty.
Hospitals that have PRAs between the
Certain combined primary care residency
floor and ceiling receive the CPI-U.
programs receive special recognition in
this count. Depending upon the
circumstances, direct GME payments can
be made to nonhospital providers.

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CRS-10
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 FY2006, hospitals that submitted the
Hospitals (SCHs) —
following payment rates as the basis of
an “applicable percentage increase”
required quality data receive the full MB
facilities located in
reimbursement: the current IPPS base
which is specified by statute and is often
increase of 3.7%. 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,
update of 3.3%. For FY2007, hospitals
the sole provider of
1987, or 1996, updated to the current
that submitted the required quality data
inpatient acute care
year. An SCH may receive additional
receive the full MB increase of 3.4%.
hospital services in a
payments if the hospital experiences a
Hospitals that did not submit the quality
geographic area based on
decrease of more than 5% in its total
data receive a reduced update of 1.4%.
distance, travel time,
inpatient cases due to circumstances
severe weather conditions,
beyond its control. An SCH receives
and/or market share as
special consideration for reclassification
established by specific
into a different area. Starting for
criteria set forth in
services on January 1, 2006, CMS
regulation (42 CFR
increased outpatient prospective
412.92).
payment system (OPPS) payments to
rural SCHs by an additional 7.1%.
Medicare dependent
BBA 97 reinstated and extended the
Target amounts for MDHs are updated
For FY1996 and thereafter, the update
hospitals (MDHs) —
MDH classification, starting on October
by an “applicable percentage increase”
for MDHs is the same as for all IPPS
small rural hospitals with
1, 1997, and extending to October 1,
which is specified by statute and is often
hospitals. These updates are also used to
a high proportion of
2001. The sunset date for the MDH
comparable to the IPPS update.
increase the hospital-specific rate
patients who are Medicare
classification was subsequently extended
applicable to an MDH. For FY2006,
beneficiaries (have at least
to September 30, 2011 by DRA. Until
hospitals that submitted the required

---

CRS-11
Provider/service
General payment policy
General update policy
Most recent update
60% of acute inpatient
October 1, 2006, an MDH is paid 50% of
quality data receive the full MB increase
days or discharges
the amount that the federal rate is
of 3.7%. Hospitals that did not submit
attributable to Medicare in
exceeded by the hospital’s target amount
the quality data receive a reduced update
FY1987 or in two of the
based on either its updated FY1982 or
of 3.3%. For FY2007, hospitals that
three most recently
FY1987 costs. DRA provided that an
submitted the required quality data
audited cost reporting
MDH would be able to elect payments
receive the full MB increase of 3.4%.
periods). As specified in
based on 50% of its FY2002 hospital-
Hospitals that did not submit the quality
regulation (42 CFR
specific costs starting October 1, 2006.
data receive a reduced update of 1.4%.
412.108), they cannot be
An MDH’s payments would be based on
an SCH and must have
75% of the adjusted hospital-specific
100 or fewer beds.
costs starting for discharges on October
1, 2006. DRA also excluded MDHs
from the 12% DSH adjustment cap for
discharges starting October 1, 2006. An
MDH may receive additional payments if
its inpatient cases decline more than 5%
due to circumstances beyond its control.

---

CRS-12
Provider/service
General payment policy
General update policy
Most recent update
Rural Referral Centers
RRCs payments are based on the IPPS
RRCs receive the operating and capital
See updates specified for operating and
(RRCs) — relatively large
for short-term general hospitals. RRCs
IPPS updates specified for short-term
capital IPPS for short-term general
hospitals, generally in
are exempt from the 12% DSH
general hospitals.
hospitals.
rural areas, that provide a
adjustment cap. Also, RRCs receive
broad array of services
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).
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
The update for FY2006 is 3.6%. In
Facilities (IRFs) —
payments to a rehabilitation facility are
is based on the MB reflecting 2002 cost
FY2006, IRF-IPPS included a reduction
freestanding hospitals and
based on a fully implemented IRF-PPS
structures from rehabilitation, long-term
of 1.9% to account for coding changes
hospital-based distinct
and 100% of the federal rate which is a
care, and psychiatric hospitals (RLP-
between 1999 and 2002. The FY2006
part units that meet the
fixed amount per discharge. This PPS
MB). The RLP-MB includes an update
IRF federal base rate is $12,767. The
modified “75% rule” and
encompasses both capital and operating
estimate for capital as well as operating
update for FY2007 is 3.3%. In 2007,
certain specified
payments to IRFs, but does not cover the
costs.
IRF-IPPS included a reduction of 2.6%
conditions of
costs of approved educational programs,
to account for coding changes, for a net
participation. The rule,
bad debt expenses, or blood clotting
increase of 0.6%. The FY2007 IRF
which was to become
factors, which are paid for separately.
federal base rate is $12,981.

---

CRS-13
Provider/service
General payment policy
General update policy
Most recent update
effective July 1, 2004, has
The 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
recently, DRA established
for certain case level adjustments, such
the IRF threshold at 60%
as early transfers, short-stay outliers,
through June 30, 2007, at
patients who die before transfer, and high
65% starting July 1, 2007,
cost outliers. Payments also depend upon
and at 75% beginning on
facility-specific adjustments to
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
services for one of 13
adjustment), and rural location (rural
conditions including
IRFs receive increased payments, about
stroke, spinal cord injury,
19% more than urban IRFs.) Starting in
brain injury, neurological
FY2006, an IME adjustment is included;
disorder, burns, and
IRFs in Alaska and Hawaii do not
certain arthritis related
receive a COLA adjustment. The IRF-
conditions.
PPS is not required to be budget neutral;

