Medicare Payment Updates and
Payment Rates

Paulette C. Morgan, Coordinator
Specialist in Health Care Financing
September 27, 2012
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown, for inclusion in its 2012 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.

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Medicare Payment Updates and Payment Rates

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. A fee schedule is a list
of Medicare payments for specific items and services, which are calculated according to
statutorily specified formula and take into account the actual amount of care provided. Many
services, including inpatient and outpatient hospital care, are paid under different prospective
payment systems (PPSs). A prospective payment system is a method of paying hospitals or other
providers amounts or rates of payment that are established in advance for a defined period and are
generally based on an episode of care, regardless of the actual amount of care used. Other
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 also based on the bids of competing providers.
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, that 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, premiums,
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. In each Congress since the 105th Congress, laws have been passed to both increase, but
more often slow, the rate of growth of payments to Medicare providers and private plans. Perhaps
of particular interest in the 112th Congress is the update to the Medicare physician fee schedule.
The method for updating the physician fee schedule amount, known as the sustainable growth
rate (SGR), would have resulted in negative updates for physician payments in recent years,
except that Congress has stepped in to stop the updates. Physician payment rates are frozen
through December 31, 2012, after which point, rates will decrease by approximately 27% in the
absence of further congressional action.
This report provides an overview of Medicare payment rules by type of service, outlines current
payment policies, and summarizes the basic rules for payment updates. This report will be
updated twice a year to reflect recent fiscal year and calendar year changes.

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Contents
Introduction...................................................................................................................................... 1
Medicare Payment Principles .......................................................................................................... 1
Medicare Payment Rules........................................................................................................... 1
Beneficiary Out-of-Pocket Payments ........................................................................................ 2
Recent Congressional Actions with Respect to Payments ............................................................... 3
Medicare Payment Policies.............................................................................................................. 8
Part A ............................................................................................................................................... 8
Part B ............................................................................................................................................. 21
Parts A and B ................................................................................................................................. 45
Part C ............................................................................................................................................. 49
Part D............................................................................................................................................. 53

Tables
Table 1. Inpatient Prospective Payment System (IPPS) for Short-term, General Hospitals............ 8
Table 2. Hospitals Receiving Special Consideration Under Medicare’s IPPS............................... 13
Table 3. IPPS-Exempt Hospitals and Distinct Part Units .............................................................. 14
Table 4. Skilled Nursing Facility (SNF) Care................................................................................ 19
Table 5. Hospice Care.................................................................................................................... 20
Table 6. Physicians ........................................................................................................................ 21
Table 7. Nonphysician Practitioners .............................................................................................. 23
Table 8. Clinical Diagnostic Laboratory Services ......................................................................... 26
Table 9. Preventive Services.......................................................................................................... 27
Table 10. Telehealth ....................................................................................................................... 29
Table 11. Durable Medical Equipment (DME).............................................................................. 30
Table 12. Prosthetics and Orthotics ............................................................................................... 31
Table 13. Surgical Dressings.......................................................................................................... 32
Table 14. Parenteral and Enteral Nutrition (PEN) ......................................................................... 33
Table 15. Ambulatory Surgical Centers (ASCs) ............................................................................ 34
Table 16. Hospital Outpatient Services.......................................................................................... 35
Table 17. Rural Health Clinics and Federally Qualified Health Center (FQHCs) Services .......... 37
Table 18. Comprehensive Outpatient Rehabilitation Facility (CORF).......................................... 38
Table 19. Part B Drugs and Biologicals Covered Incident to a Physician’s Visit.......................... 39
Table 20. Blood.............................................................................................................................. 41
Table 21. Partial Hospitalization Services Connected to Treatment of Mental Illness.................. 42
Table 22. Ambulance Services....................................................................................................... 43
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Table 23. Home Health .................................................................................................................. 45
Table 24. End-Stage Renal Disease Dialysis Services................................................................... 47
Table 25. Managed Care Organizations......................................................................................... 49
Table 26. Outpatient Prescription Drug Coverage......................................................................... 53


Acknowledgments ......................................................................................................................... 56

