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
Specialist in Health Care Financing
Mark Newsom
Specialist in Health Care Financing
Sibyl Tilson
Specialist in Health Care Financing
December 29, 2010
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown above, for inclusion in its 2011 Green Book website. CRS works
exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of
both the House and Senate, regardless of party affiliation.
Congressional Research Service
RL30526
CRS Report for Congress
Pr
epared for Members and Committees of Congress

---

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, is optional and 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); 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); and the Medicare and Medicaid Extenders
Act of 2010 (P.L. 111-309) 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.

Congressional Research Service

---

Medicare Payment Policies

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 ............................................................................................................................................. 18
Parts A and B ................................................................................................................................. 37
Part C ............................................................................................................................................. 41
Part D............................................................................................................................................. 44

Tables
Table 1. Inpatient Prospective Payment System (IPPS) for Short-term, General Hospitals............ 6
Table 2. Hospitals Receiving Special Consideration Under Medicare’s IPPS............................... 10
Table 3. IPPS-Exempt Hospitals and Distinct Part Units .............................................................. 12
Table 4. Skilled Nursing Facility (SNF) Care................................................................................ 16
Table 5. Hospice Care.................................................................................................................... 17
Table 6. Physicians ........................................................................................................................ 18
Table 7. Nonphysician Practitioners .............................................................................................. 19
Table 8. Clinical Diagnostic Laboratory Services ......................................................................... 22
Table 9. Preventive Services.......................................................................................................... 23
Table 10. Telehealth ....................................................................................................................... 25
Table 11. Durable Medical Equipment (DME).............................................................................. 26
Table 12. Prosthetics and Orthotics ............................................................................................... 27
Table 13. Surgical Dressings.......................................................................................................... 27
Table 14. Parenteral and Enteral Nutrition (PEN) ......................................................................... 28
Table 15. Miscellaneous Items and Services ................................................................................. 28
Table 16. Ambulatory Surgical Centers (ASCs) ............................................................................ 29
Table 17. Hospital Outpatient Services.......................................................................................... 30
Table 18. Rural Health Clinics and Federally Qualified Health Center (FQHCs) Services .......... 32
Table 19. Comprehensive Outpatient Rehabilitation Facility (CORF).......................................... 32
Table 20. Part B Drugs and Biologicals Covered Incident to a Physician’s Visit.......................... 33
Table 21. Blood.............................................................................................................................. 34
Congressional Research Service

---

Medicare Payment Policies

Table 22. Partial Hospitalization Services Connected to Treatment of Mental Illness.................. 34
Table 23. Ambulance Services....................................................................................................... 35
Table 24. Home Health .................................................................................................................. 37
Table 25. End-Stage Renal Disease Dialysis Services................................................................... 39
Table 26. Managed Care Organizations......................................................................................... 41
Table 27. Outpatient Prescription Drug Coverage......................................................................... 44

Acknowledgments ......................................................................................................................... 47

Congressional Research Service

---

Medicare Payment Policies

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 beyond the rebid of the first round was delayed by two years until 2011.
See CRS Report R41211, Medicare Durable Medical Equipment: The Competitive Bidding Program.
Congressional Research Service
1

---

Medicare Payment Policies

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 $96.40 to $369.10 in
2011, depending on the beneficiary’s income, a $162 deductible in 2011 (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.
6 In 2011, for each spell of illness, a beneficiary deductible is $1,132 to cover day 1 through 60 in a hospital. The daily
coinsurance charge is $283 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 $566.
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, Interactions Between the Social Security COLA and 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.
Congressional Research Service
2

---

Medicare Payment Policies

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 legislative attention, 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.10
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.11)

10 Total Medicare spending is a function of utilization and price. A Government Accountability Office (GAO) study
found that while Medicare prices increased slowly over the time period of the study, utilization increased significantly,
driving up total program costs. See U.S. Government Accountability Office, Medicare Physician Payments: Trends in
Service Utilization, Spending, and Fees Prompt Consideration of Alternative Payment Approaches, GAO-06-1008T,
July 25, 2006.
11 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,
(continued...)
Congressional Research Service
3

---

Medicare Payment Policies

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)
payment updates,12 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 their 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.”13
In addition, PPACA created an Independent Payment Advisory Board (IPAB), and charged it with
developing proposals to “reduce the per capita rate of growth in Medicare” if spending goes
above targets specified in the statute. However, unlike other agencies that advise Congress,
IPAB’s recommendations are automatically implemented unless Congress acts. Congress can alter
the Board’s proposals, within limitations, or discontinue the automatic implementation of
proposals.14 The Board will be appointed by the President in consultation with congressional
leadership and with the advice and consent of the Senate. It will submit its first set of
recommendations to the President and to Congress, if required, by January 15, 2014.15
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.16 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).17 Further adjustments were made by the Medicare, Medicaid, and SCHIP

(...continued)
see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA): Summary
and Timeline.
12 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.
13 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.
14 The Board, at various times, will also develop advisory reports on the Medicare program and on ways to slow the
growth of national health expenditures; these advisory reports are not automatically implemented.
15 For more information, see CRS Report R41511, The Independent Payment Advisory Board.
16 For more information, see CRS Report 97-802, Medicare Provisions in the Balanced Budget Act of 1997 (BBA 97,
P.L. 105-33).
17 For more information, see CRS Report RL30347, Medicare: Changes to Balanced Budget Act of 1997 (BBA 97, P.L.
105-33) Provisions.
Congressional Research Service
4

---

Medicare Payment Policies

Benefits Improvement and Protection Act (BIPA), part of the larger Consolidated Appropriations
Act, 2001 (P.L. 106-554).18 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)19 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)20; 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)21; and the Medicare Improvements for Patients and Providers Act
of 2008 (P.L. 110-275, MIPPA)22; 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);23 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);24 and the Medicare
and Medicaid Extenders Act of 2010 (P.L. 111-309).
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
December 2010. This report will be updated when additional information is available.