---

CRS-14
Provider/service
General payment policy
General update policy
Most recent update
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
Presently, the LTCH-PPS update is based
There was no increase to the LTCH base
Hospitals and satellites or
paid on a discharge basis under a DRG-
upon the MB for excluded hospitals
payment rates for RY2006 or RY2007.
onsite providers (LTCHs)
based PPS, subject to a five-year
(those paid under IPPS). This MB is
The LTCH federal payment rate remains
— acute general hospitals
transition period. A LTCH may opt to be
based on cost report data from Medicare
$38,086.
that are excluded from
paid based on 100% of the federal
participating IRFs, psychiatric facilities,
IPPS with a Medicare
prospective rate. A new LTCH must be
and long term, children’s, and changer
inpatient average length
paid on 100% of the federal rate. The
hospitals, which were subject to the
of stay (ALOS) greater
LTCH-PPS encompasses payments for
limitations and incentives established in
than 25 days.
both operating and capital-related costs
the Tax Equity and Fiscal Responsibility
of inpatient care but does not cover the
Act of 1982 (TEFRA). TEFRA MB
costs of approved educational programs,
payment only includes operating costs,
bad debt expenses, or blood clotting
so the update is based on a modified
factors which are paid for separately.
TEFRA MB that reflects capital costs.
The LTCH-PPS payment for any
The Medicare LTCH update incorporates
Medicare discharge will vary depending
a budget-neutrality factor as well. CMS
on the patient’s assignment into one of
has changed the effective date of the
more than 500 LTCH-DRGs, which are
annual update from October 1 to July 1
based on reweighted IPPS DRGs.
of each year, starting July 2003. During
Payments for specific patients may be
the five-year transition period, CMS
increased or reduced because of case-
calculates a budget-neutrality offset to
level adjustments. Payments also depend
account for the ability of LTCHs to elect
upon facility-specific adjustments such
payment based on the transition blend
as variations in area wages (implemented
methodology or on 100% of the federal

---

CRS-15
Provider/service
General payment policy
General update policy
Most recent update
over a five-year transition period) and
payment amount, whichever results in
include a COLA for hospitals in Alaska
greater Medicare payments. The election
and Hawaii. No adjustments are made
option offset for the 2005 rate year was
for the percentage of low income patients
estimated at $15 million, causing a
served by the hospital (DSH), rural
reduction in LTCH payments of 0.5%
location, or IME. The LTCH-PPS is
(0.995). No such reduction occurred in
required to be budget neutral; total
the following rate year (RY2006).
payments must equal the amount that
would have been paid if PPS had not
been implemented.
Psychiatric hospitals and
Until January 1, 2005, services provided
Initially, the IPF-PPS update in future
The IPF-PPS system was implemented
distinct part units —
in inpatient psychiatric facilities (IPF)
years was to be based on the modified
for discharges beginning on January 1,
include those primarily
had been paid on a reasonable cost basis,
TEFRA MB that reflects capital costs
2005. The RY2006 Federal per diem
engaged in providing, by
subject to modified TEFRA payment
described previously. However, the
rate is $579.17. The first update to the
or under the supervision
limitations and incentives. BBRA
proposed rule issued in January 2006
new system was scheduled for July 1,
of a psychiatrist,
required that a budget-neutral per-diem-
announced that, subject to public
2006. The update for RY2007 of 4.3%
psychiatric services for
based PPS for inpatient psychiatric
comment, the update will incorporate the
was applied to a corrected base per diem
the diagnosis and
services be implemented. Established
RPL-MB as well. The IPF-PPS
amount that was then increased by a
treatment of people with
with a three-year transition period, the
payments must be projected to equal the
wage index budget neutrality factor. The
mental illness.
IPF-PPS incorporates patient-level
amount of total payments that would
Federal per diem base rate for is $595.
adjustments for specified DRGs, selected
have been made under the prior payment
comorbidies, and in certain cases, age of
system. The initial calculation of the per
the patient. Facility-level adjustments
diem payment included a 16.33%
for relative wages, teaching status and
reduction to account for standardization
rural location are also included. IPFs in
to projected TEFRA (the prior payment
Hawaii and Alaska will receive a COLA
system) payments, a 2% reduction to

---

CRS-16
Provider/service
General payment policy
General update policy
Most recent update
adjustment. Medicare per diem
account for outlier payments, a 0.39%
payments are higher in the earlier days of
reduction to account for the stop-loss
the psychiatric stay. Also, the per diem
provision and a 2.66% reduction to
payment for the first day of each stay is
account for a behavioral offset (to reflect
higher in IPFs with qualifying (full-
changing utilization under the new
service) emergency departments than in
payment system).
other IPFs. An outlier policy for high-
cost cases is included. Patients who are
discharged from an IPF and return within
three days are considered readmissions
of the same case. Finally, under the
stop-loss provision, during the three-year
transition period ending in 2008, 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 FY2006 is 3.7%. The
hospitals:
on a reasonable cost basis, subject to
operating costs is established by statute.
update for FY2007 is 3.4.
TEFRA payment limitations and
Starting in FY2006, IPPS operating MB
Children’s hospitals are
incentives. Each provider’s
increase is used to update the target
those engaged in
reimbursement is subject to a ceiling or
amounts. The amount of increase
furnishing services to
target amount that serves as an upper
received by any specific hospital will
inpatients who are
limit on operating costs. Depending
depend upon the relationship of the
predominantly individuals
upon the relationship of the hospital’s
hospital’s costs to its target amount.
under the age of 18.
actual costs to its target amount, these
There is no specific update for capital
Cancer hospitals are
hospitals may receive relief or bonus
costs.

---

CRS-17
Provider/service
General payment policy
General update policy
Most recent update
generally recognized by
payments as well as additional bonus
the National Cancer
payments for continuous improvement;
Institute as either a
i.e., facilities whose costs have been
comprehensive or clinical
consistently less than their limits may
cancer research center; are
receive additional money. Newly
primarily organized for
established hospitals receive special
the treatment of and
treatment. Providers that can
research on cancer (not as
demonstrate that there has been a
a subunit of another
significant change in services and/or
entity); and have at least
patients may receive exceptions
50% of their discharges
payments. The capital costs for these
with a diagnosis of
hospitals are reimbursed on a reasonable
neoplastic disease. See 42
cost basis.
CFR 412.23(f).