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Introduction
Medicare is a federal insurance program that pays for covered health services for most persons 65
years of age and older and for most permanently disabled individuals under the age of 65. Part A
of the program, the Hospital Insurance program, covers hospital services, up to 100 days of post-
hospital skilled nursing facility services, post-institutional home health visits, and hospice
services. Part B, the Supplementary Medical Insurance program, covers a broad range of medical
services including physician services,1 laboratory services, durable medical equipment, and
outpatient hospital services. Part B also covers some home health visits. Part C (also known as
Medicare Advantage, or MA) provides private plan options, such as managed care, for
beneficiaries who are enrolled in both Parts A and B. Part D provides optional outpatient
prescription drug coverage.
Medicare Payment Principles
In general, the total payment received by a provider for covered services provided to a Medicare
beneficiary is composed of two parts: a program payment from Medicare plus any beneficiary
cost-sharing that is required.2 (The required beneficiary out-of-pocket payment may be paid by
other insurance, if any.)3 Medicare has established specific rules governing its program payments
for all covered services as well as for beneficiary cost sharing as described below.
Medicare Payment Rules
Medicare has established specific rules governing payment for covered services. For example, the
program pays for most acute inpatient and outpatient hospital services, skilled nursing facility
services, and home health care under a prospective payment system (PPS) established for the
particular service; under PPS, a predetermined rate is paid for each unit of service such as a
hospital discharge or payment classification group. Payments for physician services, clinical
laboratory services, and certain durable medical equipment covered under Part B are made on the
basis of fee schedules.4 Certain other services are paid on the basis of reasonable costs or
reasonable charges. In general, the program provides for annual updates of the program payments
to reflect inflation and other factors. In some cases, these updates are linked to the consumer price
index for all urban consumers (CPI-U) or to a provider-specific market basket (MB) index which

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 R42745, Medigap: A Primer.
4 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173, MMA) required the
Secretary to establish and implement a competitive bidding program for durable medical equipment, prosthetics,
orthotics and certain supplies. The program pays for certain items based on the bids of qualified suppliers in designated
areas. Payment amounts based on competitive bidding are being used in the first nine competitive bidding areas as of
January 1, 2012. See CRS Report R41211, Medicare Durable Medical Equipment: The Competitive Bidding Program.
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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
In addition to premiums, 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. Almost all persons age 65 and over are automatically entitled to premium-free Medicare
Part A, as they, or their spouse, have at least 40 quarters of Medicare covered employment. 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 monthly premiums, which range from $99.90 to
$319.70 in 2012, depending on the beneficiary’s income, a $140 deductible in 2012 (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
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) allows plans
to charge a premium to cover basic Medicare benefits if the costs to the plan exceed the
maximum amount the Centers for Medicare & Medicaid Services (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

5 For details, see CRS Report R40907, Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR)
System
.
6 In 2012, for each spell of illness, a beneficiary pays a deductible of $1,156 to cover day 1 through 60 in a hospital.
The daily coinsurance charge is $289 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 $578.
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 MMA and first took effect in 2007. For more information, see
CRS Report R40082, Medicare: Part B Premiums.
8 Through 2005, managed care plans had the option to charge a premium for basic Parts A and B Medicare benefits
only if the value of cost sharing for basic benefits was reduced by the same amount. If a plan chose to offer
supplemental benefits not covered under original Medicare, the plan could charge a supplemental premium equal to the
actuarial value of supplemental benefits; the value of the supplemental premium was not constrained by cost-sharing
levels for basic Medicare benefits. All beneficiaries in Part C and original Medicare are required to pay a Part B
premium, unless the Part C plan pays-down the value of the Part B premium as part of a supplemental benefit.
9 Plans must also adhere to specific constraints on enrollee cost-sharing. Beginning in 2011, cost sharing under an MA
plan may not exceed that under original Medicare for certain services, such as chemotherapy treatment, renal dialysis,
skilled nursing care and other services identified by the Secretary.
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reject a bid from a managed care organization in order to ensure that the bid reasonably reflects
the plan’s revenue requirements. The base beneficiary premium under part D for 2012 is $31.08
per month; however, actual premiums vary by plan and are increased for beneficiaries with
incomes above specified thresholds, similar to Part B premiums. 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
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 in some years 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 as the number of
beneficiaries increases, and the number and complexity of services becomes greater.10
The Patient Protection and Affordable Care Act (P.L. 111-148 as amended, ACA), 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), among other provisions. The anticipated savings from payment
changes to 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