18 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).
19 For more information, see CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003.
20 For more information, see CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and SCHIP
Provisions in the Deficit Reduction Act of 2005.
21 For more information, see CRS Report RL34360, P.L. 110-173: Provisions in the Medicare, Medicaid, and SCHIP
Extension Act of 2007.
22 For more information, see CRS Report RL34592, P.L. 110-275: The Medicare Improvements for Patients and
Providers Act of 2008.
23 For more information, see CRS Report R40181, Selected Health Funding in the American Recovery and
Reinvestment Act of 2009.
24 For more information, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care
Act (PPACA): Summary and Timeline.
Congressional Research Service
5

---

Medicare Payment Policies
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, in
required quality data received an update of
hospitals (Operating
costs is calculated using a national standardized
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 create
reduced update of -0.15%. The national
depends on the relative resource use associated
one unit of output. The update for operating IPPS is
standardized amount for these hospitals was
with the diagnosis related group (DRG) to which
established by statute. Under DRA, hospitals that
$5,111.64.
the patient is assigned. A new Medicare Severity
do not submit required quality data in FY2007 and
DRG (MS-DRG) patient classification system is
each subsequent year will have the applicable MB
For FY2011, hospitals that submitted the
being phased in starting in FY2008. Medicare
percentage reduced by two percentage points. Any
required quality data receive the full MB
pays additional amounts for cases with
MB reduction does not apply when computing the
increase of 2.6% (which was subject to a 2.9%
extraordinary costs (outliers); indirect medical
applicable percentage increase in subsequent years.
reduction to account for coding
education (IME) (see below); and for hospitals
The update penalty for not reporting quality data
improvements). The national standardized
serving a disproportionate share (DSH) of low-
will end in FY2012. In its FY2008 rule, CMS
amount for these hospitals is $5,164.11.
income patients (see below). IME and DSH
established prospective budget neutrality
Hospitals that did not submit the quality data
payments are made through adjustments within
adjustments of -1.2% in FY2008, -1.8% in FY2009
receive a reduced update of 0.6% (which was
IPPS so that hospitals receive more money for
and -1.8% in FY2010 because of anticipated
also subject to a 2.9% reduction to account for
each Medicare discharge. Low volume hospitals
increases in measured severity of illness
coding improvements.)The national
receive additional payments as well. The low
attributable to coding changes or documentation
standardized amount for these hospitals is
volume adjustment has been increased for
improvements (coding creep) associated with the
$5,063.21.
FY2011 and FY2012. Additional payments may
new MS-DRGs. P.L. 110-90 reduced the adjustment
Both standardized amounts are lower in
be made for cases that involve qualified new
to 0.6% in FY2008 and 0.9% in FY2009, but permits
FY2011 than in FY2010.
technologies that have been approved for special
offsets to IPPS rate increases in FY2010, FY2011,
add-on payments. Hospitals in Hawaii and Alaska
and FY2012 to account for coding creep increases
receive a cost-of-living adjustment (COLA).
in FY2008 and FY2009 above these amounts. The
Certain hospitals in low cost areas will receive a
law did not address the scheduled adjustment of an
share of $400 million in FY2011 and FY2012.
additional 1.8% decrease in FY2010 However, in
Certain services are reimbursed outside of IPPS.
FY2010, CMS did not adjust the update for coding
improvements. In FY2011, CMS estimates that an
CRS-6

---

Provider/service
General payment policy
General update policy
Recent update
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 in
The capital IPPS update for FY2010 was 1.2%.
short-term general
its operating IPPS for short-term general
statute. Capital rates are updated annually by the
After adjustments, the FY2010 capital federal
hospitals (Capital
hospitals. A hospital’s capital payment is based
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 changes
2010.
rate, depends on the DRG to which the patient
in the prices associated with capital-related costs as
is assigned, and is adjusted by a hospital’s
measured by the capital input price index (CIPI)
The capital IPPS update for FY2011 is 1.5%,
geographic adjustment factor (which is calculated
and other policy factors, including changes in case
which reflects an estimated increase in the CIPI
from the hospital’s wage index data). Capital
mix intensity, errors in previous CIPI forecasts,
of 1.2% and a forecast error correction of 0.3%.
IPPS includes an IME and DSH adjustment (see
DRG recalibration, and DRG reclassification. Other
After applying other adjustments including a
below). Starting in FY2008, the IME adjustment
adjustments include those that implement budget
coding improvement reduction, the FY2011
will be phased out over a 3-year period.
neutrality with respect to recalibration of DRGs,
federal capital rate is $420.01, which is lower
Additional payments are made for outliers (cases
documentation and coding changes resulting from
than the FY2010 rate.
with significantly higher costs above a certain
the switch to MS-DRGs that do not reflect real
threshold). Certain hospitals may also qualify for
changes in patient severity of illness, real outlier
additional payments under an exceptions
payments, changes in the geographic adjustment
process. A new hospital is paid 85% of its
factor, and exception payments. In FY2011, the
al owable Medicare inpatient hospital capital-
capital update increase was reduced by 2.9% to
related costs for its first two years of operation.
account for coding improvements.
CRS-7

---

Provider/service
General payment policy
General update policy
Recent update
Disproportionate
Approximately 2,800 hospitals receive the
No specific update. The amount of DSH spending
CBO estimates DSH spending (in both
share hospital
additional payments for each Medicare discharge
in any year is open-ended and varies by the number
operating and capital IPPS) at $10.4 billion in
(DSH) adjustment
based on a formula which incorporates the
of Medicare discharges as well as the type of
FY2009 and $10.8 billion in FY2010 (August
number of patient days provided to low-income
patient seen in any given hospital.
2010 baseline).
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.
Indirect Medical
The indirect medical education (IME) adjustment
The IME adjustment is not subject to an annual
No specific update. The amount spent on IME
Education (IME)
is one of two types of payments to teaching
update. BBA 97 reduced the IME adjustment in
depends in part on the number of Medicare
adjustment
hospitals for graduate medical education (GME)
operating IPPS from a 7.7% increase for each 10%
discharges in teaching hospitals in any given
costs (see also direct GME below). Medicare
increase in a hospital’s ratio of interns to beds
year. CBO estimates the IME payments (for
increases both its operating and capital IPPS
(IRB), a measure of teaching intensity in operating
both capital and operating IPPS) to be about
payments to teaching hospitals; different
IPPS; by FY2001, the IME adjustment was to be
$6.2 billion in FY2009 and $6.3 billion in
measures of teaching intensity are used in the
5.5%. However, the scheduled decreases were
FY2010 (August 2010 baseline).
operating and capital IPPS. For both IPPS
delayed by subsequent legislation. As established by
payments, however, the number of medical
MMA, the IME adjustment was set at 5.5% in
residents who can be counted for the IME
FY2008 and subsequently.
adjustment is capped, based on the number of
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 by
Hospitals below 140% of the national average
medical education
paid outside of the DRG payment on the basis of
the increase in the consumer price index for all
from FY2004-FY2013 receive an update of CPI-
(direct GME)
updated hospital-specific costs per resident
urban consumers (CPI-U). As established by BBRA
U. Hospitals above 140% of the national
payments
amount (PRA), the number of weighted full-time
and subsequently amended, however, the update
average for that time period wil receive no
equivalent (FTE) residents, and Medicare’s share
amount that any hospital receives depends upon
update. CBO estimates direct GME payments
CRS-8