---

CRS-18
Provider/service
General payment policy
General update policy
Most recent update
Critical Access Hospitals
Medicare pays CAHs on the basis of the
No specific update policy.
No specific update policy.
(CAHs) are limited-
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
psychiatric or
at 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-19
4. Skilled Nursing Facility (SNF) Care
Provider/service
General payment policy
General update policy
Most recent update
SNF care
SNFs are paid through a prospective
The urban and rural federal per diem
For FY2007, SNFS will receive the full
payment system (PPS) which is
payment rates are increased annually by
MB increase of 3.1%.
composed of a daily (“per-diem”) urban
an update factor that is determined, in
or rural base payment amount that is then
part, by the projected increase in the SNF
For FY2006, SNFs received the full MB
adjusted for case mix and area wages.
market basket (MB) index. This index
increase of 3.1 percentage points. The
measures changes in the costs of goods
net effect of all SNF fee-for-service
The federal per diem payment is
and services purchased by SNFs. Each
payment changes (see General Update
intended to cover all the services
year, the update of the payment rate also
Policy column), however, will likely
provided to the beneficiary that day,
includes, as appropriate, an adjustment to
result in a total net increase of 0.1
including room and board, nursing,
account for the MB forecast error for
percentage points for FY2006 (Medpac
therapy, and prescription drugs. Some
previous years.
2006, Report to Congress: Medicare
care costs are excluded from PPS and
Payment Policy).
paid separately such as physician visits,
BIPA 2000 provided for the following
dialysis and certain high cost prosthetics
updates:
For FY2005, the SNF MB estimated
and orthotics.
update was 3.1 percentage points, while
FY2001 = MB
the actual increase was 3.3 percentage
The case-mix adjustment to the federal
FY2002 = MB - 0.5 percentage points
points. Since the difference between the
per diem rate adjusts payments for the
FY2003 = MB - 0.5 percentage points
estimated and actual amounts of change
treatment and care needs of Medicare
FY2004 and subsequent years = MB
did not exceed the 0.25 percentage point
beneficiaries and categorizes individuals
threshold, the payment rates for FY2005
into groups called resource utilization
The MB level increase in the update was
do not include a forecast error
groups (RUGs). The RUGs system uses
unchanged by MMA.
adjustment and remain at 3.1 percentage
patient assessments to assign a
points.
beneficiary to one of 53 categories and to
At the end of FY2002, two temporary

---

CRS-20
Provider/service
General payment policy
General update policy
Most recent update
determine the payment for the
add-ons expired: a 4% increase in base
For FY2004, the update was 3.0%. For
beneficiary’s care.
payment rates that was in effect for
FY2004, SNFs received an additional
Patient assessments are done at various
FY2001 and FY2002 from BBRA and a
3.26% increase to account for
times during a patient’s stay and the
16.66% increase in the nursing
cumulative forecast error since SNF PPS
RUG category in which a beneficiary is
component of the payment rates that was
began on July 1, 1998.
placed can change with changes in the
in effect from April 1, 2001 until
beneficiary’s condition.
September 30, 2002, from BIPA. The
expiration of these add-on resulted in a
The final adjustment to the daily
decrease in payments of $1.4 billion.
payment rate is to account for variations
in area wages and uses the hospital wage
Another temporary increase in 26 RUGs
index.
also expired. This add-on increased
payments by about $1 billion per year
MMA increased payments for AIDS
and was scheduled to expire upon the
patients in SNFs by 128% starting
implementation of a refined RUG system
October 1, 2004, and continuing through
by the Secretary of DHHS. This refined
2006 and beyond.
RUG system was finalized in the Final
Rule (70 FR 45026) and began
Unlike other PPSs, the SNF PPS statute
implementation in FY2006. The new
does not provide for an adjustment for
system added nine new RUGS
extraordinarily costly cases (an “outlier”
(increasing the RUG categories from 44
adjustment).
to 53) to the patient classification system
and increased nursing weights associated
DRA reduced payments to SNFs for
with all RUG groups.
beneficiary bad debts to 70% for non-
duals. Bad debt payments for dual
eligibles remain at 100%.

---

CRS-21
5. Hospice Care
Provider/Service
General payment policy
General update policy
Most recent update
Hospice care
Payments for hospice care contain three
Each of the three components are
The FY2007 payment rates are updated
separate components that are adjusted
updated annually. The prospective
by the MB of 3.4%. The national
annually. These are payment rates, the
payment rates are updated by the
hospice payment rates for care furnished
hospice wage index, and the cap amount.
increase in the hospice market basket
during FY2007 are as follows: routine
Payment rates are based on one of four
(MB). Since FY2003 updates have been
home care — $130.79 per day;
prospectively determined rates which
at the full hospital MB percentage
continuous home care — $763.36; full
correspond to four different levels of
increase. The hospice wage index is
rate = 24 hours of care, or $31.81 per
care (i.e., routine home care, continuous
updated to reflect updates in the hospital
hour; inpatient respite care — $135.30
home care, inpatient respite care, and
wage index and any changes to the
per day; general inpatient care —
general inpatient care) for each day a
definition of Metropolitan Statistical
$581.82 per day.
beneficiary is under the care of the
Areas (MSAs). The OMB Bulletin No.
hospice. The hospice wage index is
03-04 announced revised definitions for
The hospice wage index will be updated
used to adjust payment rates to reflect
Micropolitan Statistical Areas and the
annually by changes to the hospital wage
local differences in area wage levels.
creation of MSAs and Combined
index. It was last updated for FY2006
This index is established using the most
Statistical Areas (Core-Based Statistical
based on revised definitions of MSAs.
current hospital wage data available.
Area, CBSA, geographic designations).
For FY2006, the hospice wage index for
Total payments to a hospice are subject
The hospice cap amount is increased or
each provider consisted of a blend of 50
to an aggregate cap that is determined by
decreased annually by the same
percent of the FY2006 MSA-based wage
multiplying the cap amount for a given
percentage as the medical care
index and 50 percent of the FY2006
year by the number of Medicare
expenditure category of the CPI-U.
CBSA-based wage index. The latest
beneficiaries who receive hospice
hospice cap for the year November 1,
services during the year. Limited cost-
2005 - October 31, 2006 is $20,585.39
sharing applies to outpatient drugs and
per beneficiary per year. For November
respite care.
1, 2004-October 31, 2005, it was
$19,635.67.

---

CRS-22
Part B
1. Physicians
Provider/service
General payment policy
General update policy
Most recent update
Physicians
Payments for physicians services are
The conversion factor is updated each
The 2007 conversion factor is $37.8975
made on the basis of a fee schedule. The
year by a formula specified in law. The
(the same as 2005 and 2006). The 2007
fee schedule assigns relative values to
update percentage equals the Medicare
anesthesia conversion factor is $17.7594
services. These relative values reflect
Economic Index (MEI, which measures
(the same as 2005 and 2006).
physician work (based on time, skill, and
inflation) subject to an adjustment to
intensity involved), practice expenses,
match spending under the cumulative
However, several other changes are
and malpractice expenses. The relative
sustainable growth rate (SGR) system.
incorporated in the 2007 fee schedule
values are adjusted for geographic
(The SGR is linked, in part, to changes in
(including modifying the relative values
variations in the costs of practicing
the gross domestic product.) The
for a number of services and changing
medicine. These geographically adjusted
adjustment sets the conversion factor so
the way practice expenses are
relative values are converted into a dollar
that projected spending for the year will
calculated). As a result, payments for
payment amount by a conversion factor.
equal allowed spending by the end of the
some services will decrease, while
Assistants-at-surgery services are paid
year. In no case can the conversion
payments for other services will increase
16% of the fee schedule amount.
factor update be more than three
from the 2006 amount.
percentage points above nor more than
Anesthesia services are paid under a
seven percentage points below the MEI.
separate fee schedule (based on base and
Application of the SGR system led to a
time units) with a separate conversion
5.4% reduction in the conversion factor
factor.
in 2002. Additional reductions were
slated to take effect in subsequent years.
Payments equal 80% of the fee schedule
However, P.L. 108-7 allowed for
amount; patients are liable for the
revisions in previous estimates used for