10 See CRS Report R41436, Medicare Financing.
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to produce it.11) The ACA productivity adjustment marks a departure from most previous
legislative actions to reduce Medicare program spending in two specific respects. First, it is a
permanent, rather than time-limited, adjustment to (non-physician) payment updates.12 Second, 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. At the time of passage, the ACA
was estimated to achieve net Medicare savings of approximately $430 billion over the 10-year
budget window (FY2010-FY2019), based on a CRS analysis of the Congressional Budget Office
estimates for provisions affecting the Medicare program.13
Though the ACA payment changes to Medicare providers and plans is expected to slow the
growth in Medicare spending and extend the solvency of the Hospital Insurance (Part A) Trust
Fund,14 some have suggested that such a policy may not be sustainable in the long run, “without
unprecedented improvements in health care provider productivity.”15 Once the impact of the
provider payment changes from the ACA is known, Congress may wish to revisit the issue of the
productivity adjustments to determine 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.
In addition, the ACA 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. IPAB is prohibited from recommending changes that would
reduce payments to certain providers before 2020 and is also prohibited from recommending
changes in premiums, benefits, eligibility and taxes or other changes that would result in
rationing.16 Unlike other agencies that advise Congress, IPAB’s recommendations are to be
automatically implemented unless Congress acts. Congress can alter the Board’s proposals,

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,
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 overridden 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 Net Medicare program savings include direct spending cost reductions (such as reductions in provider payment rate
updates) and cost increases (such as an increase in the Part D low-income subsidy), as well as interactive effects where
a direct change to one part of the program are expected to have an impact on other parts. However, the cost of repealing
ACA provisions would not necessarily be the inverse of the savings originally estimated for those provisions. The
Congressional Budget Office estimates that repeal of the ACA (including the productivity adjustments) would increase
Medicare spending by $716 billion over the 10-year period FY2013-2022. CBO, July 24, 2012 letter to Speaker
Boehner on the direct spending and revenue effects of H.R. 6079, the Repeal of Obamacare Act, as passed by the
House of Representatives on July 11, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.
See also, Patricia Davis, Estimates of Medicare Savings in the Patient Protection and Affordable Care Act,
Congressional Research Service, General Distribution Memorandum, August 31, 2012, p. 6, available upon request.
14 CRS Report R41436, Medicare Financing.
15 2012 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Fund, p. 3, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/
ReportsTrustFunds/Downloads/TR2012.pdf.
16 Providers and suppliers scheduled to receive additional reductions beyond an annual productivity adjustment under
ACA receive a time-limited exemption from IPAB’s recommendations (if any are made). These exclusions leave
payments for MA and Part D drug plan, critical access hospital, SNF, home health, dialysis, ambulance, ambulatory
surgery center services, and durable medical equipment (DME) subject to IPAB recommendations.
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within limitations, or discontinue the automatic implementation of proposals.17 The Board is to be
appointed by the President in consultation with congressional leadership and with the advice and
consent of the Senate. It is to submit its first set of recommendations to the President and to
Congress, if required, by January 15, 2014.18
Provisions in the Budget Control Act of 2011 (P.L. 112-25, BCA) are expected to impact
Medicare payments. The BCA established a Joint Select Committee on Deficit Reduction and
tasked it with providing to Congress by November 23, 2011 recommendations on ways to reduce
the deficit over the subsequent 10 years. When the Committee did not provide the
recommendations, this triggered a government-wide sequestration process to reduce Federal
spending beginning in 2013.19 Without further legislative action, payments for most Medicare
benefits will be subject to a maximum 2% reduction each year from 2013 through 2021. For
payments made to providers and suppliers under Medicare Parts A and B, the percentage
reduction applies to individual payments for items and services provided. In the case of Medicare
Parts C and D, reductions are made to the monthly payments made to the private plans that
administer these parts of the program. Certain parts of Medicare, however, are exempt from
sequestration. These include (1) the Part D low-income subsidies;20 (2) the Part D catastrophic
subsidy; and (3) Qualified Individual (QI) premiums. Outlays for certain Medicare administrative
expenditures (non-benefit spending) could be subject to reductions of greater than 2%. Provider-
specific sequestration adjustments are not reflected in the tables that follow, in part, because the
estimates and clarifications provided by the administration remain “preliminary.”21
Most recently, the Temporary Payroll Tax Cut Continuation Act of 2011 (TPTCCA, P.L. 112-78),
and the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA, P.L. 112-96) both
extended certain time-limited payment adjustments to specified Medicare providers.22
This report provides a guide to Medicare payment rules by type of benefit. The information is
presented through a series of tables, each representing a provider type, such as physicians, or
Medicare Advantage plans. The first column in each table lists the type of payments that may be
received by the provider (e.g., the separate operating and capitol payments paid to short-term
general hospitals under the prospective payment system as described in Table 1), or lists
subcategories of providers under the general provider category (such as the different types of non-
physician providers that are all listed in Table 7). The second column of each table discusses the
general policy for determining payments while column three describes how the general payment
amounts are updated, or adjusted each year (e.g., amounts may be updated by a measure of
inflation, economy-wide productivity, or statutorily specified reductions to updates). The final
column presents the most recent update amounts. This report is updated to reflect the most recent
legislative changes to the program and payment updates available through September 2012.

