Medicare Payment Policies
Paulette C. Morgan, Coordinator
Specialist in Health Care Financing
Patricia A. Davis
Specialist in Health Care Financing
Barbara English
Information Research Specialist
Jim Hahn
Analyst in Health Care Financing
Mark Newsom
Analyst in Health Care Financing
Julie Stone
Specialist in Health Care Financing
Sibyl Tilson
Specialist in Health Care Financing
September 24, 2010
Congressional Research Service
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www.crs.gov
RL30526
CRS Report for Congress
P
repared for Members and Committees of Congress

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Medicare Payment Policies

Summary
Medicare is a federal insurance program that pays for covered health services for most persons 65
years of age and older and for most permanently disabled individuals under the age of 65. Part A
of the program, the Hospital Insurance program, covers hospital, post-hospital, 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 private plan options for beneficiaries enrolled in both
Parts A and B. Part D is an optional outpatient prescription drug program.
Medicare has established specific rules for payment of covered benefits. 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 will pay). Bids and benchmarks are used to
determine payments in Medicare Parts C and D. Payments for some items of durable medical
equipment in specified locations are to be based on competitive bidding, starting in 2011. Many
services, however, including inpatient and outpatient hospital care, 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. Unlike other
services, Medicare’s outpatient prescription drug benefit can be obtained only through private
plans. Further, while all Part D plans must meet certain minimum requirements, they differ in
terms of benefit design, formulary drugs, and cost-sharing amounts.
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 regulating payments to providers, primarily hospitals and physicians. The Balanced
Budget Act of 1997 (P.L. 105-33, BBA) modified some existing payment policies, including
changing underlying payment methodologies and updates to payment amounts. Subsequent
legislation increased Medicare funding to mitigate the financial impact of some BBA provisions.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173,
MMA), too, modified payment methods and established payment increases for some providers.
Most recently, the Tax Relief and Health Care Act of 2006 (P.L. 109-432, TRHCA); the Medicare,
Medicaid, and SCHIP Extension Act of 2007 (P.L. 110-173, MMSEA); the Medicare
Improvements for Patients and Providers Act of 2008 (P.L. 110-275, MIPPA); the Health
Information Technology for Economic and Clinical Health (HITECH) Act, enacted as part of the
American Recovery and Reinvestment Act of 2009 (P.L. 111-5); and the Patient Protection and
Affordable Care Act of 2010 (P.L. 111-148, PPACA), as modified by the Health Care and
Education Reconciliation Act of 2010 (P.L. 111-152), have affected Medicare’s payments.
This report provides an overview of Medicare payment rules by type of service, outlines current
payment policies, and summarizes the basic rules for program updates. This report will be
updated at least annually.

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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
Recent Legislative History .......................................................................................................... 4
Medicare Payment Policies ......................................................................................................... 6
Part A ......................................................................................................................................... 6
Part B ....................................................................................................................................... 19
Parts A and B ............................................................................................................................ 38
Part C ....................................................................................................................................... 42
Part D ....................................................................................................................................... 45

Tables
Table 1. Inpatient Prospective Payment System (IPPS) for Short-term, General Hospitals............ 6
Table 2. Hospitals Receiving Special Consideration Under Medicare’s IPPS ............................... 9
Table 3. IPPS-Exempt Hospitals and Distinct Part Units ............................................................ 11
Table 4. Skilled Nursing Facility (SNF) Care............................................................................. 16
Table 5. Hospice Care ............................................................................................................... 18
Table 6. Physicians.................................................................................................................... 19
Table 7. Nonphysician Practitioners .......................................................................................... 20
Table 8. Clinical Diagnostic Laboratory Services....................................................................... 23
Table 9. Preventive Services...................................................................................................... 24
Table 10. Telehealth .................................................................................................................. 26
Table 11. Durable Medical Equipment (DME)........................................................................... 27
Table 12. Prosthetics and Orthotics............................................................................................ 28
Table 13. Surgical Dressings ..................................................................................................... 28
Table 14. Parenteral and Enteral Nutrition (PEN) ...................................................................... 29
Table 15. Miscellaneous Items and Services .............................................................................. 30
Table 16. Ambulatory Surgical Centers (ASCs) ......................................................................... 31
Table 17. Hospital Outpatient Services ...................................................................................... 32
Table 18. Rural Health Clinics and Federally Qualified Health Center (FQHCs) Services .......... 34
Table 19. Comprehensive Outpatient Rehabilitation Facility (CORF) ........................................ 34
Table 20. Part B Drugs and Biologicals Covered Incident to a Physician’s Visit ......................... 35
Table 21. Blood......................................................................................................................... 36
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Table 22. Partial Hospitalization Services Connected to Treatment of Mental Illness ................. 36
Table 23. Ambulance Services................................................................................................... 37
Table 24. Home Health.............................................................................................................. 38
Table 25. End-Stage Renal Disease Dialysis Services ................................................................ 40
Table 26. Managed Care Organizations ..................................................................................... 42
Table 27. Outpatient Prescription Drug Coverage ...................................................................... 45

Contacts
Author Contact Information ...................................................................................................... 48

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Introduction
Medicare is a federal insurance program that pays for covered health services for most persons 65
years of age and older and for most permanently disabled individuals under the age of 65. 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,1 laboratory services, durable medical equipment, and
outpatient hospital services. Part B also covers some home health visits. Part C (also known as
Medicare Advantage, or MA) provides private plan options, such as managed care, for
beneficiaries who are enrolled in both Parts A and B. Part D provides optional 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 from Medicare plus any beneficiary
cost-sharing that is required.2 (The required beneficiary out-of-pocket payment may be paid by
other insurance, if any.)3 Medicare has established specific rules governing its program payments
for all covered services as well as for beneficiary cost sharing as described below.
Medicare Payment Rules
Medicare has established specific rules governing payment for covered services. 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 covered under Part B are made on the
basis of fee schedules.4 Certain other services are paid on the basis of reasonable costs or
reasonable charges. In general, the program provides for annual updates of the program payments
to reflect inflation and other factors. In some cases, these updates are linked to the consumer price

1 Certain non-physicians providers (such as physician assistants, nurse practitioners, clinical nurse specialists, certified
nurse midwives, psychologists, and social workers) are permitted to furnish services and bill Medicare under the
physician fees schedule. In this report, the term “physician” or “practitioner” will include all such providers unless
otherwise specified.
2 Not all services require cost sharing from a beneficiary. For instance, clinical laboratory services and home health
services under Parts A and B of Medicare 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. Cost-
sharing requirements under Part C plans may differ from those under Parts A and B for the same service.
3 For more information, see CRS Report RL31223, Medicare: Supplementary "Medigap" Coverage.
4 The MMA required the Secretary to establish and implement a competitive bidding program for durable medical
equipment, prosthetics, orthotics and certain supplies. The program would pay for certain items based on the bids of
qualified suppliers in designated areas. The first round of the competitive bidding program started July 1, 2008.
However, MIPPA stopped the program, terminated all contracts with suppliers, and required the Secretary to rebid the
first round in 2009. Expansion of the program was delayed by two years until 2011. See CRS Report R41211,
Medicare Durable Medical Equipment: The Competitive Bidding Program.
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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. However, updates to the physician fee schedule are determined by a statutory
formula, known as the sustainable growth rate (SGR) system, which links annual updates to how
cumulative actual expenditures compare with a cumulative expenditures target.5
Beneficiary Out-of-Pocket Payments
There are two aspects of beneficiary payments to providers: required cost-sharing amounts (either
coinsurance, copayments, 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 skilled nursing facilities (SNFs), no cost
sharing for home health services, and nominal cost sharing for hospice care.6 For Part B,
beneficiaries are generally responsible for premiums, which range from $110.50 to $353.60 in
2010, depending on the beneficiary’s income, a $155 deductible in 2010 (updated annually by the
increase in the Part B premium), and a coinsurance payment of 20% of the established Medicare
payment amounts.7 For Part C, cost sharing is determined by the private plans. Through 2005, the
total of premiums8 for basic Medicare benefits and cost sharing (deductibles, coinsurance, and
co-payments) charged to a Part C enrollee could not exceed actuarially determined levels of cost
sharing for those same benefits under original Medicare. This meant that plans could not charge a
premium for Medicare-covered benefits without reducing cost-sharing amounts. Beginning in
2006, the constraint on a plan’s ability to charge a premium for basic Medicare benefits was
lifted. The bidding mechanism established by the MMA allows plans to charge a premium to
cover basic Medicare benefits if the costs to the plan exceed the maximum amount CMS will pay
for Medicare-covered benefits. The MMA eliminated the explicit inverse relationship between
cost sharing for basic Medicare benefits and a premium for basic Medicare benefits. Aggregate
enrollee cost sharing under Part C is now only constrained by the actuarial value of cost sharing
under original Medicare.9 However, also beginning in 2006, the Secretary has expanded authority
to negotiate or reject a bid from a managed care organization in order to ensure that the bid

5 For details, see CRS Report R40907, Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR)
System.
6In 2010, for each spell of illness, a beneficiary deductible is $1,100 to cover day 1 through 60 in a hospital. The daily
coinsurance charge is $275 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 $550.
7 Generally, Part B premiums are set to cover 25% of the actuarial cost of Part B services for an aged beneficiary.
Income-related Part B premiums were introduced by the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (P.L. 108-173, MMA) and first took effect in 2007. For more information, see CRS Report R40082,
Medicare: Part B Premiums and CRS Report R40561, The Effect of No Social Security COLA on Medicare Part B
Premiums.
8 Through 2005, managed care plans had the option to charge a premium for basic part A and B Medicare benefits only
if the value of cost sharing for basic benefits was reduced by the same amount. If a plan chose to offer supplemental
benefits not covered under original Medicare, the plan could charge a supplemental premium equal to the actuarial
value of supplemental benefits; the value of the supplemental premium was not constrained by cost-sharing levels for
basic Medicare benefits. All beneficiaries in Part C and original Medicare are required to pay a Part B premium, unless
the Part C plan pays-down the value of the Part B premium as part of a supplemental benefit.
9 Plans must also adhere to specific constraints on enrollee cost-sharing. Beginning in 2011, cost sharing under an MA
plan may not exceed that under original Medicare for certain services, such as chemotherapy treatment, renal dialysis,
skilled nursing care and other services identified by the Secretary.
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reasonably reflects the plan’s revenue requirements. Part D cost sharing includes a deductible, co-
payments, and catastrophic limits on out-of-pocket spending.
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, providers and practitioners are subject to limits on the amounts they
can bill beneficiaries for covered services depending on their participation status in the Medicare
program. A participating physician agrees to accept the approved fee schedule amount as
payment in full (assignment) for all services delivered to Medicare beneficiaries, of which 80% is
paid by the Medicare program and the beneficiary is responsible for the 20% coinsurance plus
any unmet deductible. 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.
Assignment is mandatory for some providers, such as nurse practitioners, physician assistants,
and clinical laboratories; 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, as outlined
below. With a few exceptions, savings in program spending have been achieved largely through
reductions in the updates to provider payments, primarily hospitals, physicians, and MA plans.
However, even when payments are frozen (as has been the case with payments to acute care
hospitals, inpatient rehabilitation facilities, long term care hospitals, and with the physician fee
schedule), Medicare spending continues to increase each year.
Most recently the Patient Protection and Affordable Care Act (P.L. 111-148, PPACA), as
amended, is estimated to achieve substantial program savings through permanent reductions in
the maximum amount paid to MA plans, and reductions in the annual updates to Medicare’s fee-
for-service (FFS) providers (other than physicians’ services). The anticipated savings from FFS
providers is substantially due to the application of a productivity adjustment. (Productivity, in
general, is a measure of output produced relative to the amount of work required to produce it.10)
PPACAs update reductions mark a departure from most previous legislative actions to reduce
Medicare program spending, first, because it is a permanent adjustment to (non-physician)

10 For a general discussion on productivity measurement and growth, see CRS Report RL34677, Productivity Growth:
Trends and Prospects. For a detailed description of the productivity adjustment as it applies to Medicare FFS providers,
see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA): Summary
and Timeline.
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payment updates,11 and second, because, in general, it specifies that the adjustment allows for
negative payment updates and as such, payment rates for a year may be less than for a preceding
year. Once the estimates of savings are known, Congress may wish to revisit this issue whether
rates are much higher or much lower than originally estimated. As in the case of physician
payment updates, it is unclear whether Congress will allow providers to be paid less under this
new provision. As the Medicare Trustees emphasized in the 2010 Annual Report, “the very
favorable financial outcomes that would be experienced if the productivity adjustments can be
sustained in the long range” are highly dependent on the actual implementation of the provisions,
although the trustees “recognize the great uncertainty associated with achieving this outcome.”12
Recent Legislative History
The Balanced Budget Act of 1997 (P.L. 105-33, BBA 97) 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.13 A number of health care provider groups stated that actual
Medicare benefit payment reductions resulting from BBA 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).14 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).15 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, MMA)16 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 modifications were made to Medicare
payments in the Deficit Reduction Act of 2005 (P.L. 109-171, DRA)17; the Tax Relief and Health
Care Act of 2006 (P.L. 109-432, TRHCA); the Medicare, Medicaid, and SCHIP Extension Act of
2007 (P.L. 110-173, MMSEA)18; and the Medicare Improvements for Patients and Providers Act

11 The Balanced Budget Act of 1997 first introduced the concept of productivity adjusted payment increases for
physician services, however, Congress has overwritten the effects of the productivity adjustment in recent years. For
more information, see CRS Report R40907, Medicare Physician Payment Updates and the Sustainable Growth Rate
(SGR) System.
12 The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,
"2010 Annual Report," August 5, 2010, http://www.cms.gov/ReportsTrustFunds/downloads/tr2010.pdf.
13 For more information, see CRS Report 97-802, Medicare Provisions in the Balanced Budget Act of 1997 (BBA 97,
P.L. 105-33).
14 For more information, see CRS Report RL30347, Medicare: Changes to Balanced Budget Act of 1997 (BBA 97, P.L.
105-33) Provisions.
15 For more information, see CRS Report RL30707, Medicare Provisions in the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000 (BIPA, P.L. 106-554).
16 For more information, see CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003.
17 For more information, see CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and SCHIP
Provisions in the Deficit Reduction Act of 2005.
18 For more information, see CRS Report RL34360, P.L. 110-173: Provisions in the Medicare, Medicaid, and SCHIP
(continued...)
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of 2008 (P.L. 110-275, MIPPA)19; the Health Information Technology for Economic and Clinical
Health (HITECH) Act, enacted as part of the American Recovery and Reinvestment Act of 2009
(P.L. 111-5);20 and the Patient Protection and Affordable Care Act (P.L. 111-148, PPACA) as
modified by the Health Care and Education Reconciliation Act (P.L. 111-152, HCERA).21
This report provides a guide to Medicare payment rules by type of benefit. It includes a summary
of current payment policies and basic rules for updating payment amounts. It is updated to reflect
the most recent legislative changes to the program and payment updates available through
September 2010. This report will be updated when additional information is available.