---

CRS-23
Provider/service
General payment policy
General update policy
Most recent update
remaining 20%. (Payments for certain
the SGR calculation, thereby permitting
mental health services equal 50% of the
an update of 1.6% effective March 1,
fee schedule amounts; patients are liable
2003. MMA provided that the update to
for the other 50%). Assignment is
the conversion factor for 2004 and 2005
optional; balance billing limits apply on
could not be less than 1.5%. DRA froze
non-assigned claims.
the 2006 rate at the 2005 level, and
P.L.109-432 froze the 2007 rate at the
2006 level.
2. Nonphysician Practitioners
Provider/service
General payment policy
General update policy
Most recent update
(a) Physician Assistants
Separate payments are made for
See physician fee schedule.
See physician fee schedule.
physician 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

---

CRS-24
Provider/service
General payment policy
General update policy
Most recent update
services, 85% of the amount that would
be paid to a physician serving as an
assistant-at-surgery). Medicare payments
equal 80% of this amount; patients are
liable for the remaining 20%.
Assignment is mandatory for PA
services.
(b) Nurse Practitioners
Separate payments are made for NP or
See physician fee schedule.
See physician fee schedule.
(NPs) and Clinical Nurse
CNS services, provided in collaboration
Specialists (CNSs)
with a physician, but only if no other
facility or other provider charge is paid.
The recognized payment amount equals
85% of the physician fee schedule
amount (or, for assistant-at-surgery
services, 85% of the amount that would
be paid to a physician serving as an
assistant-at-surgery). Medicare payments
equal 80% of this amount; patients are
liable for the 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

---

CRS-25
Provider/service
General payment policy
General update policy
Most recent update
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.
(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

---

CRS-26
Provider/service
General payment policy
General update policy
Most recent update
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
limits were to be increased by the
beneficiary limit applied to all outpatient
increase in the MEI beginning in 2002;
physical therapy services (including
however, application of the limits was
speech-language pathology services),
suspended until September 1, 2003. At
except for those furnished by a hospital
that time the limits were $1,590. MMA
outpatient department. A separate
suspended the application of the limits
$1,500 limit applied to all outpatient
beginning December 8, 2003-December
occupational therapy services except for
31, 2005. The limits were restored
those furnished by hospital outpatient
January 1, 2006. The 2006 limits were
departments. Therapy services furnished
$1,740; the 2007 limits are $1,780. DRA
as incident to physicians professional
required the Secretary to establish an
services were included in these limits.
exceptions process for 2006 for certain
medically necessary services. P.L.109-
The $1,500 limits were to apply each
432 extended the exceptions process
year. However, no limits applied from
through 2007.

---

CRS-27
Provider/service
General payment policy
General update policy
Most recent update
2000-2005, except for a brief period in
2003. The limits were restored in 2006;
however, an exceptions process applies
in 2006 and 2007.
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 area-wide 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, 2006, or 2007.
updated. There is a ceiling on payment
CPI, together with such other
amounts equal to 74% of the median of
adjustments as the Secretary deems
all fee schedules for the test.
appropriate. Updates were eliminated for
Assignment is mandatory. No cost-
1998 through 2002. MMA eliminated
sharing is imposed.
updates for 2004- 2008.

---

CRS-28
4. Preventive Services
Provider/service
General payment policy
General update policy
Most recent update
Pap smears; pelvic exams
Medicare covers screening pap smears
See clinical laboratory fee schedule. A
See clinical laboratory fee schedule.
and screening pelvic exams once every
national minimum payment amount
Minimum payment for pap smears in
two years; annual coverage is authorized
applies for pap smears.
2007 is $14.76 (the same as 2006).
for 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
See physician fee schedule and
procedures for the early detection of
laboratory fee schedule.
laboratory fee schedule.
colon 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);

---

CRS-29
Provider/service
General payment policy
General update policy
Most recent update
(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 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 laboratory 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. Assignment
is optional for sigmoidoscopies and
colonoscopies. DRA specified that the

---

CRS-30
Provider/service
General payment policy
General update policy
Most recent update
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
See physician fee schedule.
See physician fee schedule.
cancer 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 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.

---

CRS-31
Provider/service
General payment policy
General update policy
Most recent update
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.
5. Telehealth
Provider/Service
General payment policy
General update policy
Most recent update
Telehealth services
Medicare pays for services furnished via
See physician fee schedule. The facility
See physician fee schedule. The 2007
a telecommunications system by a
fee equals the amount established for the
facility fee is $22.94 (compared to
physician or practitioner,
preceding year, increased by the
$22.47 in 2006).
notwithstanding the fact that the
percentage increase in the MEI.
individual providing the service is not at

---

CRS-32
Provider/Service
General payment policy
General update policy
Most recent update
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
for 2004, 2005, 2006, and 2007.
fee schedules and making payments: (1)
Updates were eliminated for 1998-2000;
inexpensive or other routinely purchased
payments were increased by the CPI-U
equipment (defined as items costing less
for 2001; and payments were frozen for
than $150 or which are purchased at least
2002. MMA eliminated the updates for
75% of the times; (2) items requiring
2004- 2008.
frequent and substantial servicing; (3)
customized items; (4) oxygen and
oxygen equipment; and (5) other items
referred to as capped rental items. In

---

CRS-33
Provider/service
General payment policy
General update policy
Most recent update
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.

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CRS-34
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
required by MMA, there were no updates
established regionally and are subject to
eliminated the updates for 2004-2006.
for 2004, 2005 and 2006. The update for
national limits which have floors and
2007 is 4.3%.
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
See durable medical equipment fee
The update for 2003 was 1.1%. There
of a fee schedule. Payment levels are
schedule.
was no update for 2004, 2005, 2006, and
computed using the same methodology
2007.
as the durable medical equipment fee
schedule (see above). Assignment is
optional; balance billing limits do not

---

CRS-35
Provider/service
General payment policy
General update policy
Most recent update
apply to non-assigned claims. Regular
Part B cost-sharing applies.
9. Parenteral and Enteral Nutrition (PEN)
Provider/service
General payment policy
General update policy
Most recent update
Parenteral and Enteral
Parenteral and enteral nutrients,
Fee schedule amounts are updated
The 2007 rate increased by the CPI-U,
Nutrition (PEN)
equipment, and supplies are paid on the
annually by the CPI-U.
4.3%.
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.