---

Provider/service
General payment policy
General update policy
Recent update
of total patient days in the hospital (including
the relationship of its PRA to the national average
of $3.1 billion in FY2009 and 3.2 billion in
those days attributed to Medicare manged care
PRA. Hospitals with PRAs below the floor (85% of
FY2010 (August 2010 baseline).
enrol ees). There is a hospital-specific cap on the
the locality-adjusted, updated, and weighted
number of residents in the hospital for direct
national PRA) are raised to the floor amount.
GME payments. Also, the hospital’s FTE count is
Teaching hospitals with PRAs above the ceiling
based on a three-year rolling average; a specific
amount (140% of the national average, adjusted for
resident may count as half of a FTE, depending
geographic location) wil receive a lower update
on the number of years spent as a resident and
than other hospitals (CPI-U minus two percentage
the length of the initial training associated with
points) for FY2003-FY2013. Hospitals that have
the specialty. Certain combined primary care
PRAs between the floor and ceiling receive the
residency programs receive special recognition
CPI-U as an update amount.
in this count. In certain circumstances, irect
GME payments can be made to nonhospital
providers.
CRS-9

---

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 fol owing
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: the
“applicable percentage increase” which is
2010, hospitals that submitted the required
facilities located in
current IPPS base payment rate, or its hospital-
specified by statute and is often comparable to
quality data received an update of 1.85%.
geographically isolated
specific per-discharge costs from either FY1982,
the IPPS update. (See description for IPPS
Hospitals that did not submit the quality data
areas and deemed to
1987, or 1996, updated to the current year.
hospitals).
received a reduced update of -0.15%.
be the sole provider
Under MIPPA, for cost reporting periods
of inpatient acute care
beginning on or after January 1, 2009, an SCH will
For FY2011, hospitals that submitted the
hospital services in a
be able to elect payment based on its FY2006
required quality data receive the full MB
geographic area based
hospital-specific payment amount per discharge.
increase of 2.6% (which was subject to a 2.9%
on distance, travel
This amount will be increased by the annual
reduction to account for coding
time, severe weather
update starting for discharges on or after January
improvements.) Hospitals that did not submit
conditions, and/or
1, 2009. An SCH may receive additional payments
the quality data receive a reduced update of
market share as
if the hospital experiences a decrease of more
0.6% (which was also subject to a 2.9%
established by specific
than 5% in its total inpatient cases due to
reduction to account for coding
criteria set forth in
circumstances beyond its control. An SCH
improvements.)
regulation (42 CFR
receives special consideration for reclassification
412.92).
into a different area. Starting for 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 all IPPS hospitals.
small 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 proportion
for the MDH classification was subsequently
the IPPS update.
hospital-specific rate applicable to an MDH.
of patients who are
extended to September 30, 2011 by DRA. Until
Medicare beneficiaries
October 1, 2006, an MDH was paid the federal
For FY2010, starting for discharges on April 1,
(have at least 60% of
rate plus 50% of the amount that the rate is
2010, hospitals that submitted the required
acute inpatient days
exceeded by the hospital’s target amount based
quality data received an update of 1.85%.
or discharges
on either its updated FY1982 or FY1987 cost per
Hospitals that did not submit the quality data
attributable to
discharge. DRA provided that an MDH would be
received a reduced update of -0.15%.
Medicare in FY1987
able to elect payments based on using a
For FY2011, hospitals that submitted the
or in two of the three
percentage of its FY2002 hospital-specific cost
required quality data receive the full MB
most recently audited
starting October 1, 2006. An MDH’s payments
increase of 2.6% (which was subject to a 2.9%
cost reporting
would be based on 75% of the adjusted hospital-
reduction to account for coding
periods). As specified
specific cost starting for discharges on October 1,
improvements.) Hospitals that did not submit
in regulation (42 CFR
2006. DRA also excluded MDHs from the 12%
the quality data receive a reduced update of
412.108), they cannot
DSH adjustment cap for discharges starting
0.6% (which was also subject to a 2.9%
be an SCH and must
October 1, 2006. An MDH may receive additional
reduction to account for coding
have 100 or fewer
payments if its inpatient cases decline more than
improvements).
beds.
5% due to circumstances beyond its control.
CRS-10

---

Provider/service
General payment policy
General update policy
Recent update
Rural Referral
RRCs payments are based on the IPPS for short-
RRCs receive the operating and capital IPPS
See updates specified for operating and capital
Centers (RRCs)—
term general hospitals. RRCs are exempt from
updates specified for short-term general
IPPS for short-term general hospitals.
relatively large
the 12% DSH adjustment cap. Also, RRCs receive
hospitals.
hospitals, generally in
preferential consideration for reclassification to a
rural areas, that
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).

CRS-11

---

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
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
CRS-12

---

Provider/service
General payment policy
General update policy
Recent update
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
and meet certain
are based on reweighted IPPS MS-DRGs.
policies, including payments for short stay
In RY2011 (starting October 1, 2010) the
facility criteria
Payments for specific patients may be increased
outliers or the one-time adjustment to LTCH
LTCH federal payment rate was increased by a
established by
or reduced because of case-level adjustments,
prospective payments to ensure budget
2.5% MB update subject to 2.5% reduction for
MMSEA.
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
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.
providing, by or
the IPF-PPS incorporates patient-level
market basket (RPL-MB) The IPF-PPS payments
under the
adjustments for specified DRGs, selected
must be projected to equal the amount of total
The RPL-MB update for RY2011 is 2.4%,
supervision of a
comorbidies, and in certain cases, age of the
payments that would have been made under the
reduced by the PPACA offset of 0.25
psychiatrist,
patient. Facility-level adjustments for relative
prior payment system. The initial calculation of
percentage points and a wage index budget
psychiatric services
wages, teaching status and rural location are
the per diem payment included a 17.46%
neutrality offset of 0.9999. The federal base
for the diagnosis and
also included. IPFs in Hawaii and Alaska will
reduction to account for standardization to
payment is $665.71 per day.
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
CRS-13

---

Provider/service
General payment policy
General update policy
Recent update
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 wel 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
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