(...continued)
Extension Act of 2007.
19 For more information, see CRS Report RL34592, P.L. 110-275: The Medicare Improvements for Patients and
Providers Act of 2008.
20 For more information, see CRS Report R40181, Selected Health Funding in the American Recovery and
Reinvestment Act of 2009.
21 For more information, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care
Act (PPACA): Summary and Timeline.
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Part A
Table 1. Inpatient Prospective Payment System (IPPS) for Short-term, General Hospitals
Provider/service
General payment policy
General update policy
Recent update
Operating PPS for
Medicare pays acute care hospitals using a
After accounting for certain budget neutrality
For FY2010, effective for discharges after
inpatient services
prospectively determined payment for each
adjustments, IPPS payment rates are increased
April 1, 2010, hospitals that submitted the
provided by acute
discharge. A hospital’s payment for its operating
annual y by an update factor that is determined,
required quality data received an update of
hospitals (Operating
costs is calculated using a national standardized
in part, by the projected increase in the hospital
1.85%. The national standardized amount for
IPPS)
amount adjusted by a wage index associated
market basket (MB) index. This is a fixed price
these hospitals was $5,212.02. Hospitals that
with the area where the hospital is located or
index that measures the change in the price of
did not submit the quality data received a
where it has been reclassified. Payment also
goods and services purchased by hospitals to
reduced update of -0.15%. The national
depends on the relative resource use associated create one unit of output. The update for
standardized amount for these hospitals was
with the diagnosis related group (DRG) to
operating IPPS is established by statute. Under
$5,111.64.
which the patient is assigned. A new Medicare
DRA, hospitals that do not submit required
Severity DRG (MS-DRG) patient classification
quality data in FY2007 and each subsequent
For FY2011, hospitals that submitted the
system is being phased in starting in FY2008.
year will have the applicable MB percentage
required quality data receive the full MB
Medicare pays additional amounts for cases
reduced by two percentage points. Any MB
increase of 2.6% (which was subject to a 2.9%
with extraordinary costs (outliers); indirect
reduction does not apply when computing the
reduction to account for coding
medical education (IME) (see below); and for
applicable percentage increase in subsequent
improvements). The national standardized
hospitals serving a disproportionate share
years. The update penalty for not reporting
amount for these hospitals is $5,164.11
(DSH) of low-income patients (see below). IME
quality data will end in FY2012. In its FY2008
Hospitals that did not submit the quality data
and DSH payments are made through
rule, CMS established prospective budget
receive a reduced update of 0.6% (which was
adjustments within IPPS so that hospitals
neutrality adjustments of -1.2% in FY2008,
also subject to a 2.9% reduction to account for
receive more money for each Medicare
-1.8% in FY2009 and -1.8% in FY2010 because
coding improvements.)The national
discharge. Additional payments may be made
of anticipated increases in measured severity of
standardized amount for these hospitals is
for cases that involve qualified new technologies
illness attributable to coding changes or
$5,063.21
that have been approved for special add-on
documentation improvements (coding creep)
Both standardized amounts are lower in
payments. Hospitals in Hawaii and Alaska
associated with the new MS-DRGs. P.L. 110-90
FY2011 than in FY2010.
receive a cost-of-living adjustment (COLA).
reduced the adjustment to 0.6% in FY2008 and
Certain services are reimbursed outside of
0.9% in FY2009, but permits offsets to IPPS rate

IPPS.
increases in FY2010, FY2011, and FY2012 to
account for coding creep increases in FY2008
and FY2009 above these amounts. The law did
not address the scheduled adjustment of an
additional 1.8% decrease in FY2010 However,
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Provider/service
General payment policy
General update policy
Recent update
in FY2010, CMS did not adjust the update for
coding improvements. In FY2011, CMS
estimates that an additional 5.8% adjustment is
warranted for the coding improvements that
increased payments in FY2008 and FY2009 (to
recoup payments retroactively). Also, an
additional 3.9% adjustment is necessary to
eliminate the full effect of coding improvements
on future payments. CMS reduced the FY2011
update by 2.9%, half the amount of the
retroactive recoupment adjustment. The
HITECH Act established update penalties for
hospitals that are not meaningful electronic
health record (EHR) users starting in FY2015.
Specifically, these hospitals will have an update
reduction of 25% in FY2015, 50% in FY2016,
and 75% in FY2017 and in subsequent years.
PPACA established a schedule of annual
reductions in the update for FY2009 through
FY2019. The reduction in the FY2010 IPPS
update of 0.25 percentage points became
effective for discharges starting April 1, 2010.
The annual update will include a productivity
adjustment starting October 1, 2011. The
PPACA update reductions may result in a
negative update for that year.
Capital IPPS for
Medicare’s capital IPPS is structured similarly to
Updates to the capital IPPS are not established
The capital IPPS update for FY2010 was 1.2%
short-term general
its operating IPPS for short-term general
in statute. Capital rates are updated annually by
After adjustments, the FY2010 capital federal
hospitals (Capital
hospitals. A hospital’s capital payment is based
the Centers for Medicare and Medicaid (CMS)
rate was $429.56 for discharges starting April 1,
IPPS)
on a prospectively determined federal payment
according to a framework which considers
2010.
rate, depends on the DRG to which the patient
changes in the prices associated with capital-
is assigned, and is adjusted by a hospital’s
related costs as measured by the capital input
The capital IPPS update for FY2011 is 1.5%,
geographic adjustment factor (which is
price index (CIPI) and other policy factors,
which reflects an estimated increase in the CIPI
calculated from the hospital’s wage index data).
including changes in case mix intensity, errors in of 1.2% and a forecast error correction of 0.3%.
Capital IPPS includes an IME and DSH
previous CIPI forecasts, DRG recalibration, and
After applying other adjustments including a
adjustment (see below). Starting in FY2008, the
DRG reclassification. Other adjustments include coding improvement reduction, the FY2011
IME adjustment will be phased out over a 3-
those that implement budget neutrality with
federal capital rate is $420.01, which is lower
year period. Additional payments are made for
respect to recalibration of DRGs,
than the FY2010 rate.
outliers (cases with significantly higher costs
documentation and coding changes resulting
above a certain threshold). Certain hospitals
from the switch to MS-DRGs that do not
may also qualify for additional payments under
reflect real changes in patient severity of illness,
an exceptions process. A new hospital is paid
real outlier payments, changes in the geographic
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Provider/service
General payment policy
General update policy
Recent update
85% of its al owable Medicare inpatient hospital
adjustment factor, and exception payments. In
capital-related costs for its first two years of
FY2011, the capital update increase was
operation.
reduced by 2.9% to account for coding
improvements.

Disproportionate
Approximately 2,800 hospitals receive the
No specific update. The amount of DSH
CBO estimates DSH spending (in both
share hospital (DSH)
additional payments for each Medicare
spending in any year is open-ended and varies
operating and capital IPPS) at $10.4 billion in
adjustment
discharge based on a formula which
by the number of Medicare discharges as wel
FY2009 and $10.8 billion in FY2010 (August
incorporates the number of patient days
as the type of patient seen in any given hospital.
2010 baseline).
provided to low-income Medicare 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 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.
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Provider/service
General payment policy
General update policy
Recent update
Indirect Medical
The indirect medical education (IME)
The IME adjustment is not subject to an annual
No specific update. The amount spent on IME
Education (IME)
adjustment is one of two types of payments to
update. BBA 97 reduced the IME adjustment in
depends in part on the number of Medicare
adjustment
teaching hospitals for graduate medical
operating IPPS from a 7.7% increase for each
discharges in teaching hospitals in any given
education (GME) costs (see also direct GME
10% increase in a hospital’s ratio of interns to
year. CBO estimates the IME payments (for
below). Medicare increases both its operating
beds (IRB), a measure of teaching intensity in
both capital and operating IPPS) to be about
and capital IPPS payments to teaching hospitals;
operating IPPS; by FY2001, the IME adjustment
$6.2 billion in FY2009 and $6.3 billion in
different measures of teaching intensity are
was to be 5.5%. However, the scheduled
FY2010 (August 2010 baseline).
used in the operating and capital IPPS. For both
decreases were delayed by subsequent
IPPS payments, however, the number of medical
legislation. As established by MMA, the IME
residents who can be counted for the IME
adjustment was set at 5.5% in FY2008 and
adjustment is capped, based on the number of
subsequently.
medical residents as of December 31, 1996. As
established by BBA 97, teaching hospitals also
receive IME payments for their Medicare Part C
discharges. (See also Medicare Part C below.)
Direct graduate
Direct GME costs are excluded from IPPS and
In general, direct GME payments are updated
Hospitals below 140% of the national average
medical education
paid outside of the DRG payment on the basis
by the increase in the consumer price index for
from FY2004-FY2013 receive an update of CPI-
(direct GME)
of updated hospital-specific costs per resident
al urban consumers (CPI-U). As established by
U. Hospitals above 140% of the national average
payments
amount (PRA), the number of weighted ful -
BBRA and subsequently amended, however, the
for that time period will receive no update.
time equivalent (FTE) residents, and Medicare’s
update amount that any hospital receives
CBO estimates direct GME payments of $3.1
share of total patient days in the hospital
depends upon the relationship of its PRA to the
billion in FY2009 and 3.2 billion in FY2010
(including those days attributed to Medicare
national average PRA. Hospitals with PRAs
(August 2010 baseline).
manged care enrollees). There is a hospital-
below the floor (85% of the locality-adjusted,
specific cap on the number of residents in the
updated, and weighted national PRA) are raised

hospital for direct GME payments. Also, the
to the floor amount. Teaching hospitals with
hospital’s FTE count is based on a three-year
PRAs above the ceiling amount (140% of the
rolling average; a specific resident may count as
national average, adjusted for geographic
half of a FTE, depending on the number of years
location) will receive a lower update than other
spent as a resident and the length of the initial
hospitals (CPI-U minus two percentage points)
training associated with the specialty. Certain
for FY2003-FY2013. Hospitals that have PRAs
combined primary care residency programs
between the floor and ceiling receive the CPI-U
receive special recognition in this count. In
as an update amount.
certain circumstances, irect GME payments can
be made to nonhospital providers.