---

CRS-36
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
refers to those services still paid on a
calculated annually. Carriers determine
charge for 2007 is 4.3%.
reasonable charge basis. Included are
a supplier’s customary charge level.
such items as splints, casts, home
Prevailing charges may not be higher
dialysis supplies and equipment,
than 75% of the customary charges made
therapeutic shoes, certain intraocular
for similar items and services in the
lenses, blood products, and transfusion
locality during the 12-month period of
medicine. These charges may not exceed
July 1- June 30 of the previous calendar
any of the following fee screens: (1) the
year. The inflation-indexed charge is
supplier’s customary charge for the item,
updated by the CPI-U.
(2) the prevailing 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.

---

CRS-37
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
MMA established that in FY2004,
As mandated by MMA, ASCs received
Ambulatory Surgical
the facility services related to a surgery
starting April 1, 2004, the ASC update is
an 0% update in FY2005, the last
Centers (ASCs)
provided in an ASC. The associated
the CPI-U (estimated as of March 31,
quarter of calendar year 2005, CY2006
physician services (surgery and
2003) minus 3.0 percentage points.
and CY2007.
anesthesia) are reimbursed under the
MMA eliminated the payment update for
physician fee schedule. CMS maintains
FY2005, changed the update cycle to a
Effective for services on and after April
the list of approved ASC procedures
calendar year from a fiscal year, and
1, 2004, the base rates (prior to
which is required to be updated every
eliminated the updates for calendar years
geographic adjustments) are:
two years. Presently over 2,500
2006-2009. MMA also established that a
procedures are approved for ASC
revised payment system for surgical
Payment Group 1 — $333
payment and categorized into one of nine
services furnished in an ASC will be
Payment Group 2 — $446
payment groups that comprise the ASC
implemented on or after January 1, 2006,
Payment Group 3 — $510
facility fee schedule. The nine ASC
and not later than January 1, 2008. Total
Payment Group 4 — $630
payment rates reflect the national median
payments under the new system should
Payment Group 5 — $717
cost of procedures in that group; these
be equal to the total projected payments
Payment Group 6 — $826
rates are adjusted to reflect geographic
under the old system. As established by
($676 + $150 for an intraocular lens)
price variation using a hospital wage
the Tax Relief and Health Care Act of
Payment Group 7 — $995
index. Payments are also adjusted when
2006 (P.L. 109-432), starting in CY2009,
Payment Group 8 — $973
multiple surgical procedures are
the annual increase for ASCs that do not
($823 + $150 for an intraocular lens)
performed at the same time. Generally,
submit required quality data may be the
Payment Group 9 — $1,339
the ASC will receive full payment for the
required update -2 percentage points.
most expensive procedure and will
The reduction for not submitting quality
receive 50% payment for the other
data would apply for the applicable year
procedures.
only, and not for subsequent years.

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CRS-38
12. Hospital Outpatient Services
Provider/service
General payment policy
General update policy
Most recent update
Hospital Outpatient
Under HOPD-PPS, which was
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
payment is the individual service or
updates are based on the hospital MB. As
required wage index and pass-through
procedure as assigned to one of about
established by Tax Relief and Health
budget- neutrality factors. The final
570 ambulatory payment classifications
Care Act of 2006 (P.L. 109-432), starting
CY2005 conversion factor is $56.983.
(APCs). To the extent possible, integral
in CY2009, the update for hospitals that
For CY2006, the IPPS MB was 3.7%.
services and items are bundled within
do not submit required quality data will
This increase was adjusted by the
each APC, specified new technologies
be the MB -2 percentage points. The
required wage index and pass-through
are assigned to new technology APCs
reduction for not submitting quality data
budget- neutrality factors, including one
until clinical and cost data is available to
would apply for the applicable year, and
to account for the rural SCH payment
permit assignment into a clinical APC.
would not be taken into account in
adjustment. The final CY2006
Medicare’s payment for HOPD services
subsequent years.
conversion factor was $59.511. For
is calculated by multiplying the relative
CY2007, the IPPS MB was 3.4%. This
weight associated with an APC by a
increase was adjusted by the required
conversion factor. For most APC s,
wage index and pass-through budget-
60% of the conversion factor is
neutrality factors, including one to
geographically adjusted by the IPPS
account for the rural SCH payment
wage index. Except for new technology
adjustment. The final CY2007
APCs, each APC has a relative weight
conversion factor was $61.47.
that is based on the median cost of
services in that APC. Certain APCs with
significant fluctuations in their relative
weights will have the calculated change
dampened. The HOPD-PPS also

---

CRS-39
Provider/service
General payment policy
General update policy
Most recent update
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 the
beneficiary’s copayment for these
services. Copayments will be frozen at
20% of the national median charge for
the service in 1996, updated to 1999.
Over time, as PPS amounts rise, the
frozen beneficiary copayments will

---

CRS-40
Provider/service
General payment policy
General update policy
Most recent update
decline as a share of the total payment
until the beneficiary share is 20% of the
Medicare fee schedule amount. A
beneficiary copayment amount for a
procedure is limited to the inpatient
deductible amount established for that
year. Balance billing is prohibited.
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
Payment limits are updated on January 1
For CY2007, the RHC upper payment
(RHCs) and Federally
of an all-inclusive rate for each
of each year by the Medicare economic
limit is $74.29 (compared to $72.76 in
Qualified Health Center
beneficiary visit for covered services.
index (MEI) which measures inflation
2006), the urban FQHC limit is $115.33
(FQHCs) services
An interim payment is made to the RHC
for certain medical services.
(compared to $112.96 in 2006), and the
or FQHC based on estimates of
rural FQHC limit is $99.17 (compared to
allowable costs and number of visits; a
$97.13 in 2006).
reconciliation is made 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-41
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
See physician fee schedule and
Outpatient Rehabilitation
supervision of physicians) outpatient
outpatient physical and occupational
outpatient physical and occupational
Facility (CORF)
diagnostic, therapeutic and restorative
therapy services.
therapy 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
The ASP is updated quarterly by the
No specific provision.
covers approximately 450
pneumococcal, influenza, and hepatitis
Secretary. Widely available market
outpatient drugs and
B vaccines, those associated with
prices are audited. Payments under the
biologicals under the Part
certain renal dialysis services, blood
ASP method will be lowered if the ASP
B program that are
products and clotting factors and
exceeds the widely available market
authorized by statute,
radiopharmaceuticals, are paid using the
price or average manufacturer price by a
including those: (1) that
average sales price (ASP) methodology.
specified percentage (5% in 2006,
are covered if they are
Alternatively, beginning in 2006,
determined by the Secretary in
usually not self-
payment may be made through the
subsequent years). Where the