---

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

---

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 FY2011, 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
According to the FY2010 CMS Final SNF rule,
costs are excluded from PPS and paid
estimated MB update and the actual increase is
the SNF RUG-III methodology was to be
separately such as physician visits, dialysis and
greater than 0.5 percentage points, payments to
replaced with a revised RUG-IV methodology.
certain high cost prosthetics and orthotics.
SNFs are updated to account for this forecast
error. When the difference is less than 0.5
And, the Minimum Data Set (MDS) 2.0 patient
percentage points, no adjustments are made.
assessment tool, used to calculate RUG
The case-mix adjustment to the base per diem
categories, among other things, is replaced with
rate adjusts payments for the treatment and
the MDS 3.0 system on October 1, 2010.
care needs of Medicare beneficiaries and
For FY2011, SNFs will receive the full MB
PPACA delayed the implementation of this
categorizes individuals into groups called
update.
revised RUG-IV methodology until FY2011. To
resource utilization groups (RUGs). The
accommodate this delay, the SNF PPS Notice
RUGs system uses patient assessments to
Starting in FY2012, all SNF MB updates will be
for FY2011 described CMS’ plan to implement
assign a beneficiary to one of 53 categories and
subject to the productivity adjustment.
interim payment rates to reflect the use of MDS
to determine the payment for the beneficiary’s
3.0 and a hybrid RUG-III system that would
care. Patient assessments are done at various
incorporate certain RUG-IV’ revisions in
times during a patient’s stay and their RUG may
concurrent therapy and a change to the look-
change. The federal payment is also adjusted to
back period. The Medicare and Medicaid
account for variations in area wages, using the
Extenders Act of 2010 (P.L. 111-309) repealed
hospital wage index.
this delay. As a result, the RUG-IV methodology
will likely be implemented as soon as possible.
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-16

---

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 full MB update. For FY2013, the
$142.91 per day; continuous home care—
prospectively determined rates which
MB update will be reduced by 0.3% and
$834.10 for 24 hours or $34.75 per hour;
correspond to four different levels of care (i.e.,
adjusted by the productivity factor. For FY2014
inpatient respite care—$147.83 per day; and
routine home care, continuous home care,
– FY2019, a 0.3% reduction to the MB will be
general inpatient 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 updated by
care of the hospice.
insured population for 2009. Only if the level of
the MB of 2.6%. This update was affected by the
non-elderly insured population is 5 or fewer
BNAF reduction of 15% in FY2011. The
The hospice wage index is used to adjust
percentage points above the projections will
payment rates are as follows: routine home
payment rates to reflect local differences in
the MB be reduced by 0.3%.
care—$146.82 per day; continuous home
area wage levels. This index is established using
care—$856.12 for 24 hours or $35.67 per
the most current hospital wage data available.
The hospice wage index is updated to reflect
hour; inpatient respite care—$159.65 per day;
updates in the hospital wage index and any
Total payments to a hospice are subject to an
and general inpatient care—$652.27 per day.
changes to the definition of Metropolitan
aggregate cap that is determined by multiplying
Statistical Areas (MSAs). In 1997, a hospice
The latest hospice cap amount for the cap year
the cap amount for a given year by the number
wage index budget neutrality adjustment
November 1, 2009, through October 31, 2010,
of Medicare beneficiaries who receive hospice
factor (BNAF) was instituted to account for
is an aggregated $23,874.98 per beneficiary. For
services during the year. Medicare payments to
differences in hospice payments as a result of a
the year ending on October 31, 2009, it was an
hospices that exceed this amount must be
change in the data source used to adjust for
aggregated $23,014.50 per beneficiary.
returned to the Medicare program. There is
geographic differences in labor from the 1983
about a two-year lag between the time the
Bureau of Labor Statistics data to the hospital
hospice is paid and the time the hospice is billed
wage index. The final rule for FY2010 phases-
for a refund. The lag is likely a result of the time
out the BNAF over 7 years. As a result, the
to collect and process the spending and
BNAF was reduced by 10 percent in FY2010,
beneficiary data needed to make these
and will be reduced by an additional15 percent
calculations.
each year from FY2011 through FY2016.
Not earlier than October 1, 2013, PPACA
The hospice cap amount is increased or
requires the Secretary to implement budget
decreased annually by the same percentage as
neutral revisions to the methodology for
the medical care expenditure category of the
determining hospice payments for routine care
CPI-U.
and other services.
CRS-17

---

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 differences in the
which measures inflation) subject to an
the SGR formula. For January 1 through May
physician work (based on time, skill, and
adjustment to match spending under the
31, 2010, the update to the conversion factor
intensity involved), practice expenses (including
cumulative sustainable growth rate (SGR)
was set to 0% as a result of three separate acts.
the cost of nurses and other staff), and
system. (The SGR is linked, in part, to changes
For the six months from June 1 through
malpractice expenses required to produce the
in the gross domestic product per capita.) The
November 30, 2010, the update to the
service. The relative values are adjusted for
adjustment sets the conversion factor so that
conversion factor was 2.2%. The most recent
geographic variations in the costs of practicing
projected spending for the year will equal
action extends the 2.2% increase through
medicine. These geographically adjusted relative
allowed spending by the end of the year.
December 31, 2011.
values are converted into a dollar payment
Application of the SGR system led to a 5.4%
amount by a conversion factor. Assistants-at-
reduction in the conversion factor in 2002.
PPACA included several modifications to
surgery services (provided by physicians) are
Additional reductions were slated to take effect
Medicare physician reimbursement, including
paid 16% of the fee schedule amount.
in subsequent years. However, P.L. 108-7
bonus payments for primary care services and
allowed for revisions in previous estimates used
for successfully reporting quality measures as
Anesthesia services are paid under a separate
for the SGR calculation, thereby permitting an
well as many adjustments to the methodologies
fee schedule (based on base and time units)
update of 1.6% effective March 1, 2003. MMA
for calculating payments. (See CRS report on
with a separate conversion factor.
provided that the update to the conversion
Medicare and PPACA for details).
Medicare payments for most professional
factor for 2004 and 2005 could not be less than
For many years, prior to the passage of MIPPA,
services equal 80% of the fee schedule amount;
1.5%. DRA froze the 2006 rate at the 2005
beneficiary payments for outpatient mental
patients are liable for the remaining 20%.
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 during calendar year 2011,
through the end of 2008 and provided for a
beneficiaries pay 45% 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. A 5% add-on payment for
however, several of the bills that have averted
certain Medicare mental health services will also
the SGR reductions have included language that
be paid through December 31, 2011.
has overridden this condition.
CRS-18

---

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-19

---

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 CY2011 limits are $1,870.
services
Medicare coverage for outpatient therapy
to be increased by the increase in the MEI
services, including physical therapy, speech-
The Medicare and Medicaid Extenders Act of,
beginning in 2002; however, application of the
language pathology services, and occupational
2010 (P.L. 111-309) extended the exceptions
limits was suspended until September 1, 2003.
therapy have limits or “caps.” To accommodate
process through December 31, 2011.
At that time the limits were $1,590. MMA
patients with therapy needs that exceed the
suspended the application of the limits
cap, Congress created an exceptions process
beginning December 8, 2003-December 31,
that allows for specific diagnoses and
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, the 2009 limits were
occupational therapy services except for those
$1,840, and the 2010 limits were $1,860.
furnished by hospital outpatient departments.
CRS-20

---

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.