17 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.
18 For more information, see CRS Report R41511, The Independent Payment Advisory Board.
19 CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules.
20 See CRS Report R40425, Medicare Primer for an overview of the Medicare Part D benefit.
21 Executive Office of the President, OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-
155)
, September 14, 2012, p. 1, http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/
stareport.pdf.
22 For more information, see Jim Hahn, et al., Medicare and Medicaid Expiring Provisions, Congressional Research
Service, General Distribution Memorandum, August 24, 2012, available upon request.
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Selected Acronyms and Public Law Numbers of Laws that have Amended Medicare
Since 1997
BBA97
The Balanced Budget Act of 1997 (P.L. 105-33, BBA 97).23
BBRA
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), was part of a
larger measure known as the Consolidated Appropriations Act for 2000 (P.L. 106-113).24
BIPA
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA), part of the larger
Consolidated Appropriations Act, 2001 (P.L. 106-554).25
P.L. 108-7
Consolidated Appropriations Resolution, 2003.26
MMA
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173,
MMA).27
DRA
The Deficit Reduction Act of 2005 (P.L. 109-171, DRA).28
TRHCA
The Tax Relief and Health Care Act of 2006 (P.L. 109-432, TRHCA).
P.L. 110-48
An act to provide for the extension of transitional medical assistance (TMA) and the abstinence
education program through the end of fiscal year 2007, and for other purposes.29
P.L. 110-90
TMA, Abstinence Education, and QI Programs Extension Act of 2007.30
MMSEA
The Medicare, Medicaid, and SCHIP Extension Act of 2007 (P.L. 110-173, MMSEA).31
MIPPA
The Medicare Improvements for Patients and Providers Act of 2008 (P.L. 110-275, MIPPA).32
HITECH
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).33

23 For more information, see CRS Report 97-802, Medicare Provisions in the Balanced Budget Act of 1997 (BBA 97,
P.L. 105-33)
.
24 For more information, see CRS Report RL30347, Medicare: Changes to Balanced Budget Act of 1997 (BBA 97, P.L.
105-33) Provisions
.
25 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)
.
26 This public law does not have a commonly used acronym.
27 For more information, see CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003
.
28 For more information, see CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and SCHIP
Provisions in the Deficit Reduction Act of 2005
.
29 This public law does not have a commonly used acronym.
30 This public law does not have a commonly used acronym.
31 For more information, see CRS Report RL34360, P.L. 110-173: Provisions in the Medicare, Medicaid, and SCHIP
Extension Act of 2007
.
32 For more information, see CRS Report RL34592, P.L. 110-275: The Medicare Improvements for Patients and
Providers Act of 2008
.
33 The HITECH Act established a Medicare incentive program to encourage the widespread adoption of electronic
health record (EHR) technology. The program provides incentive payments to acute care hospitals, critical access
hospitals (CAHs), and nonhospital-based physicians that demonstrate “meaningful use” of EHR technology by using
their EHR systems to perform specified functions to improve the quality of care. Those functions include recording
certain demographic and medical information about patients, exchanging electronic health information, and reporting
clinical quality measures. The HITECH Act instructs the Secretary over time to establish more stringent measures of
meaningful use. Eligible physicians can receive up to $44,000 over five years. Incentive payments to hospitals, payable
over a four-year period, are based on a formula that includes a $2 million base payment plus an additional discharge-
related amount, adjusted for the hospital’s Medicare patient share and charity care. Since the program began in 2011,
more than $3.2 billion in Medicare EHR incentive payments have been made to physicians and hospitals across the
United States. Beginning in 2015, physicians and hospitals that are not meaningful EHR users will be subject to a
payment adjustment (i.e., penalty). CMS maintains an extensive website on the Medicare and Medicaid EHR incentive
programs, with links to fact sheets and other resources for providers, as well as detailed statistics on incentive payments
(continued...)
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ACA
The Patient Protection and Affordable Care Act (P.L. 111-148) as modified by the Health Care and
Education Reconciliation Act (P.L. 111-152, referred to col ectively as ACA).34
P.L. 111-309
The Medicare and Medicaid Extenders Act of 2010.35
BCA
The Budget Control Act of 2011 (BCA, P.L. 112-25).36
TPTCCA
The Temporary Payrol Tax Cut Continuation Act of 2011 (TPTCCA, P.L. 112-78).
MCTRJCA
The Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA, P.L. 112-96).