---

CRS-42
Provider/service
General payment policy
General update policy
Most recent update
administered and are
competitive acquisition program which
percentage is exceeded, the Secretary
provided incident to a
is currently under development.
will adjust the payment amount; in such
physician’s services; (2)
Medicare’s payment under the ASP
cases, the payment would equal the
those that are necessary for
methodology equals 106% of the
lesser of the widely available market
the effective use of covered
applicable price for a multiple source
price or 103% of the average
DME; (3) certain self-
drug or single source drug subject to
manufacturer price.
administered oral cancer
beneficiary deductible and coinsurance
and anti-nausea drugs
amounts. Regular Part B cost-sharing
(those with injectable
applies, except for pneumococcal and
equivalents); (4)
influenza virus vaccines. Assignment is
erythropoietin (used to
mandatory.
treat anemia); (5)
immunosuppressive drugs
after covered Medicare
organ transplants; (6)
hemophilia clotting factors;
and (7) vaccines for
influenza, pneumonia, and
hepatitis B.

---

CRS-43
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.
pint, and blood components that are
The outpatient facility is paid 100% of
provided to a hospital outpatient as part
its reasonable costs as reported on its
of other services. (Blood that is received
cost-reports. See the section on IPPS
in an IPPS hospital is bundled in the
hospitals for updates for blood included
DRG payment.) For IPPS-excluded
as part of these hospitals.
hospitals, Medicare pays allowable costs
for blood. Beneficiary pays for first three
pints of blood in a year, after which
regular Part B cost-sharing applies.
17. Partial Hospitalization Services Connected to Treatment of Mental Illness
Provider/service
General payment policy
General update policy
Most recent update
Partial hospitalization
Medicare provides Part B hospital
See physician fee schedule and hospital
See physician fee schedule and hospital
services connected to
outpatient care payments for “partial
outpatient services.
outpatient services.
treatment of mental 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.

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CRS-44
Provider/service
General payment policy
General update policy
Most recent update
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.
18. Ambulance Services
Provider/service
General payment policy
General update policy
Most recent update
Ambulance services
Ambulance services are paid on the basis
The fee schedule amounts are updated
The update for 2007 is 4.3% (compared
of a national fee schedule, which is being
each year by the CPI-U.
to 2.5% in 2006). Other provisions may
phased-in. The fee schedule establishes
will change the applicable rate.
seven categories of ground ambulance
services and two categories of air
ambulance services. The ground
ambulance categories are: basic life
support (BLS), both emergency and
nonemergency; advanced life support
Level 1 (ALS1), both emergency and
nonemergency; advanced life support
Level 2 (ALS2); speciality care transport

---

CRS-45
Provider/service
General payment policy
General update policy
Most recent update
(SCT); and paramedic ALS intercept
(PI). The air ambulance categories are:
fixed wing air ambulance (FW) and
rotary wing air ambulance (RW).
The payment for a 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.
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. There is a 25% bonus on the
mileage rate for trips of 51 miles and
more from July 2004 - December 2008.
The national fee schedule is fully
phased-in for air ambulance services. For
ground ambulance services, payments
through 2009 are equal to the greater of
the national fee schedule or a blend of
the national and regional fee schedule
amounts. The portion of the blend based
on national rates is 80% for 2007 - 2009.
In 2010 and subsequently, the payments

---

CRS-46
Provider/service
General payment policy
General update policy
Most recent update
in all areas will be based on the national
fee schedule amount. Regular Part B
cost-sharing applies. Assignment is
mandatory.
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
For HHAs that submit the required
under a prospective payment system that
standardized 60-day episode rate, is
quality data using OASIS, the update for
began in FY2001. Payment is based on
increased annually by an update factor
CY2007 is 3.3 percent. For HHAs that
60-day episodes of care for beneficiaries,
that is determined, in part, by the
do not submit these data, the update will
subject to several adjustments, with
projected increase in the home health
be reduced by 2 percentage points to
unlimited episodes of care in a year. The
market basket index. This index
1.3%.
payment covers skilled nursing, therapy,
measures changes in the costs of goods
medical social services, aide visits,
and services purchased by HHAs.
Because DRA eliminated the update for
medical supplies, and others. Durable
CY2006, the increase for CY2006 was 0.
medical equipment is not included in the
For CY2005, the update for home health
HH PPS. The base payment amount is
was the MB minus 0.8 percentage points.
adjusted for: (1) differences in area
wages using the hospital wage index; (2)
MMA provided a temporary 5% increase

---

CRS-47
Provider/service
General payment policy
General update policy
Most recent update
differences in the care needs of patients
in payments for HHAs serving rural
(case mix) using “home health resource
beneficiaries from April 1, 2004 and
groups” (HHRGs); (3) outlier visits (for
until March 31, 2005. DRA extended the
the extraordinarily costly patients); (4) a
payments for rural home health episodes
significant change in a beneficiary’s
or visits beginning on or after January 1,
condition (SCIC); (5) a partial episode
2006 and before January 1, 2007.
for when a beneficiary transfers from one
HHA to another during a 60-day episode;
(6) budget neutrality; and (7) a low
utilization payment adjustment (LUPA)
for beneficiaries who receive four or
fewer visits. There is no difference
between urban and rural base payment
amounts.
The HHRG applicable to a beneficiary is
determined following an assessment of
the patient’s condition and care needs
using the Outcome and Assessment
Information Set (OASIS). After the
assessment a beneficiary is categorized
in one of 80 HHRGs that reflect the
beneficiary’s clinical severity, functional
status, and service requirements.
HHAs are paid 60% of the case-mix and