CRS-21

---

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 annual y by the
2003. Per MMA, no update was made for
amounts are periodically 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% and for 2010, the update
the median of all fee schedules for the test.
appropriate. Updates were eliminated for 1998
was -1.9%. The update for 2011 is -1.75%.
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 full
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.

CRS-22

---

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. The
exams
screening pelvic exams once every two years;
minimum payment amount applies for pap
minimum payment for pap smears in 2011 is
annual coverage is authorized for women at
smears.
$14.87, down from $15.13 in 2010.
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 annually);
(2) screening flexible sigmoidoscopy (for
persons over 50, no more than once every four
years and 10 years after a screening
colonoscopy for those not at high risk for colon
cancer); (3) screening flexible colonoscopy for
high-risk individuals (limited to one every two
years) and for those not at high risk, every 10
years or four years after a screening
sigmoidoscopy; and (4) barium enemas (as an
alternative to either a screening flexible
sigmoidoscopy or screening colonoscopy in
accordance with the same screening parameters
established for those tests).
Payments are based on rates paid for the same
procedure when done for a diagnostic purpose.
Fecal occult blood tests are paid under the
laboratory fee schedule; other tests are paid
under physician fee schedule. If a sigmoidoscopy
or colonoscopy results in a biopsy or removal
of a lesion, it would be classified and paid as the
procedure with such biopsy or removal, rather
than as a diagnostic test. Assignment is
mandatory for fecal occult blood tests and no
CRS-23

---

Provider/service
General payment policy
General update policy
Recent update
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.
CRS-24

---

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.)

CRS-25

---

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
local y 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 fee
is equal to 85% of the weighted average of all
accessories; negative pressure wound therapy
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, all 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 was -1.4%, however Medicare
winning suppliers. Competitive acquisition was
set the update at 0.0%.
to begin in 10 metropolitan statistical areas
The update for CY2011 is -0.1% (or a 0.1%
(MSAs) in 2007, expanding to 80 MSAs in 2008,
reduction). This represents a 1.1% increase in
and additional areas in 2009. The first round of
the CPI-U for the applicable period and a
bids were submitted on September 25, 2007,
negative multifactor productivity adjustment of
and the program began on July 1, 2008.
1.2%.
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-26

---

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 annual y 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 was -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
The update for CY2011 is -0.1% (or a 0.1%
limits do not apply on non-assigned claims.
reduction). This represents a 1.1% increase in
Regular Part B cost sharing applies.
the CPI-U for the applicable period and a
negative multifactor productivity adjustment of
1.2%.
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 was -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.
The update for CY2011 is -0.1% (or a 0.1%
reduction). This represents a 1.1% increase in
the CPI-U for the applicable period and a
negative multifactor productivity adjustment of
1.2%.
CRS-27

---

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 annual y 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 Miscellaneous
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 was -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
The update for CY2011 is -0.1% (or a 0.1%
reasonable charge system. Assignment is
schedule reduction in CY2009. Parenteral
reduction). This represents a 1.1% increase in
optional; balance billing limits do not apply on
nutrition was not included in round 1.
the CPI-U for the applicable period and a
non-assigned claims. Regular Part B cost sharing
Starting in 2011 PPACA requires the fee
negative multifactor productivity adjustment of
applies.
schedule update for parenteral and enteral
1.2%.
nutrition to be subject to a productivity
adjustment, which may result in a negative
update.
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
and certain intraocular lenses. These charges
charges may not be higher than 75% of the
CY2009 update was 5.0%. For the CY2010
may not exceed any of the fol owing fee
customary charges made for similar items and
update, the CPI-U for the applicable period was
screens: (1) the supplier’s customary charge for
services in the locality during the 12-month
-1.4%, however Medicare set the update at
the item, (2) the prevailing charge for the item
period of July 1- June 30 of the previous
0.0%.
in the locality, (3) the charges made to the
calendar year. The inflation-indexed charge is
carrier’s policyholders or subscribers for
updated by the CPI-U.
For CY2011, the update to the inflation-index
comparable items, (4) the inflation-indexed
charge is 1.1%.
charge. Assignment is optional; balance billing
limits do not apply on non-assigned claims.
Regular Part B cost sharing applies.
CRS-28

---

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
The CY2010 update of 1.2% was subject to a
Centers (ASCs)
surgery-related facility services provided in an
FY2005 under the prior payment system,
wage index budget neutrality adjustment of
ASC using a payment system based on the
changed the update cycle to a calendar year
0.9996. The CY2010 ASC conversion factor
hospital outpatient prospective payment system
from a fiscal year, and eliminated the updates
was $41.873.
(OPPS). The new payment system will be
for calendar years 2006-2009. MMA also
implemented over a four-year transition period.
established that a revised payment system for
The CY2011 update of 1.5% is subject to a
The ASC payment system uses the same
surgical services furnished in an ASC wil be
multifactor productivity adjustment of 1.3
payment groups (APCs) as the OPPS. Many of
implemented on or after January 1, 2006, and
percentage points and a wage index budget
the ASC relative weights procedures will be the
not later than January 1, 2008. Total payments
neutrality factor of 0.9996. The CY2011 ASC
same as in OPPS. Certain services will be
under the new system were established as
conversion factor is established at $41.923.
eligible for separate payments. The relative
equal to the total projected payments under
weights will be multiplied by a conversion factor
the old system. As established by the TRHCA,
(average payment amount) to get a payment for
starting in CY2009, the annual increase for
a specific procedure. The ASC conversion
ASCs that do not submit required quality data
factor is based on a percentage of the OPPS
may be the required update minus 2 percentage
conversion factor set to ensure budget
points. The reduction for not submitting quality
neutrality between the old ASC payment
data would apply for the applicable year only,
system and the new one. CMS uses different
and not for 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) taken to the midpoint of the year
involved. The ASC update will include a
productivity adjustment starting January 1,
2011.