Table 2. Hospitals Receiving Special Consideration Under Medicare’s IPPS
Provider/service
General payment policy
General update policy
Recent update
Sole Community
An SCH receives the higher of the following
Target amounts for SCHs are updated by an
For FY2010, starting for discharges on April 1,
Hospitals (SCHs)—
payment rates as the basis of reimbursement:
“applicable percentage increase” which is
2010, hospitals that submitted the required
CRS-9

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Provider/service
General payment policy
General update policy
Recent update
facilities located in
the current IPPS base payment rate, or its
specified by statute and is often comparable to
quality data received an update of 1.85%.
geographical y
hospital-specific per-discharge costs from either
the IPPS update. (See description for IPPS
Hospitals that did not submit the quality data
isolated areas and
FY1982, 1987, or 1996, updated to the current
hospitals).
received a reduced update of -0.15%.
deemed to be the
year. Under MIPPA, for cost reporting periods
sole provider of
beginning on or after January 1, 2009, an SCH

For FY2011, hospitals that submitted the
inpatient acute care
will be able to elect payment based on its
required quality data receive the full MB
hospital services in a
FY2006 hospital-specific payment amount per
increase of 2.6% (which was subject to a 2.9%
geographic area based discharge. This amount will be increased by the
reduction to account for coding
on distance, travel
annual update starting for discharges on or after
improvements.) Hospitals that did not submit
time, severe weather
January 1, 2009. An SCH may receive additional
the quality data receive a reduced update of
conditions, and/or
payments if the hospital experiences a decrease
0.6% (which was also subject to a 2.9%
market share as
of more than 5% in its total inpatient cases due
reduction to account for coding
established by specific
to circumstances beyond its control. An SCH
improvements.)
criteria set forth in
receives special consideration for
regulation (42 CFR
reclassification into a different area. Starting for
412.92).
services on January 1, 2006, CMS increased
outpatient prospective payment system (OPPS)
payments to rural SCHs by an additional 7.1%.
Medicare dependent
BBA 97 reinstated and extended the MDH
Target amounts for MDHs are updated by an
For FY1996 and thereafter, the update for
hospitals (MDHs)—
classification, starting on October 1, 1997, and
“applicable percentage increase” which is
MDHs is the same as for al IPPS hospitals.
smal rural hospitals
extending to October 1, 2001. The sunset date
specified by statute and is often comparable to
These updates are also used to increase the
with a high
for the MDH classification was subsequently
the IPPS update.
hospital-specific rate applicable to an MDH.
proportion of
extended to September 30, 2011 by DRA. Until
patients who are
October 1, 2006, an MDH was paid the federal
For FY2010, starting for discharges on April 1,
Medicare
rate plus 50% of the amount that the rate is
2010, hospitals that submitted the required
beneficiaries (have at
exceeded by the hospital’s target amount based
quality data received an update of 1.85%.
least 60% of acute
on either its updated FY1982 or FY1987 cost
Hospitals that did not submit the quality data
inpatient days or
per discharge. DRA provided that an MDH
received a reduced update of -0.15%.
discharges
would be able to elect payments based on using
For FY2011, hospitals that submitted the
attributable to
a percentage of its FY2002 hospital-specific cost
required quality data receive the full MB
Medicare in FY1987
starting October 1, 2006. An MDH’s payments
increase of 2.6% (which was subject to a 2.9%
or in two of the three
would be based on 75% of the adjusted
reduction to account for coding
most recently audited
hospital-specific cost starting for discharges on
improvements.) Hospitals that did not submit
cost reporting
October 1, 2006. DRA also excluded MDHs
the quality data receive a reduced update of
periods). As specified
from the 12% DSH adjustment cap for
0.6% (which was also subject to a 2.9%
in regulation (42 CFR
discharges starting October 1, 2006. An MDH
reduction to account for coding
412.108), they cannot
may receive additional payments if its inpatient
improvements).
be an SCH and must
cases decline more than 5% due to
have 100 or fewer
circumstances beyond its control.
beds.
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Provider/service
General payment policy
General update policy
Recent update
Rural Referral
RRCs payments are based on the IPPS for
RRCs receive the operating and capital IPPS
See updates specified for operating and capital
Centers (RRCs)—
short-term general hospitals. RRCs are exempt
updates specified for short-term general
IPPS for short-term general hospitals.
relatively large
from the 12% DSH adjustment cap. Also, RRCs
hospitals.
hospitals, generally in
receive preferential consideration for
rural areas, that
reclassification to a different area.
provide a broad array
of services and treat
patients from a wide
geographic area as
established by specific
criteria set forth in
regulation. (42 CFR
412.96).
Table 3. IPPS-Exempt Hospitals and Distinct Part Units
Provider/service
General payment policy
General update policy
Recent update
Inpatient
As of January 1, 2002, Medicare’s payments to a
Starting in FY2006, the IRF-PPS update is based
The FY2010 IRF-PPS update was 2.5% before
Rehabilitation
rehabilitation facility are based on a fully
on the MB reflecting 2002 cost structures from
the enactment of PPACA which imposed a 0.25
Facilities (IRFs)—
implemented IRF-PPS and 100% of the federal
rehabilitation, psychiatric, and long-term care
percentage point reduction on the FY2010
freestanding hospitals
rate which is a fixed amount per discharge. This
hospitals (RPL-MB). The RLP-MB includes an
update (to 2.25%) for discharges starting April
and hospital-based
PPS encompasses both capital and operating
update estimate for capital as well as operating
1, 2010. Starting then, the base federal rate for
distinct part units
payments to IRFs, but does not cover the costs
costs. MMSEA establishes the IRF update factor
IRFs was $13,627.
that treat a
of approved educational programs, bad debt
at 0% in FY2008 and FY2009, starting for
percentage of
expenses, or blood clotting factors, which are
discharges on April 1, 2008. PPACA established
The FY2011 IRF-PPS update is 2.5% before the
patients with a
paid for separately. The IRF-PPS payment for
a schedule of annual reductions in the update
PPACA reduction of 0.25 percentage point,
defined set of
any Medicare discharge will vary depending on
for FY2009 through FY2019. The reduction in
and other budget neutrality adjustments. The
conditions and meet
the patient’s impairment level, functional status,
the FY2010 update of 0.25 percentage points
final FY2011 federal rate for IRFs is $13,860.
certain established
comorbidity conditions, and age. These factors
became effective for discharges starting April 1,
conditions of
determine which of the 87 Case Mix Groups
2010. The FY2011 update reduction is 0.25
participation. As
(CMGs) is assigned to the inpatient stay. Within
percentage points. The annual update will
established by
each of these CMGs, patients are further
include a productivity adjustment starting
MMSEA, starting July
assigned to one of four tiers based on any
October 1, 2011. The PPACA update
1, 2007, the IRF
comorbidities they may have. Five other CMGs
reductions may result in a negative update for
compliance threshold
are used for patients discharged before the
that year.
(which determines
fourth day (short stay outliers) and for those
whether a facility is
who die in the facility. Generally, IRF payments
an IRF or an acute
are reduced or increased for certain case level
care hospital) is set
adjustments, such as early transfers, short-stay
at 60%; comorbidities outliers, patients who die before transfer, and
are included as
high cost outliers. Payments also depend upon
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Provider/service
General payment policy
General update policy
Recent update
qualifying conditions.
facility-specific adjustments to accommodate for
To be paid as an IRF,
variations in area wages, percentage of low
an entity must have
income patients (LIP) served by the hospital (a
60% of its inpatients
DSH adjustment), and rural location (rural IRFs
with one of 13
receive increased payments, about 19% more
conditions including
than urban IRFs.) Starting in FY2006, an IME
stroke, spinal cord
adjustment is included; IRFs in Alaska and
injury, brain injury,
Hawaii do not receive a COLA adjustment. The
neurological
IRF-PPS is not required to be budget neutral;
disorder, burns, and
total payments can exceed the amount that
certain arthritis
would have been paid if this PPS had not been
related conditions.
implemented.
Long-Term Care
Effective October 1, 2002, LTCHs are paid on a
The LTCH update is not specified in statue.
In RY2010 (starting October 1, 2009) the
Hospitals and
discharge basis under a DRG-based PPS, subject
CMS has established a policy to update the
LTCH federal payment rate was increased by
satellites or onsite
to a five-year transition period. The LTCH-PPS
LTCH rates based on the most recent estimate
2.0% which reflects a 2.5% MB increase adjusted
providers (LTCHs)—
encompasses payments for both operating and
of the rehabilitation, psychiatric, and long-term
for case-mix changes attributed to
acute general
capital-related costs of inpatient care but does
care (RPL) market basket adjusted to account
documentation and coding improvements. For
hospitals that are
not cover the costs of approved educational
for improved coding practices. CMS changed
discharges starting April 1, 2010, the update will
excluded from IPPS
programs, bad debt expenses, or blood clotting
the effective date of the annual update from
be reduced by 0.25 percentage points; the
with a Medicare
factors which are paid for separately. The
October 1 to July 1 of each year, starting July
LTCH federal payment rate is set at $39,794.95
inpatient average
LTCH-PPS payment for any Medicare discharge
2003. MMSEA established a three-year
for discharges starting on that date until
length of stay (ALOS)
will vary depending on the patient’s assignment
moratorium period during which the Secretary
September 30, 2010.
greater than 25 days.
into a Medicare severity- LTC-DRG. LT-DRGs
will not be able to apply certain payment
are based on reweighted IPPS MS-DRGs.
policies, including payments for short stay
In RY2011 (starting October 1, 2010) the
Payments for specific patients may be increased
outliers or the one-time adjustment to LTCH
LTCH federal payment rate was increased by a
or reduced because of case-level adjustments,
prospective payments to ensure budget
2.5% MB update subject to 2.5% reduction for
such as short stay cases, interrupted stay cases,
neutrality. In the RY2009 final rule, CMS
coding improvements that happened in FY2008
readmitted cases from co-located providers and
changed the effective date of the annual update
and FY2009, and the PPACA reduction of 0.5
high costs outliers. Payments also depend upon
back to October 1, beginning October 1, 2009.
percentage points. The update factor for LTCH
facility-specific adjustments such as variations in
In order to implement the change, RY2009 will
federal rate was -0.49%. The LTCH federal
area wages and include a COLA for hospitals in
be a 15-month rate year, from July 1, 2008,
payment rate is set at $39,599.95 for discharges
Alaska and Hawaii. No adjustments are made
through September 30, 2009. PPACA
starting on October 1, 2010.
for the percentage of low income patients
established a schedule of annual reductions in
served by the hospital (DSH), rural location, or
the update for RY2009 through RY2019. The
IME. The LTCH-PPS is required to be budget
reduction in the RY2010 update of 0.25
neutral; total payments must equal the amount
percentage points became effective for
that would have been paid if PPS had not been
discharges starting April 1, 2010. The RY2011
implemented.
update reduction is 0.5 percentage points. The
update will include a productivity adjustment
starting October 1, 2011. The PPACA update
reductions may result in a negative update for
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Provider/service
General payment policy
General update policy
Recent update
that year.
Psychiatric hospitals
Starting January 1, 2005, Medicare pays for
The IPF update is not specified in statue. CMS
The RPL-MB update for RY2010 was 2.1%
and distinct part
services provided in inpatient psychiatric
has established a policy to update the per diem
After applying a wage index budget neutrality
units—include those
facilities (IPF) using a per-diem based PPS.
rates based on the most recent estimate of the
factor of 1.0009, the federal base payment is
primarily engaged in
Established with a three-year transition period,
rehabilitation, psychiatric, and long-term care
$651.76 per day. The RPL-MB update for
providing, by or
the IPF-PPS incorporates patient-level
market basket (RPL-MB) The IPF-PPS payments
RY2011 is 2.4%,reduced by the PPACA offset
under the
adjustments for specified DRGs, selected
must be projected to equal the amount of total
of 0.25 percentage points and a wage index
supervision of a
comorbidies, and in certain cases, age of the
payments that would have been made under the budget neutrality offset of 0.9999. The federal
psychiatrist,
patient. Facility-level adjustments for relative
prior payment system. The initial calculation of
base payment is $665.71 per day.
psychiatric services
wages, teaching status and rural location are
the per diem payment included a 17.46%
for the diagnosis and
also included. IPFs in Hawaii and Alaska will
reduction to account for standardization to
treatment of people
receive a COLA adjustment. Medicare per diem
projected TEFRA (the prior payment system)
with mental illness.
payments are higher in the earlier days of the
payments, a 2% reduction to account for outlier
psychiatric stay. Also, the per diem payment for
payments, a 0.39% reduction to account for the
the first day of each stay is 12% higher in IPFs
stop-loss provision and a 2.66% reduction to
with qualifying (full-service) emergency
account for a behavioral offset (to reflect
departments than in other IPFs. An outlier
changing utilization under the new payment
policy for high-cost cases is included. Patients
system). PPACA established a schedule of
who are discharged from an IPF and return
annual reductions in the update starting RY2011
within three days are considered readmissions
through RY2020. The reduction in the RY2011
of the same case. IPFs also receive an additional
IPF update of 0.25 percentage points effective
payment for each eletroconvulsive therapy
July 1, 2010. The update will include a
treatment furnished to a patient. Final y, under
productivity adjustment starting July 1, 2012.
the stop-loss provision, during the three-year
The PPACA update reductions may result in a
transition period ending in 2008, an IPF is
negative update for that year.
guaranteed at least 70% of the aggregate
payments that would have been made under the
prior payment system.
Children’s and cancer Children’s and cancer hospitals are paid on a
An update factor for reimbursement of
The update for FY2010 was 2.1%.
hospitals:
reasonable cost basis, subject to TEFRA
operating costs is established by statute.
payment limitations and incentives. Each
Starting in FY2006, the IPPS operating MB
The update for FY2011 is 2.6%.
Children’s hospitals
provider’s reimbursement is subject to a ceiling
increase is used to update the target amounts.
are those engaged in
or target amount that serves as an upper limit
The amount of increase received by any specific
furnishing services to
on operating costs. Depending upon the
hospital will depend upon the relationship of
inpatients who are
relationship of the hospital’s actual costs to its
the hospital’s costs to its target amount. There
predominantly
target amount, these hospitals may receive
is no specific update for capital costs.
individuals under the
relief or bonus payments as well as additional
age of 18. Cancer
bonus payments for continuous improvement
hospitals are
(i.e., facilities whose costs have been
generally recognized
consistently less than their limits may receive
by the National
additional money). Newly established hospitals
CRS-13

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Provider/service
General payment policy
General update policy
Recent update
Cancer Institute as
receive special treatment. Providers that can
either a
demonstrate that there has been a significant
comprehensive or
change in services and/or patients may receive
clinical cancer
exceptions payments. The capital costs for
research center; are
these hospitals are reimbursed on a reasonable
primarily organized
cost basis.
for the treatment of
and research on
cancer (not as a
subunit of another
entity); and have at
least 50% of their
discharges with a
diagnosis of
neoplastic disease.
See 42 CFR
412.23(f).
CRS-14

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Provider/service
General payment policy
General update policy
Recent update
Critical Access
Medicare pays CAHs on the basis of the
No specific update policy.
No specific update policy.
Hospitals (CAHs) are
reasonable costs of the facility for inpatient and
limited-service
outpatient services. CAHs may elect either a
facilities that are
cost-based hospital outpatient service payment
located more than 35
or an all-inclusive rate which is equal to a
miles from another
reasonable cost payment for facility services
hospital (15 miles in
plus 115% of the fee schedule payment for
certain
professional services. Ambulance services that
circumstances) or
are owned and operated by CAHs are
designated by the
reimbursed on a reasonable cost basis if these
state as a necessary
ambulance services are 35 miles from another
provider of health
ambulance system. MMA provided that
care; offer 24-hour
inpatient, outpatient, and swing bed services
emergency care; have
provided by CAHs will be paid at 101% of
no more than 25
reasonable costs for cost reporting periods
acute care inpatient
beginning January 1, 2004. Starting July 1, 2009,
beds and have a 96-
clinical diagnostic laboratory services furnished
hour average length
by a CAH will be paid as outpatient hospital
of stay. Beds in
services at 101% of costs without regard to
distinct-part skilled
whether the individual is physically present in
nursing facility,
the CAH, or in a SNF or a clinic (including a
psychiatric or
rural health clinic) that is operated by a CAH at
rehabilitation units
the time the specimen is collected.
operated by a CAH
do not count toward
the bed limit.