(...continued)
by program, state, and type of provider, at http://www.cms.gov/Regulations-and-Guidance/Legislation/
EHRIncentivePrograms/index.html. For more information, see CRS Report R40181, Selected Health Funding in the
American Recovery and Reinvestment Act of 2009
.
34 For more information, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care
Act (PPACA): Summary and Timeline
.
35 This public law does not have a commonly used acronym.
36 CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules.
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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 FY2012, hospitals that submitted the
inpatient services
prospectively determined payment for each
adjustments, IPPS payment rates are increased
required quality data had a national
provided by acute
discharge. A hospital’s payment for its operating
annual y by an update factor that is determined, in
standardized amount of $5,209.74. Hospitals
hospitals (Operating
costs is calculated using a national standardized
part, by the projected increase in the hospital
that did not submit the quality data had a
IPPS)
amount adjusted by a wage index associated
market basket (MB) index. This is a fixed price
national standardized amount of $5,107.49.
with the area where the hospital is located or
index that measures the change in the price of
where it has been reclassified. Payment also
goods and services purchased by hospitals to create
In FY2012, the MB increase of 3.0% was
depends on the relative resource use associated
one unit of output. The update for operating IPPS is
reduced by a 1.0% multifactor productivity
with the diagnosis related group (DRG) to which
established by statute. Under DRA, hospitals that
adjustment and then reduced by the ACA
the patient is assigned. A new Medicare Severity
do not submit required quality data in FY2007 and
adjustment of 0.1% for a net increase of 1.9%.
DRG (MS-DRG) patient classification system was each subsequent year will have the applicable MB
This update was then increased by 1.1% due to
phased in starting in FY2008; that transition is
percentage reduced by two percentage points. Any
litigation concerning the rural floor budget
now complete. Medicare pays additional
MB reduction does not apply when computing the
neutrality factor and then decreased by the
amounts for cases with extraordinary costs
applicable percentage increase in subsequent years.
prospective coding adjustment of 2.0% for a net
(outliers); indirect medical education (IME) (see
Starting in FY2015, the reporting penalty will be
increase of 1.0% before the application of
below); and for hospitals serving a
25% of the update factor. The HITECH Act
budget neutrality and other policy adjustments
disproportionate share (DSH) of low-income
established update penalties for hospitals that are
(such as a 2.0% reduction for hospitals that did
patients (see below). IME and DSH payments are
not meaningful electronic health record (EHR)
not submit required quality data).
made through adjustments to IPPS so that
users starting in FY2015. Specifically, these hospitals For FY2013, hospitals that submitted the
hospitals receive more money for each Medicare
will have an update reduction of 25% in FY2015,
required quality data have a national
discharge. Certain low volume hospitals receive
50% in FY2016, and 75% in FY2017 and in
standardized amount of $5,328.76. Hospitals
additional payments as well. ACA made the
subsequent years. ACA established a schedule of
that did not submit the quality data have a
existing low volume adjustment more generous
annual reductions in the update for FY2009
national standardized amount of $5,243.67.
for FY2011 and FY2012 only. Starting in FY2013,
through FY2019. The annual update includes a
hospitals with higher than expected readmissions
productivity adjustment starting October 1, 2011.
In FY2013, the MB increase of 2.6% is reduced
are subject to as much as a 1% penalty.
The ACA update reductions may result in a
by a 0.7% multifactor productivity adjustment
Additional payments may be made for cases that
negative update for that year. This update is then
and then reduced by the ACA adjustment of
involve qualified new technologies that have
subject to other budget neutrality and other policy
0.1% for a net increase of 1.8% before the
been approved for special add-on payments.
adjustments.
application of budget neutrality and other policy
Hospitals in Hawaii and Alaska receive a cost-of-
adjustments (such as a 2.0% reduction for
living adjustment (COLA). The cost of certain
In its FY2008 rule, CMS established prospective
hospitals that did not submit required quality
budget neutrality adjustments of -1.2% in FY2008,
CRS-8