CRS-29

---

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 CY2010, the MB update was 2.1% which,
Departments
August 2000, the unit of payment is the
year schedule. These annual updates are based
as directed by PPACA, was reduced by 0.25
(HOPDs)
individual service or procedure as assigned to
on the hospital IPPS MB. As established by
percentage points to result in an increase in
one of about 570 ambulatory payment
TRHCA, starting in CY2009, the update for
1.85%. Hospitals that did not submit required
classifications (APCs). To the extent possible,
hospitals that do not submit required quality
quality data received a negative 0.15% update.
integral services and items are bundled within
data will be the MB minus 2 percentage points.
This increase was adjusted by the required
each APC, specified new technologies are
The reduction for not submitting quality data
budget neutrality factors for wage index
assigned to new technology APCs until clinical
would apply for the applicable year, and would
changes and pass-through expenses. The
and cost data is available to permit assignment
not be taken into account in subsequent years.
CY2010 conversion factor was $67.241 for
into a clinical APC. Medicare’s payment for
PPACA established a schedule of annual
hospitals that submit required quality data and
HOPD services is calculated by multiplying the
reductions in the update for starting CY2010
$65.921 for hospitals that did not submit this
relative weight associated with an APC by a
through CY2019. The CY2010 update
data. (The prior year’s update penalty for not
conversion factor. For most APCs, 60% of the
reduction is 0.25 percentage points. The
submitting quality data is not taken into
conversion factor is geographically adjusted by
update will include a productivity adjustment
account in the next year.)
the IPPS wage index. Except for new technology
starting January 1, 2012. The PPACA update
APCs, each APC has a relative weight that is
reductions may result in a negative update for
For CY2011, the MB update is 2.6% which, as
based on the median cost of services in that
that year.
directed by PPACA, is reduced by 0.25
APC. Certain APCs with significant fluctuations
percentage points to result in an increase of
in their relative weights will have the calculated
2.35%. Hospitals that fail to submit the required
change dampened. The HOPD-PPS also includes
quality data receive an update of 1.35%. This
budget-neutral pass-through payments for new
increase is adjusted by budget-neutrality factors
technology and budget-neutral outlier
associated with wage index changes and pass
payments. Cancer and children’s hospitals have
through expenses. The final CY2011
a permanent hold harmless protection from the
conversion factor for hospitals that did submit
HOPD-PPS. HOPDs in rural hospitals with 100
the required quality data is $68.876 and is
or fewer beds (that are not SCHs) will receive
$68.530 for those that did not submit the
at least 85% of the payment it would have
required data.
received under the prior payment system
during CY2011. 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 CY2011.
Over time, under Medicare’s prior payment
system, beneficiaries’ share of total outpatient
payments grew to 50%. HOPD-PPS slowly
reduces the beneficiary’s copayment for these
services. Copayments will be frozen at 20% of
the national median charge for the service in
1996, updated to 1999. Over time, as PPS
CRS-30

---

Provider/service
General payment policy
General update policy
Recent update
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.

CRS-31

---

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 CY2010, the RHC upper payment limit
(RHCs) and Federally
all-inclusive rate for each beneficiary visit for
year by the Medicare economic index (MEI)
was $77.76, the urban FQHC limit was
Qualified Health
covered services. An interim payment is made
which measures inflation for certain medical
$125.72, and the rural FQHC limit was
Center (FQHCs)
to the RHC or FQHC based on estimates of
services.
$108.81.
services
allowable costs and number of visits; a
reconciliation is made at the end of the year
PPACA provided for the development and
For CY2011, the RHC upper payment limit is
based on actual costs and visits. Per-visit
implementation of a prospective payment
$77.99, the urban FQHC limit is $126.10, and
payment limits are established for all RHCs
system (PPS) for Medicare FQHCs to be
the rural FQHC limit is $109.14.
(other than those in hospitals with fewer than
implemented in 2014. The PPS for Medicare
50 beds) and FHQCs. Assignment is mandatory;
payments to FQHCs will eliminate the
no deductible applies for FHQC services.
Medicare FQHC all-inclusive payment rate,
upper payment limits, and productivity
guidelines currently in effect.
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).


CRS-32

---

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 CMS, drug prices under ASP
including vaccines.
influenza, and hepatitis B vaccines, those
Payments under the ASP method may be
continue to be stable, with the majority (56%)
Medicare covers
associated with certain renal dialysis services,
lowered by the Secretary if the ASP exceeds
of the high volume drugs changing less than 2%
certain outpatient
blood products and clotting factors and
the widely available market price or average
between the 4th quarter of 2010 and the 1st
drugs and biologicals
radiopharmaceuticals, are paid using the average
manufacturer price by a specified percentage
quarter of 2011. Overall, the high volume drug
under the Part B
sales price (ASP) methodology. The ASP for all
(5% in 2006 to present, as determined by the
prices had an average increase of 0.7% for the
program that are
drug products included within the same billing
Secretary). In such cases, the payment would
1st quarter of 2011.
authorized by statute,
and payment code, usual y the Healthcare
equal the lesser of the widely available market
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. Some HHS OIG reports have found that
they are usual y not
manufacturer’s average sales prices reported to
the percentage has been exceeded for some
self-administered and
CMS across all the National Drug Codes
drugs and the Secretary has chosen not to
are provided incident
(NDCs) assigned to the code. Medicare’s
exercise the option of lowering the payment
to a physician’s
payment under the ASP methodology equals
rate for these drugs.
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 fol owing
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
On September 10, 2008, the Centers for
Medicare organ
through a competitive process using bidders’
Medicare & Medicaid Services announced the
transplants; (6)
prices, which use the ASP payment amounts as
postponement of CAP program due to their
hemophilia clotting
a ceiling. To date, BioScrip was the only bidder
inability to establish contracts with any qualified
factors; and (7)
to sign a contract under the CAP program,
bidders.
vaccines for influenza,
however the contract expired.
pneumonia, and
hepatitis B.

CRS-33

---

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 allowable 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.

CRS-34

---

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
In CY2010, the CPI-U for the applicable period
national fee schedule, which is being phased-in.
year by the CPI-U for the 12 month period
was -1.4%; Medicare set that the AIF for 2010
The fee schedule establishes seven categories of
ending in June. The update is referred to as the
at 0.0%.
ground ambulance services and two categories
ambulance inflation factor (AIF). Under PPACA,
In CY2011, the CPI-U for the applicable period
of air ambulance services. The ground
starting January 1, 2011, the AIF will be adjusted
is 1.1% which is subject to a multifactor
ambulance categories are: basic life support
by changes in economy wide productivity.
productivity adjustment of 1.2 percentage
(BLS), both emergency and nonemergency;
Specifically, the AIF wil be subject to a 10-year
points. Medicare set the AIF for CY2011 at
advanced life support Level 1 (ALS1), both
moving average of changes in annual economy
-0.1%
emergency and nonemergency; advanced life
wide private nonfarm business multifactor
support Level 2 (ALS2); specialty care transport
productivity.
(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, 2011, 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, 2011, 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 as
extended by PPACA (and subsequent
legislation) specifies that any area designated as
rural for the purposes of making payments for
CRS-35

---

Provider/service
General payment policy
General update policy
Recent update
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, 2011. Regular
Part B cost sharing applies. Assignment is
mandatory.