CRS-15

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Table 4. Skilled Nursing Facility (SNF) Care
Provider/service
General payment policy
General update policy
Recent update
Skilled Nursing
SNFs are paid through a prospective payment
The urban and rural federal per diem payment
For FY2010, SNFs receive the full MB increase
Facility (SNF) care
system (PPS) which is composed of a daily
rates are increased annual y by an update factor
of 2.2%.
(“per-diem”) urban or rural base payment
determined, in part, by the projected increase
amount adjusted for case mix and area wages.
in the SNF market basket (MB) index. This
For FY 2011, SNFs will receive a MB increase
index measures changes in the costs of goods
of 2.3%, adjusted by a negative 0.6 percentage
The federal per diem payment is intended to
and services purchased by SNFs. Each year, the
point forecast error from FY2009, for a total
cover all the services provided to the
update may include an adjustment to account
net increase of 1.7%.
beneficiary that day, including room and board,
for the MB forecast error for previous years.
nursing, therapy, and prescription drugs. Some
Since FY2008, when the difference between the
costs are excluded from PPS and paid
estimated MB update and the actual increase is
separately such as physician visits, dialysis and
greater than 0.5 percentage points, payments to
certain high cost prosthetics and orthotics.
SNFs are updated to account for this forecast
error. When the difference is less than 0.5
percentage points, no adjustments are made.
The case-mix adjustment to the base per diem
rate adjusts payments for the treatment and
care needs of Medicare beneficiaries and
For FY2011, SNFs will receive the full MB
categorizes individuals into groups called
update.
resource utilization groups (RUGs). The
RUGs system uses patient assessments to
Starting in FY2012, all SNF MB updates will be
assign a beneficiary to one of 53 categories and
subject to the productivity adjustment.
to determine the payment for the beneficiary’s
care. Patient assessments are done at various
times during a patient’s stay and their RUG may
change. The federal payment is also adjusted to
account for variations in area wages, using the
hospital wage index.
According to the FY2010 CMS Final SNF rule,
the SNF RUG-III methodology was to be
replaced with a revised RUG-IV methodology.
And, the Minimum Data Set (MDS) 2.0 patient
assessment tool, used to calculate RUG
categories, among other things, is replaced with
the MDS 3.0 system on October 1, 2010. For
FY2010, PPACA delays the implementation of
this revised RUG methodology until FY2011.
According to the SNF PPS Notice for FY2011,
CMS will apply interim payment rates that
reflect the use of MDS 3.0 and a hybrid RUG-III
CRS-16

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Provider/service
General payment policy
General update policy
Recent update
system which incorporates certain RUG-IV’
revisions in concurrent therapy and a change to
the look-back period.
Starting on October 1, 2004, MMA increased
payments for AIDS patients in SNFs by 128%.
Unlike other PPSs, the SNF PPS statute does
not provide for an adjustment for
extraordinarily costly cases (an “outlier”
adjustment). DRA reduced payments to SNFs
for beneficiary bad debts to 70% for non-duals
(individuals who are not enrolled in both
Medicare and Medicaid). Bad debt payments for
dual eligibles (individuals enrolled in both
Medicare and Medicaid) remain at 100%.

CRS-17

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Table 5. Hospice Care
Provider/Service
General payment policy
General update policy
Recent update
Hospice care
Payments for hospice care contain three
Each of the three components are updated
The FY2010 payment rates were updated by
separate components that are adjusted annually. annual y. The prospective payment rates are
the MB of 2.1%. This update was affected by the
These components are the payment rates, the
updated by the increase in the hospice market
BNAF reduction of 10% in the FY2010 Hospice
hospice wage index, and the cap amount.
basket (MB). Since FY2003 updates have been
Wage Index. The net effect was a 1.4%
Limited cost sharing applies to outpatient drugs
at the full hospital MB percentage increase.
increase in payment rates. The national hospice
and respite care.
base payment rates for care furnished during
For FY2010 – FY2012, hospice providers
FY2010 were as follows: routine home care—
Payment rates are based on one of four
receive the ful MB update. For FY2013, the
$142.91; continuous home care—$834.10 for
prospectively determined rates which
MB update will be reduced by 0.3% and
24 hours or $34.75 per hour; inpatient respite
correspond to four different levels of care (i.e.,
adjusted by the productivity factor. For FY2014 care—$147.83 per day; and general inpatient
routine home care, continuous home care,
– FY2019, a 0.3% reduction to the MB will be
care—$406.94 per day.
inpatient respite care, and general inpatient
contingent upon the level of the insured
care) for each day a beneficiary is under the
population relative to the projection of the
The FY2011 payment rates are as follows:
care of the hospice.
insured population for 2009. Only if the level of
routine home care—$146.82; continuous home
non-elderly insured population is 5 or fewer
care—$856.12 for 24 hours or $35.67 per
The hospice wage index is used to adjust
percentage points above the projections will
hour; inpatient respite care—$159.65 per day;
payment rates to reflect local differences in
the MB be reduced by 0.3%.
and general inpatient care—$652.27 per day.
area wage levels. This index is established using
the most current hospital wage data available.
The hospice wage index is updated to reflect
The latest hospice cap amount for the cap year
updates in the hospital wage index and any
November 1, 2009, through October 31, 2010,
Total payments to a hospice are subject to an
changes to the definition of Metropolitan
is an aggregated $23,874.98 per beneficiary. For
aggregate cap that is determined by multiplying
Statistical Areas (MSAs). In 1997, a hospcie
the year ending on October 31, 2009, it was an
the cap amount for a given year by the number
wage index budget neutrality adjustment
aggregated $23,014.50 per beneficiary.
of Medicare beneficiaries who receive hospice
factor (BNAF) was instituted to account for
services during the year. Medicare payments to
differences in hospice payments as a result of a

hospices that exceed this amount must be
change in the data source used to adjust for
returned to the Medicare program.
geographic differences in labor from the 1983
Not earlier than October 1, 2013, PPACA
Bureau of Labor Statistics data to the hospital
requires the Secretary to implement budget
wage index. The final rule for FY2010 phases-
neutral revisions to the methodology for
out the BNAF over 7 years. As a result, the
determining hospice payments for routine care
BNAF was reduced by 10 percent in FY2010,
and other services.
and will be reduced by an additional15 percent
each year from FY2011 through FY2016.
The hospice cap amount is increased or
decreased annually by the same percentage as
the medical care expenditure category of the
CPI-U.

CRS-18

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Part B
Table 6. Physicians
Provider/service
General payment policy
General update policy
Recent update
Physicians
Payments for physicians services are made on
The conversion factor is updated each year by a
Congress has passed several bills that have
the basis of a fee schedule. The fee schedule
formula specified in law. The update percentage
overridden the reduction in the update factor
assigns relative values to services. These
equals the Medicare Economic Index (MEI,
that would have been required for 2010 under
relative values reflect physician work (based on
which measures inflation) subject to an
the SGR formula. For January 1 through May
time, skill, and intensity involved), practice
adjustment to match spending under the
31, the update to the conversion factor was set
expenses (including the cost of nurses and
cumulative sustainable growth rate (SGR)
to 0% as a result of three separate acts. For the
other staff), and malpractice expenses. The
system. (The SGR is linked, in part, to changes
six months from June 1 through November 30,
relative values are adjusted for geographic
in the gross domestic product per capita.) The
2010, the update to the conversion factor is
variations in the costs of practicing medicine.
adjustment sets the conversion factor so that
2.2%. Unless Congress passes additional
These geographically adjusted relative values
projected spending for the year will equal
legislation, a substantial reduction in the update
are converted into a dol ar payment amount by
al owed spending by the end of the year.
factor will be required on December 1, 2010.
a conversion factor. Assistants-at-surgery
Application of the SGR system led to a 5.4%
services (provided by physicians) are paid 16%
reduction in the conversion factor in 2002.
PPACA included several modifications to
of the fee schedule amount.
Additional reductions were slated to take effect
Medicare physician reimbursement, including
in subsequent years. However, P.L. 108-7
bonus payments for primary care services and
Anesthesia services are paid under a separate
allowed for revisions in previous estimates used
for successfully reporting quality measures as
fee schedule (based on base and time units)
for the SGR calculation, thereby permitting an
well as many adjustments to the methodologies
with a separate conversion factor.
update of 1.6% effective March 1, 2003. MMA
for calculating payments. (See CRS report on
Medicare and PPACA for details).
Medicare payments for most professional
provided that the update to the conversion
services equal 80% of the fee schedule amount;
factor for 2004 and 2005 could not be less than
For many years, prior to the passage of MIPPA,
patients are liable for the remaining 20%.
1.5%. DRA froze the 2006 rate at the 2005
beneficiary payments for outpatient mental
level, TRHCA froze the 2007 rate at the 2006
health services equaled 50% of the fee schedule
level; and MMSEA provided that the level for
amounts. MIPPA included a mental health parity
the first six months of 2008 is increased by
provision to be phased in over 5 years. For
0.5%. MIPPA extended this 0.5% increase
services provided before Jan. 1, 2010,
through the end of 2008 and provided for a
beneficiaries pay 50% of the covered charges
1.1% increase in 2009. Under current law, the
(after meeting their deductible); beginning Jan.
conversion factor update can not be more than
1, 2014, outpatient mental health services will
three percentage points above nor more than
be covered at the same rate (80%) as other
seven percentage points below the MEI,
Part B services.
however, several of the bills that have averted
the SGR reductions have included language that
has overridden this condition.
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Table 7. Nonphysician Practitioners
Provider/service
General payment policy
General update policy
Recent update
(a) Physician
Separate payments are made for physician
See physician fee schedule.
See physician fee schedule.
Assistants
assistant (PA) services, when provided under
the supervision of a physician, but only if no
In a skilled nursing facility (SNF), Medicare law
facility or other provider charge is paid.
allows physicians, as well as nurse practitioners
Payment is made to the employer (such as a
and clinical nurse specialists who do not have a
physician). The PA may be in an independent
direct or indirect employment relationship with
contractor relationship with the employer.
a SNF, but who are working in collaboration
with a physician, to certify the need for post-
The recognized payment amount equals 85% of
hospital extended care services for purposes of
the physician fee schedule amount (or, for
Medicare payment. PPACA includes a provision
assistant-at-surgery services, 85% of the amount
that allows a physician assistant who does not
that would be paid to a physician serving as an
have a direct or indirect employment
assistant-at-surgery). Medicare payments equal
relationship with a SNF, but who is working in
80% of this amount; patients are liable for the
collaboration with a physician, to certify the
remaining 20%. Assignment is mandatory for PA
need for post-hospital extended care services
services.
for Medicare payment purposes, beginning on
or after January 1, 2011.
(b) Nurse
Separate payments are made for NP or CNS
See physician fee schedule.
See physician fee schedule.
Practitioners (NPs)
services, provided in collaboration with a
and Clinical Nurse
physician, but only if no other facility or other
Specialists (CNSs)
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 certified
See physician fee schedule.
See physician fee schedule.
nurse midwife services equals 65% of the
physician fee schedule amount. Nurse midwives
can be paid directly. Medicare payments equal
80% of this amount; patients are liable for the
remaining 20%. Assignment is mandatory.
(d) Certified
CRNAs are paid under the same fee schedule
See physician fee schedule.
See physician fee schedule.
Registered Nurse
used for anesthesiologists. Payments furnished
Anesthetists
by an anesthesia care team composed of an
(CRNAs)
anesthesiologist and a CRNA are capped at
CRS-20