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
services, including Medicare beneficiaries’ bad
-1.8% in FY2009 and -1.8% in FY2010 because of
data). The increase is subject to budget
debt, are reimbursed outside of IPPS. MCTRJCA
anticipated increases in measured severity of illness
neutrality adjustments to correct for MS-DRG
reduced reimbursement on bad debt for hospital
attributable to coding changes or documentation
recalibrations, wage index changes, hospital
services provided to beneficiaries from 70% to
improvements (coding creep) associated with the
reclassifications, documentation and coding
65%, starting in FY2013.
new MS-DRGs. P.L. 110-90 reduced the adjustment
improvements as well as to fund outlier
to -0.6% in FY2008 and -0.9% in FY2009, but
payments and the Rural Community
permitted offsets to IPPS rate increases in FY2010,
Demonstration program.
FY2011, and FY2012 to account for coding creep
increases in FY2008 and FY2009 above these
amounts. The law did not address the scheduled
adjustment of an additional 1.8% decrease in
FY2010. However, in FY2010, CMS did not adjust
the update for coding improvements. In FY2011,
CMS estimated that an additional 5.8% adjustment
was warranted for the coding improvements that
increased payments in FY2008 and FY2009 (to
recoup payments retroactively). Also, an additional
3.9% adjustment was necessary to eliminate the full
effect of coding improvements on future payments
(a prospective adjustment). CMS reduced the
FY2011 update by 2.9%, half the amount of the
retroactive recoupment adjustment. In FY2012,
CMS implemented the remainder of the 2.9%
retroactive adjustment (after adding back the 2.9%
reduction from the earlier year). CMS also
implemented a 2.0% prospective reduction (leaving
a 1.9% prospective adjustment for future years). In
FY2013, the documentation and coding
improvements for FY2008 and FY2009 are
completed by reversing (or adding) the 2.9%
adjustment for FY2012, which is offset by a negative
1.9% adjustment. The FY2013 documentation and
coding adjustment is 1.0%.
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 FY2012 was 1.5%.
short-term general
its operating IPPS for short-term general
statute. Capital rates are updated annually by the
After adjustments, the FY2012 capital federal
hospitals (Capital
hospitals. A hospital’s capital payment is based
Centers for Medicare & Medicaid Services (CMS)
rate was $421.42 for discharges starting
IPPS)
on a prospectively determined federal payment
according to a framework which considers changes
October 1, 2011.
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 FY2013 is 1.2%,
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%; the FY2013 federal capital rate is
IPPS includes an IME and DSH adjustment (see
DRG recalibration, and DRG reclassification. Other
$425.49.
CRS-9

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
below). Starting in FY2008, the IME adjustment
adjustments include those that implement budget

will be phased out over a 3-year period.
neutrality with respect to recalibration of DRGs,
Additional payments are made for outliers (cases
documentation and coding changes resulting from
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. The capital update
al owable Medicare inpatient hospital capital-
increase was reduced by 2.9% in FY2011 and by
related costs for its first two years of operation.
1.0% in FY2012 to account for coding
improvements.
CRS-10

Medicare Payment Updates and Payment Rates

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 payments) at $10.5 billion
(DSH) adjustment
based on a formula which incorporates the
of Medicare discharges as well as the type of
in FY2011 and $10.8 billion in FY2012 (March
number of patient days provided to low-income
patient seen in any given hospital.
2012 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 payments) to be
payments to teaching hospitals; different
IPPS; by FY2001, the IME adjustment was to be
about $6.2 billion in FY2011 and $6.3 billion in
measures of teaching intensity are used in the
5.5%. However, the scheduled decreases were
FY2012 (March 2012 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-11

Medicare Payment Updates and Payment Rates

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 $2.7 billion in FY2011 and $2.8 billion in
those days attributed to Medicare managed care
PRA. Hospitals with PRAs below the floor (85% of
FY2012 (March 2012 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, direct
GME payments can be made to nonhospital

providers.
CRS-12

Medicare Payment Updates and Payment Rates

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 FY2012, the hospital-specific amount for
Hospitals (SCHs)—
payment rates as the basis of reimbursement: the
“applicable percentage increase” which is
SCHs that submitted the required quality data
facilities located in
current IPPS base payment rate, or its hospital-
specified by statute and is often comparable to
received the full MB increase of 3.0% which was
geographically isolated
specific per-discharge costs from either FY1982,
the IPPS update. (See description for IPPS
then reduced by 2.0% to account for coding
areas and deemed to
1987, or 1996, updated to the current year.
hospitals).
improvements. The update to the hospital
be the sole provider
Under MIPPA, for cost reporting periods
specific amount for SCHs that did not submit
of inpatient acute care
beginning on or after January 1, 2009, an SCH can
the quality data was reduced by another 2
hospital services in a
elect payment based on its FY2006 hospital-
percentage points.
geographic area based
specific payment amount per discharge. This
on distance, travel
amount is increased by the annual update starting
For FY2013, the hospital-specific amount for
time, severe weather
for discharges on or after January 1, 2009. An
SCHs that submit the required quality data
conditions, and/or
SCH may receive additional payments if the
receive a full MB increase of 2.6%, which is
market share as
hospital experiences a decrease of more than 5%
subject to a 0.5% reduction to account for
established by specific
in its total inpatient cases due to circumstances
coding improvements in FY2008 and FY2009.
criteria set forth in
beyond its control. An SCH receives special
The update for those that do not submit quality
regulation (42 CFR
consideration for reclassification into a different
data is subject to the 2 percentage point
412.92).
area. Starting for services on January 1, 2006,
reduction.
CMS increased outpatient prospective payment

system (OPPS) payments to rural SCHs by an
additional 7.1%.
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-13