CRS-36

---

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 CY2010, the HH MB update is 2.0% for
prospective payment system that began in
standardized 60-day episode rate, is increased
HHAs that submit the required quality data and
FY2001. Payment is based on 60-day episodes
annual y by an update factor that is determined,
0% for HHAs that do not. The CY2010 base
of care for beneficiaries, subject to several
in part, by the projected increase in the HH
payment amounts for 60-day episodes 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 CY2011, the HH MB update is 1.1% for
equipment is not included in the home health
DRA specified that HHAs that submit health
HHAs that submit the required quality data and
(HH) PPS. The base payment amount is
care quality data, as specified by the Secretary,
-0.9% for those that do not. This update
adjusted for: (1) differences in area wages using
receive a full MB increase; while HHAs that do
reflects the home health market basket update
the hospital wage index; (2) differences in the
not submit such data receive an update
minus 1 percentage point, per PPACA. The
care needs of patients (case mix) using “home
equivalent to the MB minus 2 percentage
CY2011 base payment amounts for 60-day
health resource groups” (HHRGs); (3) outlier
points. This requirement was applicable for
episode will also be adjusted downward by
visits (for the extraordinarily costly patients);
CY2007 and each subsequent year.
3.79% as a result of case mix refinements.
(4) a significant change in a beneficiary’s
In CY2010, HHAs receive the full MB update.
For visits ending on or after April 1, 2010, and
condition (SCIC); (5) a partial episode for when
As specified in PPACA, the MB updates will be
before January 1, 2016, HHAs serving rural
a beneficiary transfers from one HHA to
reduced by 1.0% for al HHAs in CY2011
areas will receive a 3% add-on payment.
another during a 60-day episode; (6) budget
through CY2013. For CY2014, HHAs will
neutrality; and (7) a low utilization payment
receive the full MB. Starting in CY2015, the MB
adjustment (LUPA) for beneficiaries who
update will be subject to the productivity factor
receive four or fewer visits. There is no
adjustment.
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 fol owing an assessment of the
years (ending in CY2011) to account for
patient’s condition and care needs using the
changes in case mix that are not related to
Outcome and Assessment Information Set
home health patients’ actual clinical conditions;
(OASIS). After the assessment, a beneficiary is
among other things. This resulted in a payment
categorized in one of 80 HHRGs that reflect
downward for a 60-day episode of care of
the beneficiary’s clinical severity, functional
2.75% for CY2008 through CY2010, and 2.71%
status, and service requirements.
for CY2011.
Starting in CY2010, outlier payments are
According to PPACA, starting in CY2014, the
capped at 10% of total payments per HHA, and
Secretary is required to rebase HH payments
no more than 2.5% of total aggregate PPS
by a percentage considered appropriate by the
CRS-37

---

Provider/service
General payment policy
General update policy
Recent update
payments for all Medicare HH payments.
Secretary to, among other things, reflect the
number, mix and level of intensity of HH
HHAs are paid 60% of the case-mix and wage-
services in an episode, and the average cost of
adjusted payment after submitting a request for
providing care. Any adjustments that result
anticipated payment (RAP). The RAP may be
must be made before the annual payment
submitted at the beginning of a beneficiary’s
updates are applied for that year (see next
care once the HHA has received verbal orders
column regarding MB updates). A four-year
from the beneficiary’s physician and the
phase-in, ending in 2017, will be implemented,
assessment is completed. The remaining
in equal increments, each increment may not
payment is made when the beneficiary’s care is
exceed 3.5% of the HH PPS base payment
completed or the 60-day episode ends.
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.
CRS-38

---

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
The composite rate for dialysis services
disease (ESRD)
failure, that must be treated either with a
rate beginning January 1, 2005. Since April 1,
furnished in CY2010 increased by 1% over the
kidney transplant or by dialysis. Because of the
2005 the composite rate has been case-mixed
December 31, 2009 amount, resulting in a
scarcity of available kidneys for transplant,
adjusted, budget neutrally. The Secretary was
composite rate of $135.15 for both hospital-
dialysis is the treatment option for most ESRD
required to update the basic wage-adjusted
based and independent facilities services
beneficiaries. Dialysis treatment removed
case-mix payment amounts annual y beginning
furnished on or after January 1, 2010. The drug
excess fluid and toxins from the patient’s blood.
with 2006, but only for that portion of the case-
add-on adjustment for 2010 remained the same
Dialysis services involve several procedures and
mix adjusted system that is represented by the
as the 2009 adjustment, at $20.33 per
prescription drugs necessary to ful y treat
add-on adjustment and not for the portion
treatment. The wage index adjustment for 2010
ESRD.
represented by the composite rate.
reflects the latest available wage date, including
a revised budget neutrality adjustment of
Dialysis services are offered in three outpatient
MIPPA changed the payment increases for the
1.057888. The ESRD wage index floor was
settings: hospital-based facilities, independent
composite rate in 2009 and 2010.
reduced from .70 to .65.
facilities, and the patient’s home. MMA required
the Secretary to establish a basic case-mix
As required by MIPPA, estimated Medicare
The composite rate for CY2011 increased by
adjusted prospective payment system for
total dialysis payments for 2011 will equal 98%
2.5% to $138.53. This increase does not apply
dialysis services furnished either at a facility or
of payments that would have been made if the
to the drug add-on adjustment to the
in a patient’s home, for services furnished
ESRD PPS had not been implemented.
composite rate. In addition, for purposes of the
beginning on January 1, 2005. The basic case-
Section 1881(b)(14)(F) of the SSA, as added by
composite rate portion of the blended payment
mix adjusted system has two components: (1)
section 153(b) of MIPPA and amended by
amount, an add-on of $0.49 will be added to
the composite rate, which covers services,
section 3401(h) of PPACA requires that the
the adjusted composite payment to account for
including dialysis; and (2) a drug add-on
composite rate portion of the blended payment
ESRD related drugs and biologicals that were
adjustment for the difference between the
amount be increased in CY2011 by the ESRD
separately paid under Part D and are now
payment amounts for separately billable drugs
market basket percentage increase factor of
included in the ESRD PPS. A reduction in the
and biologicals and their acquisition costs, as
2.5%.
wage index floor from 0.65 to 0.60, then after
determined by Inspector General Reports.
applying a budget neutrality of 1.056929, the
Per MIPPA, beginning in 2012, the Secretary will
wage index floor is 0.64320.
MIPPA changed payments for dialysis. Beginning
annual y increase the ESRD PPS amounts by an
January 1, 2009, the payment rate for dialysis
ESRD market basket increase factor
The ESRD PPS base rate effective January 1,
services are “site neutral” and in applying the
appropriate for a bundled payment system for
2011 is $229.63. This base rate will be wage
geographic index to providers of services, the
renal dialysis minus 1 percentage point.
adjusted where the labor-related share of the
labor share is based on the labor share
However, PPACA amended this provision so
base rate from the ESRD PPS market basket is
otherwise applied for renal dialysis facilities.
that the market basket will no longer be subject
.41737, and the non labor-related share of the
Adjustments are no longer made to the
to a 1 percentage point reduction beginning in
base rate is $133.79. During the transition, the
composite rate for hospital-based dialysis
2012, but will be subject to the productivity
labor-related share of the case-mix adjusted
facilities to reflect higher overhead costs.
factor adjustments instead.
composite payment system will remain .53711.
Once the base rate is wage adjusted, any
MIPPA requires the Secretary to implement a
Beginning in January 1, 2012, providers of renal
applicable patient-level adjustments, facility-level
bundled ESRD prospective payment system
dialysis services and renal dialysis facilities will
adjustments, outlier adjustments, and training
(ESRD PPS), making a single payment for
be subject to quality incentive requirements and
add-on payments (adjusted for area wage levels)
Medicare renal dialysis services, beginning
they will be subject to a reduction of up to 2%
are applied to determine the payment rate for a
January 1, 2011. The ESRD PPS will include
if they do not meet the requirements.
dialysis treatment. Once the payment rate for
CRS-39