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Provider/service
General payment policy
General update policy
Recent update
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
The recognized payment amount for services
See physician fee schedule.
See physician fee schedule.
Psychologists and
provided by a clinical social worker is equal to
Clinical Social
75% of the physician fee schedule amount.
Workers
Services in connection with the treatment of
mental, psychoneurotic, and personality
disorders of a patient who is not a hospital
inpatient are subject to the mental health
services limitation. In these cases Medicare pays
50% of incurred expenses and the patient is
liable for the remaining 50%. Otherwise, regular
Part B cost sharing applies. Assignment is
mandatory for services provided by clinical
psychologists and clinical social workers.
(f) Outpatient
Payments are made under the physician fee
Updates in fee schedule payments are
See physician fee schedule.
physical or
schedule.
dependent on the update applicable under the
occupational therapy
physician fee schedule. The $1,500 limits were
The CY2009 limits or “caps” were $1,840.
services
Medicare coverage for outpatient therapy
to be increased by the increase in the MEI
The CY2010 limits are $1,860.
services, including physical therapy, speech-
beginning in 2002; however, application of the
language pathology services, and occupational
However, the Temporary Extension Act of
limits was suspended until September 1, 2003.
therapy have limits or “caps.” To accommodate
2010, H.R. 4691 extended the exceptions
At that time the limits were $1,590. MMA
patients with therapy needs that exceed the
process through March 31, 2010 and PPACA
suspended the application of the limits
cap, Congress created an exceptions process
extended the exceptions process for therapy
beginning December 8, 2003-December 31,
that allows for specific diagnoses and
caps through December 31, 2010.
2005. The limits were restored January 1, 2006.
procedures to receive Medicare coverage even
DRA required the Secretary to establish an
after a beneficiary has met the therapy cap for
exceptions process for 2006 for certain
the year.
medically necessary services. TRHCA extended
In 1999, an annual $1,500 per beneficiary limit
the exceptions process through 2007; MMSEA
applied to all outpatient physical therapy
extended the process an additional six months.
services (including speech-language pathology
MIPPA extended the exceptions process
services), except for those furnished by a
through December 31, 2009. The 2006 limits
hospital outpatient department. A separate
were $1,740; the 2007 limits were $1,780, the
$1,500 limit applied to all outpatient
2008 limits were $1,810, and the 2009 limits
occupational therapy services except for those
were $1,840.
furnished by hospital outpatient departments.
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Provider/service
General payment policy
General update policy
Recent update
Therapy services furnished as incident to
physicians professional services were included
in these limits.
The $1,500 limits were to apply each year.
However, no limits applied from 2000-2005,
except for a brief period in 2003. The limits
were restored in 2006; however, an exceptions
process has applied in each year since the limits
were reintroduced in 2006 .
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.
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Table 8. Clinical Diagnostic Laboratory Services
Provider/service
General payment policy
General update policy
Recent update
Clinical diagnostic
Clinical lab services are paid on the basis of
Generally, the Secretary of HHS is required to
The fee schedules were updated by 1.1% in
laboratory services
area-wide fee schedules. The fee schedule
adjust the payment amounts annually by the
2003. Per MMA, no update was made for
amounts are periodical y updated. There is a
percentage change in the CPI, together with
2004, 2005, 2006, 2007, or 2008. In 2009,
ceiling on payment amounts equal to 74% of
such other adjustments as the Secretary deems
the update was 4.5%. For 2010, the update is -
the median of al fee schedules for the test.
appropriate. Updates were eliminated for 1998
1.9%.
Assignment is mandatory. No cost sharing is
through 2002. MMA eliminated updates for
imposed.
2004-2008.
PPACA modified provider updates based on
the MB or CPI minus ful productivity estimates

The annual clinical laboratory test fee schedule
for all Parts A and B providers and suppliers
update adjustment for 2009-2013 will be the
who are subject to a MB or CPI update. (See
percentage increase or decrease in the CPI for
above for details.) For the clinical laboratory
al urban consumers minus 0.5 percentage
test fee schedule, the modification will replace
points. MIPPA repealed the Medicare
the scheduled 0.5% payment reduction for
Competitive Bidding Demonstration Project
CY2011 through CY2013 with a ful
for Clinical Laboratory Services.
productivity adjustment for CY2011 and
subsequent years. A 1.75 percentage point
MIPAA clarified the payment for clinical
reduction to the update in CY2011 through
laboratory services in CAHs. Beginning July 1,
CY2015 will be established; this reduction may
2009, clinical diagnostic laboratory services
result in a negative update. The productivity
furnished by a CAH will be reimbursed as
adjustment factor will be applied to the CPI-U
outpatient hospital services at 101% of costs
starting in CY2011, but in the application of
without regard to whether the individual who
the adjustment will not be able to reduce the
receives the service is physically present in the
increase to less than zero.
CAH, or in a skilled nursing home or a clinic
(including a rural health clinic) that is operated
PPACA authorized a two-year demonstration
by a CAH at the time the specimen is
project, beginning on July 1, 2011, that will
collected.
make separate payments to laboratories for
complex diagnostic laboratory tests provided
to Medicare beneficiaries and provided a one
year extension (ending July 1, 2011) for clinical
diagnostic laboratory service for qualifying
rural hospitals with under 50 beds to be paid
on the basis of reasonable cost.
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Table 9. Preventive Services
Provider/service
General payment policy
General update policy
Recent update
Pap smears; pelvic
Medicare covers screening pap smears and
See clinical laboratory fee schedule. A national
See clinical laboratory fee schedule. Minimum
exams
screening pelvic exams once every two years;
minimum payment amount applies for pap
payment for pap smears in 2010 is $15.13
annual coverage is authorized for women at
smears.
(down 1.9%, or $0.29, from 2009).
high risk. Payment is based on the clinical
diagnostic laboratory fee schedule. Assignment
is mandatory. No cost sharing is imposed.
Screening
Coverage is authorized for an annual screening
See physician fee schedule.
See physician fee schedule.
mammograms
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 laboratory fee
See physician fee schedule and laboratory fee
procedures for the early detection of colon
schedule.
schedule.
cancer: (1) screening fecal occult blood tests
(for persons over 50, no more than annual y);
(2) screening flexible sigmoidoscopy (for
persons over 50, no more than once every four
years and 10 years after a screening
colonoscopy for those not at high risk for colon
cancer); (3) screening flexible colonoscopy for
high-risk individuals (limited to one every two
years) and for those not at high risk, every 10
years or four years after a screening
sigmoidoscopy; and (4) barium enemas (as 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
CRS-24

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Provider/service
General payment policy
General update policy
Recent update
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 Part B deductible does not
apply for screenings, effective January 1, 2007.
Balance billing limits apply on non-assigned
claims.
Prostate cancer
Medicare covers an annual prostate cancer
See physician fee schedule.
See physician fee schedule.
screening
screening test. Payment is made under the
physician fee schedule.
Glaucoma screening
Medicare covers an annual glaucoma screening
See physician fee schedule.
See physician fee schedule.
for persons with diabetes, persons with a family
history of glaucoma, African-Americans age 50
and over, and Hispanic Americans age 65 and
over. Payment is made under the physician fee
schedule.
Diabetes outpatient
Medicare covers services furnished by a
See physician fee schedule.
See physician fee schedule.
self-management
certified provider. Payment is made under the
training
physician fee schedule.
Medical nutrition
Coverage is authorized for certain individuals
See physician fee schedule.
See physician fee schedule.
therapy services
with diabetes or renal disease. Payment equals
85% of the amount established under the
physician fee schedule for the service if it had
been furnished by a physician.
Bone mass
Bone mass measurements are covered for
See physician fee schedule.
See physician fee schedule.
measurements
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
Ultrasound screenings for abdominal aortic
See physician fee schedule.
See physician fee schedule.
screenings for
aneurysms are covered for individuals who: (1)
abdominal aortic
receive a referral for such screening during the
aneurysms
initial preventive services exam; (2) have not
had such a screening paid for by Medicare; and
(3) have a family history of abdominal aortic
aneurysm or manifest certain risk factors.
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Table 10. Telehealth
Provider/Service
General payment policy
General update policy
Recent update
Telehealth services
Medicare pays for services furnished via a
Current law established the payment amount

telecommunications system by a physician or
for the Medicare telehealth originating site
practitioner, notwithstanding the fact that the
facility fee for telehealth services provided from
individual providing the service is not at the
October 1, 2001 through December 31, 2002 at
same location as the beneficiary. Payment is
$20. The facility fee for telehealth services
equal to the amount that would be paid under
provided on or after January 1 of each
the physician fee schedule if the service had
subsequent calendar year is the amount for the
been furnished without a telecommunications
previous year increased as of the first day of the
system. A facility fee is paid to the originating
subsequent year by the percentage increase in
site (the site where the beneficiary is when the
the Medicare Economic Index (MEI).
service is provided).
MIPPA added certain entities as originating sites
eligible for for payment of telehealth services.
Eligible distant site physicians and practitioners
who provide services to beneficiaries located at
the expanded list of sites may now be paid for
qualifying telehealth services. This expanded list
includes hospital-based or critical access
hospital-based renal dialysis centers (including
satellites); skilled nursing facilities (SNFs); and/or
community mental health centers (CMHCs.)
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Table 11. Durable Medical Equipment (DME)
Provider/service
General payment policy
General update policy
Recent update
Durable Medical
Except in designated DMEPOS Competitive
In general, fee schedule amounts are updated
The update for CY2003 was 1.1%. As required
Equipment (DME)
Bidding Areas, DME is paid on the basis of a fee
annual y by the CPI-U.
by MMA, there were no updates for CY2004,
schedule. Items are classified into five groups
CY2005, CY2006, CY2007, and CY2008.
for determining the fee schedules and making
Updates were eliminated for 1998-2000;
payments: (1) inexpensive or other routinely
payments were increased by the CPI-U for
In CY2009, the following 10 items were
purchased equipment (defined as items costing
2001; and payments were frozen for 2002.
subject to a 9.5% reduction: oxygen supplies
less than $150 or which are purchased at least
MMA eliminated the updates for 2004-2008.
and equipment; standard power wheelchairs,
75% of the times); (2) items requiring frequent
scooters and related accessories; complex
To pay for the delay in the competitive
and substantial servicing; (3) customized items;
rehabilitative power wheelchairs and related
acquisition program, MIPPA reduced the fee
(4) oxygen and oxygen equipment; and (5)
accessories; mail-order diabetic supplies;
schedule update for 2009 by 9.5% for al items,
other items referred to as capped rental items.
enteral nutrients, equipment, and supplies;
services and accessories included in round 1 of
In general, fee schedule rates are established
continuous positive airway pressure (CPAP)
the competitive bidding program. For 2010 the
locally and are subject to national limits. The
devices and Respiratory Assist Devices (RADs)
fee schedule update will be the increase in the
national limits have floors and ceilings. The floor
and related supplies; hospital beds and related
CPI-U.. Starting in 2011 PPACA requires the
is equal to 85% of the weighted average of all
accessories; negative pressure wound therapy
fee schedule update for DME to be subject to a
local payment amounts and the ceiling is equal
pumps and related supplies and accessories;
productivity adjustment, which may result in a
to 100% of the weighted average of all local
walkers and related accessories; and support
negative update.
payment amounts. Assignment is optional.
surfaces, including group 2 mattresses and
Balance billing limits do not apply on non-
overlays.
assigned claims. Regular Part B cost sharing
In CY2009, al items not subject to the 9.5%
applies. MMA required the Secretary to begin a
reduction received a 5.0% update.
program of competitive acquisition for DME,
prosthetics and orthotics in which payments for
For the CY2010 update, the CPI-U for the
these items would be based on the bids of
applicable period is -1.4%, however Medicare
winning suppliers. Competitive acquisition was
set the update at 0.0%.
to begin in 10 metropolitan statistical areas
(MSAs) in 2007, expanding to 80 MSAs in 2008,
and additional areas in 2009. The first round of
bids were submitted on September 25, 2007,
and the program began on July 1, 2008.
However, MIPPA stopped the program,
terminated all contracts with suppliers and
required the Secretary to rebid the first round
in 2009. Expansion of the program was delayed
by two years until 2011. PPACA expanded the
number of areas in round two to 91 and
requires the Secretary to expand the program
or apply competitive rates to remaining areas
by 2016.
CRS-27

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Table 12. Prosthetics and Orthotics
Provider/service
General payment policy
General update policy
Recent update
Prosthetics and
Except in designated DMEPOS competitive
Fee schedule amounts are updated annually by
The update for CY2003 was 1.1%. As required
orthotics
bidding areas as described above, prosthetics
the CPI-U. MMA eliminated the updates for
by MMA, there were no updates for CY2004,
and orthotics are paid on the basis of a fee
2004-2006.
CY2005 and CY2006. The update for
schedule. These rates are established regionally
CY2007 was 4.3%. The update for CY2008
and are subject to national limits which have
Starting in 2011 PPACA requires the fee
was 2.7%. The update for CY2009 was 5.0%.
floors and ceilings. The floor is equal to 90% of
schedule update for prosthetics and orthotics
For the CY2010 update, the CPI-U for the
the weighted average of all regional payment
to be subject to a productivity adjustment,
applicable period is -1.4%, however Medicare
amounts and the ceiling is equal to 120% of the
which may result in negative update.
set the update at 0.0%.
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.