---

CRS-48
Provider/service
General payment policy
General update policy
Most recent update
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-49
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
MMA required the Secretary to establish
The Tax Relief and Health Care Act of
outpatient settings: hospital-based
a basic case-mix adjusted prospective
2006 maintains the current composite
facilities, independent facilities, and the
payment system for dialysis services
rate component of the basic case-mix
patient’s home. There are two methods
furnished either at a facility or in a
adjusted system through March 31, 2007.
for payment. Under Method I, facilities
patient’s home, for services furnished
For services furnished on or after April
are paid a prospectively set amount,
beginning on January 1, 2005. The basic
1, 2007, the composite rate component of
known as the composite rate, for each
case-mix adjusted system has two
the basic case-mix adjusted system will
dialysis session, regardless of whether
components: (1) the composite rate,
be increased by 1.6 percent, above the
services are provided at the facility or in
which covers services, including dialysis;
amount of such rate for services
the patient’s home. The composite rate
and (2) a drug add-on adjustment for the
furnished on March 31, 2007.
is derived from audited cost data and
difference between the payment amounts
adjusted for the national proportion of
for separately billable drugs and
patients dialyzing at home versus in a
biologicals and their acquisition costs, as
facility, and for area wage differences.
determined by Inspector General
Adjustments are made to the composite
Reports.
rate for hospital-based dialysis facilities

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

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CRS-50
Provider/service
General payment policy
General update policy
Most recent update
of reasonable charges, limited to 100%
of the median hospital composite rate,
except for patients on continuous cycling
peritoneal dialysis, when the limit is
130% of the median hospital composite
rate. Assignment is mandatory; regular
Part B cost-sharing applies.
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.

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CRS-51
Part C
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
For 2007, in each county, the MA local
contracts
payment in advance to participating
by the method described under “General
benchmarks will be updated by the
Medicare Advantage (MA) health plans
Payment Policy.”
greater of either 7.13% or by 100% of
for each enrolled beneficiary in a
per capita FFS spending. The national
payment area. In exchange, the plans
Beginning in 2005, payments to local
growth percentage increase adjusted for
agree to furnish all Medicare-covered
plans are annually updated by the greater
prior years’ errors is 7.13% for 2007.
items and services to each enrollee.
of (1) a 2% increase over the prior year’s
The Secretary calculated 100% FFS for
rate, (2) by the growth in the national
2007 as well.
Beginning in 2005, payments to local
growth percentage increases, or (3) in
MA plans are updated by the highest of
years as specified by the Secretary, 100%
the minimum percentage increase or, in
of FFS. The national growth percentage
years in which the Secretary specifies
is equal to the projected increase in
(but not less than once every three
Medicare per capita expenditures.
years), 100% of FFS. The minimum
percentage increase is the greater of a 2%
Furthermore, the national growth
increase over the previous year’s
percentage is adjusted each year to
payment rate or the previous year’s
correct for errors in prior years’ rates.
payment increased by the national
The MMA allows for adjustments
growth percentage.
beginning in 2004.
Beginning in 2006, the Secretary will
The annual increase for regional plans
determine local MA payment rates by
and local plans in CCA areas will have
comparing plan bids to a benchmark.
both a statutory increase and a

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CRS-52
Provider/service
General payment policy
General update policy
Most recent update
Plans will submit bids representing their
competitive increase. The statutory
estimated premium for providing
component is similar to the local update
required Parts A and B benefits. The
and the competitive component is based
benchmark will be calculated, according
on a weighted average of plan bids.
to statute, by updating the previous
Congress made substantial changes to the
year’s payment in a local area by the
Medicare+Choice program with the
minimum percentage increase or 100%
passage of the MMA. The act created the
of FFS, in years in which it is specified.
Medicare Advantage (MA) program,
If a plan’s bid is less than the benchmark,
which replaced the M+C program and
its payment will equal its bid plus a
introduced several enhancements
rebate of 75% of the difference and the
designed to increase the availability of
remaining 25% of difference will be
private plans for Medicare beneficiaries.
retained by the federal government. If a
In addition to the immediate payment
plan’s bid is equal to or above the
increases to plans, beginning in 2006 the
benchmark, its payment will be the
MA program will change the payment
benchmark.
structure and introduce regional plans
that operate like Preferred Provider
Also beginning in 2006, the MA program
Organizations. Additionally, in 2006
will offer MA regional plans covering
beneficiaries will have access to a drug
both in- and out-of-network required
plan whether they are in FFS Medicare
services. MA organizations will submit
or enrolled in managed care. Finally,
bids. The regional benchmark, unlike the
beginning in 2010 a limited number of
local benchmark, includes two
geographic areas will be selected to
components; a statutorily determined
examine enhanced competition between
increase, and a weighted average of plan
local MA plans and competition between
bids. The calculation of rebates for
private plans and FFS Medicare.

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CRS-53
Provider/service
General payment policy
General update policy
Most recent update
regional plans will be similar to that for
local plans.
Additional financial incentives will be
provided for regional plans. For 2006
and 2007, Medicare will share risk with
MA regional plans if plan costs fall
above or below a statutorily specified
risk corridor. Also, 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. Finally, a
stabilization fund, with initial funding of
$3.5 billion in 2012, 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.
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.

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CRS-54
Provider/service
General payment policy
General update policy
Most recent update
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 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

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CRS-55
Provider/service
General payment policy
General update policy
Most recent update
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 be updated
by the minimum percentage increase
with corrections to 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

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CRS-56
Provider/service
General payment policy
General update policy
Most recent update
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 the 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.
Eliminating budget neutrality for risk
adjustment would not occur in any year
if it would increase payments.

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CRS-57
Provider/service
General payment policy
General update policy
Most recent update
(b) Cost contracts
Medicare pays cost contract health
No specific update. Cost-based HMOs
No specific update. (However MMA
maintenance organizations (HMOs) and
are paid 100% of their actual costs.
extends or renews reasonable cost
competitive medical plans (CMPs) the
contracts indefinitely. Beginning
actual costs they incur for furnishing
January 1, 2008, cost contracts may not
Medicare-covered services (less the
be extended or renewed in a service area
estimated value of required Medicare
if, during the entire previous year, the
cost-sharing), subject to a test of
service area had two or more MA
“reasonableness.” Interim payment is
regional plans or two or more MA local
made to the HMO/CMP on a monthly
plans meeting the following minimum
per capita basis; final payment reconciles
enrollment requirements: (1) at least
interim payments to actual costs.
5,000 enrollees for the portion of the area
that is within a metropolitan statistical
area having more than 250,000 people
and counties contiguous to such an area,
and (2) at least 1,500 enrollees for any
other portion of such area.