Medicare Payment Updates and Payment Rates

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 FY2012 IRF-PPS update was the MB of
Rehabilitation
rehabilitation facility are based on a fully
on the MB derived from the cost reports of
2.9% reduced by a 1.0 percentage point
Facilities (IRFs)—
implemented IRF-PPS and 100% of the federal
rehabilitation, psychiatric, and long-term care
productivity adjustment, the ACA adjustment of
freestanding hospitals
rate which is a fixed amount per discharge. This
hospitals (RPL-MB); in FY2012 the RPL-MB was
0.1 percentage point and other budget
and hospital-based
PPS encompasses both capital and operating
revised and rebased to reflect FY2008 data. The
neutrality adjustments. The final FY2012
distinct part units
payments to IRFs, but does not cover the costs
RLP-MB includes an update estimate for capital
standard conversion factor for IRFs was
that treat a
of approved educational programs, bad debt
as well as operating costs. MMSEA established
$14,076.
percentage of
expenses, or blood clotting factors, which are
the IRF update factor at 0% in FY2008 and
patients with a
paid for separately. The IRF-PPS payment for
FY2009, starting for discharges on April 1, 2008.
The FY2013 IRF-PPS update is the MB of 2.7%
defined set of
any Medicare discharge will vary depending on
ACA established a schedule of annual
reduced by a 0.7 percentage point productivity
conditions and meet
the patient’s impairment level, functional status,
reductions in the update for FY2010 through
adjustment, the ACA adjustment of 0.1
certain established
comorbidity conditions, and age. These factors
FY2019. The FY2013 update reduction is 0.1
percentage point, and other budget neutrality
conditions of
determine which of the 87 Case Mix Groups
percentage point. The annual update also
adjustments. The final FY2013 standard
participation. As
(CMGs) is assigned to the inpatient stay. Within
includes a productivity adjustment starting
conversion factor for IRFs is $14,343.
established by
each of these CMGs, patients are further
October 1, 2011. Under ACA, update
MMSEA, starting July
assigned to one of four tiers based on any
reductions may result in a negative update for
1, 2007, the IRF
comorbidities they may have. Five other CMGs
that year.
compliance threshold
are used for patients discharged before the
(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. MCTRJCA reduced
reimbursement on bad debt for IRF services
provided to beneficiaries from 70% to 65%,
starting in FY2013.
CRS-14