Table 13. Surgical Dressings
Provider/service
General payment policy
General update policy
Recent update
Surgical Dressings
Surgical dressings are paid on the basis of a fee
See durable medical equipment fee schedule.
The update for CY2003 was 1.1%. There was
schedule. Payment levels are computed using
no update for CY2004, CY2005, CY2006,
the same methodology as the durable medical
Starting in 2011 PPACA requires the fee
CY2007, and CY2008. The update for
equipment fee schedule (see above).
schedule update for medical supplies to be
CY2009 was 5.0%. For the CY2010 update,
Assignment is optional; balance billing limits do
subject to a productivity adjustment, which may
the CPI-U for the applicable period is -1.4%,
not apply to non-assigned claims. Regular Part B
result in negative update.
however Medicare set the update at 0.0%.
cost sharing applies.
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Table 14. Parenteral and Enteral Nutrition (PEN)
Provider/service
General payment policy
General update policy
Recent update
Parenteral and
Except in designated DMEPOS competitive
Fee schedule amounts are updated annually by
In CY2009 Enteral nutrients, equipment and
Enteral Nutrition
bidding areas as described above, parenteral
the CPI-U.
supplies were subject to the 9.5% reduction
(PEN)
and enteral nutrients, equipment, and supplies
while parenteral nutrients received a 5.0%
are paid on the basis of the PEN fee schedule.
MIPPA reduced the fee schedule update for
update.
Prior to 2002, PEN was paid on a reasonable
2009 by 9.5% for al items, services and
charge basis (see below under Miscel aneous
accessories included in round 1 of the
For the CY2010 update, the CPI-U for the
Items and Services). The fee schedule amounts
competitive bidding program. Enteral nutrition
applicable period is -1.4%, however Medicare
are based on payment amounts made on a
was included in the first round of competitive
set the update at 0.0%.
national basis to PEN suppliers under the
bidding, and is thus subject to the 9.5% fee
reasonable charge system. Assignment is
schedule reduction in CY2009. Parenteral
optional; balance billing limits do not apply on
nutrition was not included in round 1.
non-assigned claims. Regular Part B cost sharing
Starting in 2011 PPACA requires the fee
applies.
schedule update for parenteral and enteral
nutrition to be subject to a productivity
adjustment, which may result in a negative
update.
CRS-29

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Table 15. Miscellaneous Items and Services
Provider/service
General payment policy
General update policy
Recent update
Miscellaneous
Miscellaneous items and services here refers to
Payments for reasonable charge items are
The update to the inflation-indexed charge for
services
those services still paid on a reasonable charge
calculated annually. Carriers determine a
CY2007 was 4.3%. The update to the inflation-
basis. Included are such items as splints, casts,
supplier’s customary charge level. Prevailing
indexed charge for CY2008 was 2.7%. The
home dialysis supplies and equipment,
charges may not be higher than 75% of the
CY2009 update was 5.0%. For the CY2010
therapeutic shoes, certain intraocular lenses,
customary charges made for similar items and
update, the CPI-U for the applicable period is -
and transfusion medicine. These charges may
services in the locality during the 12-month
1.4%, however Medicare set the update at 0.0%.
not exceed any of the following fee screens: (1)
period of July 1- June 30 of the previous
the supplier’s customary charge for the item,
calendar year. The inflation-indexed charge is
(2) the prevailing charge for the item in the
updated by the CPI-U.
locality, (3) the charges made to the carrier’s
policyholders or subscribers for comparable

items, (4) the inflation-indexed charge.
Assignment is optional; balance billing limits do
not apply on non-assigned claims. Regular Part
B cost sharing applies.
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Table 16. Ambulatory Surgical Centers (ASCs)
Provider/service
General Payment policy
General update policy
Recent update
Ambulatory Surgical
Starting January 1, 2008, Medicare will pay for
MMA eliminated the payment update for
In CY2009, the ASC conversion factor was
Centers (ASCs)
surgery-related facility services provided in an
FY2005 under the prior payment system,
established at $41.393, after budget neutrality
ASC using a payment system based on the
changed the update cycle to a calendar year
adjustments.
hospital outpatient prospective payment system
from a fiscal year, and eliminated the updates
(OPPS). The new payment system will be
for calendar years 2006-2009. MMA also
The CY2010 update of 1.2% is subject to a
implemented over a four-year transition period.
established that a revised payment system for
wage index budget neutrality adjustment of
The ASC payment system uses the same
surgical services furnished in an ASC will be
0.9996. The CY2010 ASC conversion factor is
payment groups (APCs) as the OPPS. Many of
implemented on or after January 1, 2006, and
$41.873.
the ASC relative weights procedures will be the
not later than January 1, 2008. Total payments
same as in OPPS. Certain services will be
under the new system should be equal to the
eligible for separate payments. The relative
total projected payments under the old system.
weights will be multiplied by a conversion factor As established by the TRHCA, starting in
(average payment amount) to get a payment for
CY2009, the annual increase for ASCs that do
a specific procedure. The ASC conversion
not submit required quality data may be the
factor is based on a percentage of the OPPS
required update minus 2 percentage points. The
conversion factor set to ensure budget
reduction for not submitting quality data would
neutrality between the old ASC payment
apply for the applicable year only, and not for
system and the new one. CMS uses different
subsequent years.
methods to set payments for new office-based
procedures, separately payable radiology
Beginning in CY2010, the ASC conversion
services, separately payable drugs and device
factor will be updated annually using the
intensive services.
consumer price index for al urban consumers
(CPI-U). The ASC update will include a
productivity adjustment starting January 1,
2011.
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Table 17. Hospital Outpatient Services
Provider/service
General payment policy
General update policy
Recent update
Hospital Outpatient
Under HOPD-PPS, which was implemented in
The conversion factor is updated on a calendar
For CY2009, the update was 3.6%. Hospitals
Departments
August 2000, the unit of payment is the
year schedule. These annual updates are based
that fail to submit the required quality data l
(HOPDs)
individual service or procedure as assigned to
on the hospital IPPS MB. As established by
received an update of 1.6%. This increase was
one of about 570 ambulatory payment
TRHCA, starting in CY2009, the update for
adjusted by budget-neutrality factors associated
classifications (APCs). To the extent possible,
hospitals that do not submit required quality
with wage index changes and pass through
integral services and items are bundled within
data will be the MB minus 2 percentage points.
expenses. The final CY2009 conversion factor
each APC, specified new technologies are
The reduction for not submitting quality data
for hospitals that did submit the required
assigned to new technology APCs until clinical
would apply for the applicable year, and would
quality data was $66.059 and was $64.784 for
and cost data is available to permit assignment
not be taken into account in subsequent years.
those that did not submit the required data.
into a clinical APC. Medicare’s payment for
PPACA established a schedule of annual
HOPD services is calculated by multiplying the
reductions in the update for starting CY2010
For CY2010, the MB update is 2.1% which, as
relative weight associated with an APC by a
through CY2019. The CY2010 update
directed by PPACA, is reduced by 0.25
conversion factor. For most APCs, 60% of the
reduction is 0.25 percentage points. The
percentage points to result in an increase in
conversion factor is geographical y adjusted by
update will include a productivity adjustment
1.85%. Hospitals that did not submit required
the IPPS wage index. Except for new technology
starting January 1, 2012. The PPACA update
quality data receive a negative 0.15% update.
APCs, each APC has a relative weight that is
reductions may result in a negative update for
This increase was adjusted by the required
based on the median cost of services in that
that year.
budget neutrality factors for wage index
APC. Certain APCs with significant fluctuations
changes and pass-through expenses. The
in their relative weights will have the calculated
CY2010 conversion factor is $67.241 for
change dampened. The HOPD-PPS also includes
hospitals that submit required quality data and
budget-neutral pass-through payments for new
$65.921 for hospitals that did not submit this
technology and budget-neutral outlier
data. (The prior year’s update penalty for not
payments. Cancer and children’s hospitals have
submitting quality data is not taken into
a permanent hold harmless protection from the
account in the next year.)
HOPD-PPS. HOPDs in rural hospitals with 100

or fewer beds (that are not SCHs) will receive
at least 85% of the payment it would have
received under the prior payment system
during CY2010. Starting for services on January
1, 2006, rural SCHs will receive a 7.1% payment
increase. All SCHs receive 85% of the payment
difference for covered HOPD services
furnished during CY2010.
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
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Provider/service
General payment policy
General update policy
Recent update
1996, updated to 1999. Over time, as PPS
amounts rise, the frozen beneficiary
copayments will decline as a share of the total
payment until the beneficiary share is 20% of
the Medicare fee schedule amount. A
beneficiary copayment amount for a procedure
is limited to the inpatient deductible amount
established for that year. Balance billing is
prohibited.
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Table 18. Rural Health Clinics and Federally Qualified Health Center (FQHCs) Services
Provider/service
General payment policy
General update policy
Recent update
Rural Health Clinics
RHCs and FQHCs are paid on the basis of an
Payment limits are updated on January 1 of each For CY2009, the RHC upper payment limit
(RHCs) and Federally
al -inclusive rate for each beneficiary visit for
year by the Medicare economic index (MEI)
was $76.84, the urban FQHC limit was
Qualified Health
covered services. An interim payment is made
which measures inflation for certain medical
$119.29, and the rural FQHC limit was
Center (FQHCs)
to the RHC or FQHC based on estimates of
services.
$102.58.
services
al owable costs and number of visits; a
reconciliation is made at the end of the year
For CY2010, the RHC upper payment limit is
based on actual costs and visits. Per-visit
$77.76, the urban FQHC limit is $125.72, and
payment limits are established for all RHCs
the rural FQHC limit is $108.81.
(other than those in hospitals with fewer than

50 beds) and FHQCs. Assignment is mandatory;
no deductible applies for FHQC services.

Table 19. Comprehensive Outpatient Rehabilitation Facility (CORF)
Provider/service
General payment policy
General update policy
Recent update
Comprehensive
CORFs provide (by or under the supervision of
See physician fee schedule and outpatient
See physician fee schedule and outpatient
Outpatient
physicians) outpatient diagnostic, therapeutic
physical and occupational therapy services.
physical and occupational therapy services.
Rehabilitation Facility
and restorative services. Payments for services
(CORF)
are made on the basis of the physician fee
schedule. Therapy services are subject to the
therapy limits (described above for physical and
occupational therapy providers).
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Table 20. Part B Drugs and Biologicals Covered Incident to a Physician’s Visit
Provider/service
General payment policy
General update policy
Recent update
Drugs and biologics
Drug products, except for pneumococcal,
The ASP is updated quarterly by the Secretary.
According to the Centers for Medicare and
including vaccines.
influenza, and hepatitis B vaccines, those
Payments under the ASP method may be
Medicaid Services, the third quarter 2010 ASP
Medicare covers
associated with certain renal dialysis services,
lowered by the Secretary if the ASP exceeds
payment amounts remain stable compared to
certain outpatient
blood products and clotting factors and
the widely available market price or average
the previous quarter. For most of the higher
drugs and biologicals
radiopharmaceuticals, are paid using the average manufacturer price by a specified percentage
volume drugs (31 out of the top 50), the prices
under the Part B
sales price (ASP) methodology. The ASP for all
(5% in 2006 to present, as determined by the
changed 2% or less. Overall, the prices for 13 of
program that are
drug products included within the same billing
Secretary). In such cases, the payment would
the top 50 drugs decreased, 2 remained the
authorized by statute,
and payment code, usual y the Healthcare
equal the lesser of the widely available market
same, and 35 increased.
including those: (1)
Common Procedure Coding System (HCPCS)
price or 103% of the average manufacturer
that are covered if
Code, is the volume-weighted average of the
price. Several OIG reports found that the
On September 10, 2008, the Centers for
they are usual y not
manufacturer’s average sales prices reported to
percentage was exceeded for some drugs and
Medicare & Medicaid Services announced the
self-administered and
CMS across all the National Drug Codes
the Secretary has chosen not to exercise the
postponement of CAP program due to their
are provided incident
(NDCs) assigned to the code. Medicare’s
option of lowering the payment rate for these
inability to establish contracts with any qualified
to a physician’s
payment under the ASP methodology equals
drugs.
bidders.
services; (2) those
106% of the applicable price for a multiple
that are necessary for
source drug or single source drug subject to
CAP payments are updated on an annual basis
the effective use of
beneficiary deductible and coinsurance
based on the approved CAP vendor's
covered DME; (3)
amounts. This is intended to cover both the
reasonable net acquisition costs based, in part,
certain self-
acquisition cost of the drug and any
on information disclosed to CMS and limited by
administered oral
administrative overhead resulting from
the weighted payment amount established
cancer and anti-
procurement, storage, and administration of the
under section 1847A of the Social Security Act.
nausea drugs (those
drug. Regular Part B cost sharing applies, except
Adjustment to the payment amounts may be
with injectable
for pneumococcal and influenza virus vaccines.
made more often than annual y, but no more
equivalents); (4)
often than quarterly, in any of the following
erythropoietin
The MMA established a competitive acquisition
cases: (1) Introduction of new drugs, (2)
stimulating agents
program (CAP) for Medicare Part B drugs and
Expiration of a drug patent or availability of a
(ESAs) used to treat
biologicals not paid on a cost or prospective
generic drug, (3) Material shortage that results
anemia; (5)
payment system basis. Payment amounts for
in a significant price increase for the drug, or
immunosuppressive
drugs furnished during the first year of an
(4) Withdrawal of a drug from the market.
drugs after covered
approved CAP vendor’s contract are set
Medicare organ
through a competitive process using bidders’
transplants; (6)
prices, which use the ASP payment amounts as
hemophilia clotting
a ceiling. To date, BioScrip was the only bidder
factors; and (7)
to sign a contract under the CAP program,
vaccines for influenza,
however the contract expired.
pneumonia, and
hepatitis B.
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Table 21. Blood
Provider/service
General payment policy
General update policy
Recent update
Blood
Medicare pays the reasonable cost for pints of
There is no specific update for the
No specific update.
blood, starting with the fourth pint, and blood
reimbursement of Part B blood costs. The
components that are provided to a hospital
outpatient facility is paid 100% of its reasonable
outpatient as part of other services. (Blood that
costs as reported on its cost-reports. See the
is received in an IPPS hospital is bundled into
section on IPPS hospitals for updates for blood
the DRG payment.) For IPPS-excluded hospitals,
included as part of these hospitals.
Medicare pays al owable costs for blood.
Beneficiary pays for first three pints of blood
(for Parts A and B combined) in a year, after
which regular Part B cost sharing applies.