---

Provider/service
General payment policy
General update policy
Recent update
items and services which were included in the
the dialysis treatment is determined, the last
composite rate as of December 31, 2010,
item in the computation to determine the final
erythropoiesis stimulating agents (ESAs) and
payment rate is the application of the transition
other drugs and biologicals paid for separately
budget neutrality factor of .969, that is, a 3.1%
(before bundling), and diagnostic laboratory
reduction.
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 ESRD PPS will be phased-in equal y (and
budget neutrally) over four years. It will be fully
implemented by January 1, 2014.
CRS-40

---

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 enrol ee. In
were updated annually 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 all MA plan
plans for Medicare beneficiaries. In addition to
to exclude the value of Medicare direct medical
enrol ees 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
enrol ees 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
bid and the benchmark. (Before 2012, the
adjustment to account for coding intensity
differences between MA plans and original
CRS-41

---

Provider/service
General payment policy
General update policy
Recent update
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),
enrol ee 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 wel as premium and cost-sharing
percentage of per capita spending in original
reimbursements for qualified low-income
Medicare. After 2010, the numerator of the
enrol ees.
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
65% for plans with a star rating of 3.5 or
be a rebased amount for all counties, or an
CRS-42

---

Provider/service
General payment policy
General update policy
Recent update
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 all
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 wil
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.
CRS-43

---

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 CY2011, “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 $2,840 (the initial coverage
prescription drug
alternative coverage, with at least actuarial y
previous July.
period). From this point, there is no coverage, ,
coverage is provided
equivalent benefits. For 2011, most plans offer
until the beneficiary has total out-of-pocket
through private
actuarial y equivalent benefits or enhanced
costs of $4,550 ($6,447.50 in total spending);
prescription drug
coverage rather than the standard package. A
this coverage gap has been labeled the
plans (PDPs) or MA
number of plans have reduced or eliminated the
“doughnut hole.” Once the beneficiary reaches
prescription drug
deductible. Many plans offer tiered cost sharing
the catastrophic limit, the program pays all
(MA-PD) plans. The
under which lower cost sharing applies for
costs except for nominal cost sharing.
program relies on
generic drugs, higher cost sharing applies for
these private plans to
preferred brand name drugs, and even higher
PPACA, as amended by HCERA phases out the
provide coverage and
cost sharing applies for non-preferred brand
Part D doughnut hole. Beginning in 2011,
to bear some of the
name drugs. Some plans provide some coverage
manufacturers are required to provide a 50%
financial risk for drug
in the coverage gap (“doughnut hole”); this is
discount on brand-name drugs during the
costs; federal
generally limited to generic drugs.
coverage gap to participate in the Part D
subsidies cover the
program. The law phases in Medicare coverage
bulk of the risk.
for generic drugs during the coverage gap
Unlike other
starting in 2011, and for brand name drugs in
Medicare services,
2013. When the doughnut hole is fully phased
the benefits can only
out in 2020, Part D enrollees will be
be obtained through
responsible for 25% of the cost of brand name
private plans. While
and generic drugs during the coverage gap (the
al plans have to meet
same as in the initial coverage phase). The
certain minimum
catastrophic coverage limit wil also be reduced
requirements, there
to a smal extent in years 2014 through 2019.
are significant
differences among
them in terms of
benefit design,
beneficiary premiums
amounts, drugs
included on plan
formularies (i.e. list of
covered drugs) and
cost sharing
CRS-44

---

Provider/service
General payment policy
General update policy
Recent update
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
2011 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 allowable costs, are provided for
enrol ees whose costs exceed the annual out-
of-pocket threshold ($4,550 in 2011).
Beneficiary
Beneficiary premiums represent on average
Beneficiary premiums are calculated annual y 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
2011 plan year. The base beneficiary premium
beneficiary premium is calculated based on the
Policy.”
for 2011 is $32.34. (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
(except those entitled to a low income subsidy).
CRS-45

---

Provider/service
General payment policy
General update policy
Recent update
Risk corridors
The federal government and plans share the
In 2006 and 2007, plans were at ful risk for
The 2011 risk corridors are modified, as
risk for costs within specified “risk corridors.
costs within 2.5% above or below the target. If
described under “General Update Policy.”
”Risk corridors” are specified percentages for
costs were between 2.5% and 5% above the
costs above and below a target amount; the
target, they were at risk for 25% of spending
target amount is defined as total payments paid
between 2.5% and 5% of the target and 20% of
to the plan taking into account the amount paid
spending above that amount. If plans fel below
to the plan by the government and enrol ees.
the target, they have to refund 75% of the
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 ful 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.
CRS-46

---

Medicare Payment Policies




Acknowledgments
The authors wish to thank Julie Stone, a former Specialist in Health Care Financing, and David Newman, a
Specialist in Health Care Financing, for their contributions to this report.

Congressional Research Service
47

---