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CRS-58
Part D
Outpatient Prescription Drug Coverage
Provider/service
General payment policy
General update policy
Most recent update
Part D drug coverage. Outpatient
Federal payments to plans are linked
The definition of standard coverage
In 2007, “standard coverage” has a
prescription drug coverage is
to “standard coverage.” Qualified
is updated annually based on the
$265 deductible, 25% coinsurance
provided through private prescription
Part D plans are required to offer
estimated increase in per capita costs
for costs between $266 and $2,400.
drug plans (PDPs) or MA
either “standard coverage” or
for the 12 month period ending the
From this point, there is no coverage
prescription drug (MA-PD) plans.
alternative coverage, with at least
previous July.
until the beneficiary has out-of-
The program relies on these private
actuarially equivalent benefits. In
pocket costs of $3,850 ($5,451.25 in
plans to provide coverage and to bear
2007, most plans offer actuarially
total spending); this coverage gap has
some of the financial risk for drug
equivalent benefits or enhanced
been labeled the “doughnut hole.”
costs; federal subsidies covering the
coverage rather than the standard
Once the beneficiary reaches the
bulk of the risk. Unlike other
package. A number of plans have
catastrophic limit, the program pays
Medicare services, the benefits can
reduced or eliminated the deductible.
all costs except for nominal cost-
only be obtained through private
Many plans offer tiered cost-sharing
sharing.
plans. While all plans have to meet
under which lower cost-sharing
certain minimum requirements, there
applies for generic drugs, higher
are significant differences among
cost-sharing applies for preferred
them in terms of benefit design,
brand name drugs, and even higher
beneficiary premiums amounts, drugs
cost-sharing applies for non-preferred
included on plan formularies (i.e. list
brand name drugs. Some plans
of covered drugs) and cost-sharing
provide some coverage in the
applicable for particular drugs.
coverage gap (“doughnut hole”); this
is generally limited to generic drugs.

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CRS-59
Provider/service
General payment policy
General update policy
Most recent update
Federal Subsidy Payments
Federal subsidy payments (including
Payments to plans are calculated
Federal payments were recalculated
both direct payments and reinsurance
annually by the method described
for the 2007 plan year.
payments) are made to plans
under “General Payment Policy.”
consistent with an overall subsidy
level of 74.5% for basic coverage.
Direct monthly per capita payments
are made to a plan equal to the plan’s
standardized bid amount adjusted for
health status and risk and reduced by
the base beneficiary premium, as
adjusted to reflect the difference
between the bid and the national
average bid. Reinsurance payments,
equal to 80% of allowable costs, are
provided for enrollees whose costs
exceed the annual out-of-pocket
threshold ($3850 in 2007).

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CRS-60
Provider/service
General payment policy
General update policy
Most recent update
Beneficiary Premiums
Beneficiary premiums represent on
Beneficiary premiums are calculated
Beneficiary premiums were
average 25.5% of the cost of the
annually by the method described
recalculated for the 2007 plan year.
basic benefit. A base beneficiary
under “General Payment Policy.”
premium is calculated and is
adjusted, up or down as appropriate,
to reflect differences between it and
the geographically-adjusted national
average monthly bid amount. It is
further increased for any
supplemental benefits and decreased
if the individual is entitled to a low-
income subsidy. The premium is the
same for all individuals in a
particular plan (except those entitled
to a low income subsidy).
Risk corridors
The federal government and plans
In 2006 and 2007, plans are at full
The 2007 risk corridors are the same
share the risk for costs within
risk for costs within 2.5% above or
as 2006, as described under “General
specified “risk corridors.”Risk
below the target. If costs are between
Update Policy.”
corridors” are specified percentages
2.5% and 5% above the target, they
for costs above and below a target
are at risk for 25% of spending
amount; the target amount is defined
between 2.5% and 5% of the target
as total payments paid to the plan
and 20% of spending above that
taking into account the amount paid
amount. If plans fall below the target,
to the plan by the government and
they have to refund 75% of the
enrollees.
savings if costs fall between 2.5%
and 5% below the target and 80% of

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CRS-61
Provider/service
General payment policy
General update policy
Most recent update
any amounts below 5% of the target.
For 2008 - 2011, risk corridors are
modified. Plans will be at full risk for
spending within 5% above or below
the target. They will be at risk for
50% of spending between 5% and
10% of the target and 20% of any
spending exceeding 10% of the
target.

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CRS-62
CRS Reports for Additional Information
CRS Report RL33712, Medicare: A Primer, by Jennifer O’Sullivan
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 RL22399 Recent Developments in Medicare Affecting Long-Term Care
Hospitals, by Sibyl Tilson
CRS Report RL32640, Medicare Payment Issues Affecting Inpatient Rehabilitation
Facilities (IRFs), by Sibyl Tilson
CRS Report RS21465, Medicare’s Skilled Nursing Facility Payment, by Julie Stone
CRS Report RS20173, Medicare: Financing the Part A Hospital Insurance
Program, by Jennifer O’ Sullivan
CRS Report RS20946, Medicare: History of the Part A Trust Fund Insolvency
Projections, by Jennifer O’Sullivan
CRS Report RL31199, Medicare: Payments to Physicians, by Jennifer O’Sullivan.
CRS Report RL31419, Medicare: Payments for Covered Part B Prescription Drugs,
by Jennifer O’Sullivan
CRS Report RS22495, Medicare Durable Medical Equipment: Proposed Payment
Changes for Certain Inhalation Medications, by Paulette C. Morgan and
Barbara English
CRS Report RL32582, Medicare: Part B Premiums, by Jennifer O’Sullivan
CRS Report RS21731, Medicare: Part B Premium Penalty, by Jennifer O’Sullivan
CRS Report RL32618, Medicare Advantage Payments, by Hinda Chaikind and
Paulette C. Morgan
CRS Report RS21814, Medicare Home Health — Benefits and Payments, by Jennifer
L. Boulanger
CRS Report RL33782, Federal Drug Price Negotiation: Implications for Medicare
Part D, by Jim Hahn

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CRS-63
CRS Report RL33136, Medicare: Enrollment in Medicare Drug Plans, by Jennifer
O’Sullivan
CRS Report RL33041, Medicare Drug Benefit: Retiree Provisions, by Jennifer
O’Sullivan
CRS Report RL33802, Pharmaceutical Costs: A Comparison of Department of VA,
Medicaid, and Medicare Policies, by Gretchen A. Jacobson, Jean Hearne, and
Sidath Viranga Panangala
CRS Report RL33781, Pharmaceutical Costs: An International Comparison of
Government Policies, by Gretchen A. Jacobson
CRS Report RL32902, Medicare Prescription Drug Benefit: Low Income Provisions,
by Jennifer O’Sullivan

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