Table 22. Partial Hospitalization Services Connected to Treatment of Mental Illness
Provider/service
General payment policy
General update policy
Recent update
Partial hospitalization
Medicare provides Part B hospital outpatient
See physician fee schedule and hospital
See physician fee schedule and hospital
services connected to
care payments for “partial hospitalization”
outpatient services.
outpatient services.
treatment of mental
mental health care. The services are covered
illness
only if the individual would otherwise require
inpatient psychiatric care. Services must be
provided under a structured program which is
hospital-based or hospital-affiliated and must be
a distinct and organized intensive ambulatory
treatment service offering less than 24-hour
daily care. The program may also be covered
when provided in a community mental health
center. Payment for professional services is
made under the physician fee schedule. Other
services are paid under the hospital outpatient
prospective payment system. Regular Part B
cost sharing applies; balance billing is prohibited.
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Table 23. Ambulance Services
Provider/service
General payment policy
General update policy
Recent update
Ambulance services
Ambulance services are paid on the basis of a
The fee schedule amounts are updated each
The CPI-U for the applicable period was -1.4%;
national fee schedule, which is being phased-in.
year by the CPI-U for the 12 month period
Medicare set that the AIF for 2010 at 0.0%.
The fee schedule establishes seven categories of
ending in June. The update is referred to as the
The AIF for 2009 was 5.0%.
ground ambulance services and two categories
ambulance inflation factor (AIF).
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); specialty care transport
(SCT); and paramedic ALS intercept (PI). The
air ambulance categories are: fixed wing air
ambulance (FW) and rotary wing air ambulance
(RW).
The 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 in all areas will
be based on the national fee schedule amount.
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. For ambulance services
provided between July 1, 2008 and December
31, 2010, the fee schedule amounts are
increased by 2% for services originating in
urban areas and by 3% for services originating
in rural areas. For the period July 1, 2004 to
December 31, 2010, mileage payments are
increased by 22.6% for ground ambulance
services originating in rural, low population
density areas. There is a 25% bonus on the
mileage rate for trips of 51 miles and more
from July 2004-December 2008. MIPPA and
extended by PPACA specifies that any area
designated as rural for the purposes of making
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Provider/service
General payment policy
General update policy
Recent update
payments for air ambulance services on
December 31, 2006, will be treated as rural for
the purpose of making air ambulance payments
during the period July 1, 2008-December 31,
2010. Regular Part B cost sharing applies.
Assignment is mandatory.
Parts A and B
Table 24. Home Health
Provider/service
General payment policy
General update policy
Recent update
Home health services
Home health agencies (HHAs) are paid under a
The base payment amount, or national
For CY2009, the HH MB update was 2.9% for
prospective payment system that began in
standardized 60-day episode rate, is increased
HHAs that submitted the required quality data
FY2001. Payment is based on 60-day episodes
annual y by an update factor that is determined,
and 0.9% for those that do not. The CY2009
of care for beneficiaries, subject to several
in part, by the projected increase in the HH
base payment amounts for 60-day episode were
adjustments, with unlimited episodes of care in
market basket (MB) index. This index measures
also adjusted downward by 2.75% as a result of
a year. The payment covers skilled nursing,
changes in the costs of goods and services
case mix refinements.
therapy, medical social services, aide visits,
purchased by HHAs.
medical supplies, and others. Durable medical
For CY2010, the HH MB update is 2.0% for
equipment is not included in the home health
In CY2010, HHAs receive the ful MB update.
HHAs that submit the required quality data and
(HH) PPS. The base payment amount is
As specified in PPACA, the MB updates will be
0% for HHAs that do not. The CY2010 base
adjusted for: (1) differences in area wages using
reduced by 1.0% for al HHAs in CY2011
payment amounts for 60-day episodes were
the hospital wage index; (2) differences in the
through CY2013. For CY2014, HHAs will
also adjusted downward by 2.75% as a result of
care needs of patients (case mix) using “home
receive the ful MB. Starting in CY2015, the MB
case mix refinements.
health resource groups” (HHRGs); (3) outlier
update will be subject to the productivity factor
For visits ending on or after April 1, 2010, and
visits (for the extraordinarily costly patients);
adjustment.
before January 1, 2016, HHAs serving rural
(4) a significant change in a beneficiary’s
DRA specified that HHAs that submit health
areas will receive a 3% add-on payment.
condition (SCIC); (5) a partial episode for when
care quality data, as specified by the Secretary,
a beneficiary transfers from one HHA to
receive a full MB increase; while HHAs that do

another during a 60-day episode; (6) budget
not submit such data receive an update
neutrality; and (7) a low utilization payment
equivalent to the MB minus 2 percentage
adjustment (LUPA) for beneficiaries who
points. This requirement was applicable for
receive four or fewer visits. There is no
CY2007 and each subsequent year.
difference between urban and rural base
payment amounts.
In CY2008, refinements to the Medicare HH
PPS included a reduction in the national
The HHRG applicable to a beneficiary is
standardized 60-day episode payment rate for 4
determined following an assessment of the
years (ending in FY2011) to account for
patient’s condition and care needs using the
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Provider/service
General payment policy
General update policy
Recent update
Outcome and Assessment Information Set
changes in case mix that are not related to
(OASIS). After the assessment, a beneficiary is
home health patients’ actual clinical conditions;
categorized in one of 80 HHRGs that reflect
among other things. This resulted in a payment
the beneficiary’s clinical severity, functional
downward for a 60-day episode of care of
status, and service requirements.
2.75% for CY2008 through CY2010, and 2.71%
for CY2011.
Starting in CY2010, outlier payments are
capped at 10% of total payments per HHA, and
According to PPACA, starting in CY2014, the
no more than 2.5% of total aggregate PPS
Secretary is required to rebase HH payments
payments for al Medicare HH payments.
by a percentage considered appropriate by the
Secretary to, among other things, reflect the
HHAs are paid 60% of the case-mix and wage-
number, mix and level of intensity of HH
adjusted payment after submitting a request for
services in an episode, and the average cost of
anticipated payment (RAP). The RAP may be
providing care. Any adjustments that result
submitted at the beginning of a beneficiary’s
must be made before the annual payment
care once the HHA has received verbal orders
updates are applied for that year (see next
from the beneficiary’s physician and the
column regarding MB updates). A four-year
assessment is completed. The remaining
phase-in, ending in 2017, will be implemented,
payment is made when the beneficiary’s care is
in equal increments, each increment may not
completed or the 60-day episode ends.
exceed 3.5% of the HH PPS base payment
amount as of March 23, 2010. PPACA also
requires the Secretary to reduce the standard
HHRG amounts such that the aggregate
reduction in payments will equal 5% of total PPS
payments for a period.
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Table 25. End-Stage Renal Disease Dialysis Services
Provider/service
General payment policy
General update policy
Recent update
End-stage renal
ESRD is a condition of permanent kidney
MMA provided for an update to the composite
For CY2009, the composite rate was increased
disease (ESRD)
failure, that must be treated either with a
rate beginning January 1, 2005. Since April 1,
by 1% to $133.81 for both hospital-based
kidney transplant or by dialysis. Because of the
2005 the composite rate has been case-mixed
facilities and independent facilities. The drug
scarcity of available kidneys for transplant,
adjusted, budget neutrally. The Secretary was
add-on adjustment to the composite rate
dialysis is the treatment option for most ESRD
required to update the basic wage-adjusted
payment was $20.33 per treatment. The wage
beneficiaries. Dialysis treatment removed
case-mix payment amounts annual y beginning
index adjustment for 2009 reflected the latest
excess fluid and toxins from the patient’s blood.
with 2006, but only for that portion of the case-
available wage date, including a revised budget
Dialysis services involve several procedures and
mix adjusted system that is represented by the
neutrality adjustment of 1.056672. The ESRD
prescription drugs necessary to ful y treat
add-on adjustment and not for the portion
wage index floor was reduced from .75 to .70.
ESRD.
represented by the composite rate.
Beginning in 2009, wage adjustments will be
Dialysis services are offered in three outpatient
MIPPA changed the payment increases for the
based on 100% of the Core-Based Statistical
settings: hospital-based facilities, independent
composite rate in 2009 and 2010.
Area geographic adjustments.
facilities, and the patient’s home. There are two
The composite rate for dialysis services
payment methods. Under Method I, facilities
As required by MIPPA, estimated Medicare
furnished in CY2010 increased by 1% over the
are paid a prospectively set amount, known as
total dialysis payments for 2011 will equal 98%
December 31, 2009 amount, resulting in a
the composite rate, for each dialysis session,
of payments that would have been made if the
composite rate of $135.15 for both hospital-
regardless of whether services are provided at
bundled payment system had not been
based and independent facilities services
the facility or in the patient’s home. The
implemented.
furnished on or after January 1, 2010. The drug
composite rate is derived from audited cost
Per MIPPA, beginning in 2012, the Secretary will add-on adjustment for 2010 remained the same
data and adjusted for the national proportion of
annual y increase the bundled payment amounts
as the 2009 adjustment, at $20.33 per
patients dialyzing at home versus in a facility,
by an ESRD market basket increase factor
treatment. The wage index adjustment for 2010
and for area wage differences. Beneficiaries
appropriate for a bundled payment system for
reflects the latest available wage date, including
electing home dialysis may choose not to be
renal dialysis minus 1 percentage point.
a revised budget neutrality adjustment of
associated with a facility and may make
However, PPACA amended this provision so
1.057888. The ESRD wage index floor was
independent arrangements with a supplier for
that the market basket will no longer be subject
reduced from .70 to .65.
equipment, supplies, and support services.
to a 1 percentage point reduction beginning in
Payment to these suppliers, known as Method
2012, but will be subject to the productivity
II, is made on the basis of reasonable charges,
factor adjustments instead.
limited to 100% of the median hospital
composite rate, except for patients on
Beginning in January 1, 2012, providers of renal
continuous cycling peritoneal dialysis, when the
dialysis services and renal dialysis facilities will
limit is 130% of the median hospital composite
be subject to quality incentive requirements and
rate. Assignment is mandatory; regular Part B
they will be subject to a reduction of up to 2%
cost sharing applies. Kidney transplantation
if they do not meet the requirements.
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.
MMA required the Secretary to establish a basic
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Provider/service
General payment policy
General update policy
Recent update
case-mix adjusted prospective payment system
for dialysis services furnished either at a facility
or in a patient’s home, for services furnished
beginning on January 1, 2005. The basic case-
mix adjusted system has two components: (1)
the composite rate, which covers services,
including dialysis; and (2) a drug add-on
adjustment for the difference between the
payment amounts for separately billable drugs
and biologicals and their acquisition costs, as
determined by Inspector General Reports.
MIPPA changed payments for dialysis. Beginning
January 1, 2009, the payment rate for dialysis
services are “site neutral” and in applying the
geographic index to providers of services, the
labor share is based on the labor share
otherwise applied for renal dialysis facilities.
Adjustments are no longer made to the
composite rate for hospital-based dialysis
facilities to reflect higher overhead costs.
MIPPA requires the Secretary to implement a
bundled payment system, making a single
payment for Medicare renal dialysis services,
beginning January 1, 2011. The bundled
payment will include items and services which
were included in the composite rate as of
December 31, 2010, erythropoiesis stimulating
agents (ESAs) and other drugs and biologicals
paid for separately (before bundling), and
diagnostic laboratory tests among other items.
It will not include vaccines.
Payments will include adjustments for case mix,
high cost outliers (including variations in the
amount of ESAs), and costs in rural, low-volume
facilities (with a minimum payment adjustment
of 10% for services furnished between January
1, 2011, and January 1, 2014), among others.
The bundled payments system will be phased-in
equal y (and budget neutral y) over four years. It
will be fully implemented by January 1, 2014.
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Part C
Table 26. Managed Care Organizations
Provider/service
General payment policy
General update policy
Recent update
(a) Medicare
In general, Medicare makes a monthly payment
The MA payments are determined annual y by
For CY2009, MA benchmarks were updated
advantage contracts
in advance to participating Medicare Advantage
the method described under “General Payment
by the greater of either 100% FFS spending, or
(MA) health plans for each enrol ed beneficiary
Policy.”
the previous year’s benchmark increased by the
in a payment area. In exchange, the plans agree
national MA growth percentage (4.24%)
to furnish all Medicare-covered items and
For CY2004 through CY2009, plan benchmarks
adjusted for budget neutrality (1.009)—an
services (except hospice) to each enrollee. In
were updated annual y by the minimum
increase of 3.6%.
general, the actuarial value of basic cost sharing
percentage increase, or in certain years, 100%
may not exceed the actuarial value of cost
of FFS spending in the area (the rebased
For CY2010, MA benchmarks were not
sharing under original Medicare.
amount). The minimum percentage increase is
rebased. Al benchmarks were updated by the
the prior year’s benchmark increased by the
increase in the national MA growth percentage
Congress made substantial changes to the
national MA growth percentage (projected
(0.81%), adjusted for budget neutrality (1.001),
Medicare+Choice program with the passage of
increase in Medicare per capita expenditures). In
and the phase-out of indirect medical education
the MMA in 2003. The act created the Medicare years when the Secretary rebases rates, the
(a maximum reduction of approximately 0.6%).
Advantage (MA) program, which replaced the
benchmark for each county was updated by the
M+C program and introduced several changes
greater of either the national MA growth
Also for CY2010, a uniform 3.4% reduction will
designed to increase the availability of private
percentage, or 100% of FFS spending adjusted
be applied to the risk scores of al MA plan
plans for Medicare beneficiaries. In addition to
to exclude the value of Medicare direct medical
enrollees to account for differences in coding
the immediate payment increases to plans,
education payments, as explained below.
patterns between MA plans and providers
beginning in 2006 the MA program changed the
Beginning in 2004 and at a minimum every third
under Parts A and B of original Medicare.
payment structure and introduced regional
year, the Secretary is required to rebase FFS
As required by PPACA, the MA benchmarks for
plans that operate like Preferred Provider
payment rates. Rebasing is updating FFS rates to
CY2011 are the same as the benchmarks in
Organizations. Additionally, beneficiaries had
reflect recent growth in county health care
CY2010.
access to a drug plan whether they were
expenditures.
enrolled in original Medicare or a private plan.
For CY2011, a uniform 3.41% reduction will be
The update to the benchmark for regional plans
applied to the risk scores of all MA plan
In 2006, the Secretary began determining MA
has both a statutory increase and a competitive
enrollees to account for diagnosis coding
plan payments by comparing plan bids to a
increase. The statutory component is similar to
intensity differences between MA plans and
benchmark. A plan’s bid is its estimated revenue
the update for other MA plans and the
providers under original Medicare.
requirement of providing Part A and B
competitive component is based on a weighted
Medicare services to beneficiaries (including
average of plan bids.

cost of services, administration, and profit). A
benchmark is the maximum amount CMS will
DRA made additional changes to the
pay a plan for providing these required benefits.
benchmark calculation. Beginning in 2007, DRA
If a plan’s bid is less than the benchmark, its
added two new adjustments to calculating the
payment is equal to its bid plus a rebate equal
benchmark: (1) an adjustment to exclude
to a percentage of the difference between its
budget neutrality in risk adjustment, and (2) an
adjustment to account for coding intensity
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Provider/service
General payment policy
General update policy
Recent update
bid and the benchmark. (Before 2012, the
differences between MA plans and original
rebate is equal to 75%; starting in 2012, the size
Medicare for years 2007 through 2010. For
of the rebate is contingent of plan quality, as
purposes of calculating the phase-out of budget
explained below.) The remaining amount is
neutrality in risk adjustment, the Secretary was
retained by the federal government. If a plan’s
required to conduct a study of the difference
bid is greater than the benchmark, its payment
between treatment and coding patterns
is equal to the benchmark amount and the plan
between MA plans and providers under Parts A
must make up the difference between its bid
and B of Medicare. The findings were to be
and the benchmark by charging a beneficiary
incorporated into calculations of MA
premium. In general, the Secretary has the
benchmarks in 2008, 2009, and 2010, however
authority to review and negotiate plan bid
they were first incorporated in 2010.
amounts to ensure that the bid reflects revenue
requirements. At least one plan offered by an
Beginning in 2010, MIPPA requires that the
MA organization must be an MA-PD plan, one
value of indirect medical education be phased-
that offers Part D prescription drug coverage.
out of al benchmarks. The amount phased-out
MA organizations offering prescription drug
each year will be based on a ratio of (1) a
coverage receive a direct subsidy for each
specified percentage (0.60% in the first year),
enrollee in their MA-PD plan, equal to the
relative to (2) the proportion of per capita
plan’s risk adjusted standardized bid amount
costs in original Medicare in the county that
(reduced by the base beneficiary premium). The
IME costs represent. The effect of the ratio is
plans also receive a reinsurance payment
to phase-out a higher proportion of IME costs
amount for the federal share of their payment
in areas where IME makes up a smaller
as well as premium and cost-sharing
percentage of per capita spending in original
reimbursements for qualified low-income
Medicare. After 2010, the numerator of the
enrollees.
phase-out percentage will be increased by 0.60
percentage points each year.
Also beginning in 2006, the MA program began
offering regional plans covering both in- and
CY2011 benchmarks will be frozen at the
out-of-network required Medicare services. To
CY2010 level.
encourage regional plan participation in the
Starting in CY2012, benchmarks will begin to be
program additional payments were authorized
calculated as a percent of a base rate. In
in certain circumstances for hospitals that
CY2012, the base rate will equal 100% FFS
would not otherwise join a private plan’s
spending in the area and will be updated each
network.
year. County benchmarks will be set at either
Beginning in 2012, for MA plans that bid below
95%, 100%, 107.5% or 115% of the base rate,
the benchmark, the rebate will be contingent on with higher percentages applied to counties
plan quality as measured by a 5-star quality
with the lowest FFS spending. The phase-in will
rating system established by the Secretary. The
take place over 2 to 6 years, with a larger
calculation will be phased in over three years
phase-in period for areas where the new
from 75% for al MA plans that bid below the
methodology would result in larger benchmark
benchmark for years prior to 2012, to a rate of
decreases.
70% for plans with a star rating of 4.5 or higher,
The yearly update to the base rate will either
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Provider/service
General payment policy
General update policy
Recent update
65% for plans with a star rating of 3.5 or
be a rebased amount for al counties, or an
greater, but below 4.5 stars, and 50% for plans
increase above the previous years’ base equal
with less than 3.5 stars. The rebate based on
to the national MA growth percentage for al
plan quality will be fully phased-in by 2014.
counties. Also starting in CY2012, benchmarks
will be increased based on plan quality with
higher increases in qualifying areas. The coding
intensity adjustment first specified in DRA will
continue after CY2010 with specified minimum
adjustments starting in CY2014.
(b) Cost contracts
Medicare pays cost contract health maintenance
No specific update. Cost-based HMOs are paid
No specific update.
organizations (HMOs) and competitive medical
100% of their actual costs.
plans (CMPs) the actual costs they incur for
furnishing Medicare-covered services (less the
estimated value of required Medicare cost
sharing), subject to a test of “reasonableness.”
Interim payment is made to the HMO/CMP on
a monthly per capita basis; final payment
reconciles interim payments to actual costs.
Beginning January 1, 2013, cost contracts can
not be extended or renewed in a service area if,
during the entire previous year, the service area
had two or more MA regional plans or two or
more MA local plans offered by different
organizations.
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Part D
Table 27. Outpatient Prescription Drug Coverage
Provider/service
General payment policy
General update policy
Recent update
Part D drug
Federal payments to plans are linked to
The definition of standard coverage is updated
In CY2010, “standard coverage” has a $310
coverage.
“standard coverage.” Qualified Part D plans are
annual y based on the estimated increase in per
deductible and 25% coinsurance for costs
Outpatient
required to offer either “standard coverage” or
capita costs for the 12 month period ending the
between $310 and $2,830 (the initial coverage
prescription drug
alternative coverage, with at least actuarially
previous July.
period). From this point, there is no coverage,
coverage is provided
equivalent benefits. For 2010, most plans offer
except for a $250 Medicare rebate mandated
through private
actuarial y equivalent benefits or enhanced
by recent legislation, until the beneficiary has
prescription drug
coverage rather than the standard package. A
out-of-pocket costs of $4,550 ($6,440 in total
plans (PDPs) or MA
number of plans have reduced or eliminated the
spending); this coverage gap has been labeled
prescription drug
deductible. Many plans offer tiered cost sharing
the “doughnut hole.” Once the beneficiary
(MA-PD) plans. The
under which lower cost sharing applies for
reaches the catastrophic limit, the program pays
program relies on
generic drugs, higher cost sharing applies for
all costs except for nominal cost sharing.
these private plans to
preferred brand name drugs, and even higher
provide coverage and
cost sharing applies for non-preferred brand
PPACA, as amended by HCERA, mandates
to bear some of the
name drugs. Some plans provide some coverage
phasing out the Part D doughnut hole.
financial risk for drug
in the coverage gap (“doughnut hole”); this is
Beginning in 2011, manufacturers will be
costs; federal
generally limited to generic drugs.
required to provide a 50% discount on brand-
subsidies cover the
name drugs to participate in the Part D
bulk of the risk.
program. The law phases in Medicare coverage
Unlike other
for generic drugs during the coverage gap
Medicare services,
starting in 2011, and for brand name drugs in
the benefits can only
2013. When the doughnut hole is ful y phased
be obtained through
out in 2020, Part D enrollees will be
private plans. While
responsible for 25% of the cost of brand name
al plans have to meet
and generic drugs during the coverage gap (the
certain minimum
same as in the initial coverage phase). The
requirements, there
catastrophic coverage limit will also be reduced
are significant
to a smal extent in years 2014 through 2019.
differences among

them in terms of
benefit design,
beneficiary premiums
amounts, drugs
included on plan
formularies (i.e. list of
covered drugs) and
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Provider/service
General payment policy
General update policy
Recent update
cost sharing
applicable for
particular drugs. Drug
prices under Part D
are determined
through negotiations
between the PDPs, or
MA-PDs, and drug
manufacturers. The
Secretary of Health
and Human Services
is statutorily
prohibited from
intervening in Part D
drug price
negotiations.
Federal Subsidy
Federal subsidy payments (including both direct
Payments to plans are calculated annual y by the
Federal payments were recalculated for the
Payments
payments and reinsurance payments) are made
method described under “General Payment
2010 plan year.
to plans consistent with an overall subsidy level
Policy.”
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 al owable costs, are provided for
enrollees whose costs exceed the annual out-
of-pocket threshold ($4,550 in 2010).
Beneficiary
Beneficiary premiums represent on average
Beneficiary premiums are calculated annually by
Beneficiary premiums were recalculated for the
Premiums
25.5% of the cost of the basic benefit. A base
the method described under “General Payment
2010 plan year. The base beneficiary premium
beneficiary premium is calculated based on the
Policy.”
for 2010 is $31.94. (Actual premiums paid by
national average monthly bid amount for basic
individual beneficiaries vary from one Part D
coverage. This amount is then adjusted, up or
plan to another.)
down as appropriate, to reflect differences
between the plan’s standardized bid amount
and the 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
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Provider/service
General payment policy
General update policy
Recent update
(except those entitled to a low income subsidy).
Risk corridors
The federal government and plans share the
In 2006 and 2007, plans were at ful risk for
The 2010 risk corridors are modified, as
risk for costs within specified “risk
costs within 2.5% above or below the target. If
described under “General Update Policy.”
corridors.”Risk corridors” are specified
costs were between 2.5% and 5% above the
percentages for costs above and below a target
target, they were at risk for 25% of spending
amount; the target amount is defined as total
between 2.5% and 5% of the target and 20% of
payments paid to the plan taking into account
spending above that amount. If plans fell below
the amount paid to the plan by the government
the target, they have to refund 75% of the
and enrollees.
savings if costs fal between 2.5% and 5% below
the target and 80% of any amounts below 5% of
the target. For 2008-2011, risk corridors are
modified. Plans are at full risk for spending
within 5% above or below the target. They are
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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Medicare Payment Policies



Author Contact Information

Paulette C. Morgan, Coordinator
Mark Newsom
Specialist in Health Care Financing
Analyst in Health Care Financing
pcmorgan@crs.loc.gov, 7-7317
mnewsom@crs.loc.gov, 7-1686
Patricia A. Davis
Julie Stone
Specialist in Health Care Financing
Specialist in Health Care Financing
pdavis@crs.loc.gov, 7-7362
jstone@crs.loc.gov, 7-1386
Barbara English
Sibyl Tilson
Information Research Specialist
Specialist in Health Care Financing
benglish@crs.loc.gov, 7-1927
stilson@crs.loc.gov, 7-7368
Jim Hahn

Analyst in Health Care Financing
jhahn@crs.loc.gov, 7-4914


Congressional Research Service
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