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
Long-Term Care
Effective October 1, 2002, LTCHs are paid on a
The LTCH update is not specified in statue.
In FY2012 (starting October 1, 2011) the
Hospitals and
discharge basis under a DRG-based PPS, subject
Until FY2013, CMS increased the LTCH rates
LTCH federal payment rate was increased by a
satellites or onsite
to a five-year transition period. The LTCH-PPS
based on the most recent estimate of the
2.9% MB update reduced by a productivity
providers (LTCHs)—
encompasses payments for both operating and
rehabilitation, psychiatric, and long-term care
adjustment of 1.0 percentage point and the
acute general
capital-related costs of inpatient care but does
(RPL) market basket adjusted to account for
ACA reduction of 0.1 percentage point. The
hospitals that are
not cover the costs of approved educational
improved coding practices. Starting in FY2013,
update factor of 1.8% was subject to budget
excluded from IPPS
programs, bad debt expenses, or blood clotting
CMS has implemented an LTCH specific MB as
neutrality adjustments but not a coding
with a Medicare
factors which are paid for separately. The
the basis for its update policy. CMS changed the
improvement reduction. The LTCH federal
inpatient average
LTCH-PPS payment for any Medicare discharge
effective date of the annual update from
payment rate is set at $40,222.05 for discharges
length of stay (ALOS)
will vary depending on the patient’s assignment
October 1 (the beginning of the fiscal year) to
starting on October 1, 2011.
greater than 25 days
into a Medicare severity (MS) LTC-DRG. MS-
July 1 of each year (referred to as a rate year),
and meet certain
LTC-DRGs are based on reweighted IPPS MS-
starting July 2003. In the rate year (RY) for
In FY2013 (starting October 1, 2012) the
facility criteria
DRGs. Payments for specific patients may be
2009 final rule, CMS changed the effective date
LTCH federal payment rate is increased by a
established by
increased or reduced because of case-level
of the annual update back to October 1,
2.6% MB update reduced by a productivity
MMSEA.
adjustments, such as short stay cases,
beginning October 1, 2009. CMS adopted the
adjustment of 0.7 percentage points and the
interrupted stay cases, readmitted cases from
term fiscal year rather than rate year beginning
ACA reduction of 0.1 percentage point. The
co-located providers and high costs outliers.
October 1, 2010. ACA established a schedule
update factor of 1.8% will be subject to the
Payments also depend upon facility-specific
of annual reductions in the update for RY2010
phased-in one time budget neutrality adjustment
adjustments such as variations in area wages
through RY2019. The reduction in the RY2010
of approximately -1.3% starting for discharges
and include a COLA for hospitals in Alaska and
update of 0.25 percentage point became
on December 29, 2012. The LTCH federal
Hawaii. No adjustments are made for the
effective for discharges starting April 1, 2010.
payment rate is set at $40,915.95 for discharges
percentage of low income patients served by
CMS established a fiscal year schedule (October
starting on October 1, 2012 through December
the hospital (DSH), rural location, or IME. The
1st) for the ACA adjustments, starting in 2011.
28, 2012. Starting December 29, 2012, the
LTCH-PPS is required to be budget neutral;
The FY2012 update reduction is 0.1 percentage
LTCH federal payment rate will be $40,397.96.
total payments must equal the amount that
point. The update will include a productivity

would have been paid if the PPS had not been
adjustment starting October 1, 2011. The ACA
implemented. MMSEA imposed a moratorium
update reductions may result in a negative

on this budget neutrality adjustment and other
update for that year. For FY2013, CMS
LTCH regulations including one that established
determined that a one-time prospective budget
Medicare’s payments for very short stay
neutrality adjustment of 3.75% (0.9625) will be
outliers. The moratoria have been subsequently
permanently applied to the federal payment rate
extended but will lapse starting December 29,
over a three year period, starting for discharges
2012. MCTRJCA reduced reimbursement on
December 29, 2012.
bad debt expenses for LTCH services provided
to beneficiaries from 70% to 65%, starting in
Starting in FY2014, LTCHs that do not comply
FY2013.
wit the LTCH quality reporting program will
have their annual updates reduced by 2
percentage points.
CRS-15

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
Psychiatric hospitals
Starting January 1, 2005, Medicare pays for
The IPF update is not specified in statue. CMS
CMS shifted IPFs to an October 1st rate setting
and distinct part
services provided in inpatient psychiatric
has established a policy to update the per diem
cycle starting July 1 2011. To make the change,
units—include those
facilities (IPF) using a per-diem based PPS.
rates based on the most recent estimate of the
CMS established a 15 month RPL-MB update
primarily engaged in
Established with a three-year transition period,
rehabilitation, psychiatric, and long-term care
starting RY2012 (on July, 1, 2011) at 3.2%. After
providing, by or
the IPF-PPS incorporates patient-level
market basket (RPL-MB). ACA established a
applying a wage index budget neutrality factor
under the
adjustments for specified DRGs, selected
schedule of annual reductions in the update
of 0.9995 and the ACA offset of 0.25
supervision of a
comorbidies, and in certain cases, age of the
starting RY2011 through RY2020. The
percentage point, the federal base payment is
psychiatrist,
patient. Facility-level adjustments for relative
reduction in the RY2011 IPF update of 0.25
$685.01 per day until September 30, 2012.
psychiatric services
wages, teaching status, and rural location are
percentage points was effective July 1, 2010.
for the diagnosis and
also included. IPFs in Hawaii and Alaska will
The update will include a productivity
In FY2013, the IPF per diem is increased by a
treatment of people
receive a COLA adjustment. Medicare per diem
adjustment starting July 1, 2012. The ACA
2.7 MB update reduced by a productivity
with mental illness.
payments are higher in the earlier days of the
update reductions may result in a negative
adjustment of 0.7 percentage points, an ACA
psychiatric stay. Also, the per diem payment for
update for that year. In RY2011, CMS shifted
adjustment of 0.1 percentage point and other
the first day of each stay is 12% higher in IPFs
IPFs from a July 1st rate setting cycle to an
budget neutrality adjustments. The FY2013 IPF
with qualifying (full-service) emergency
October 1st. fiscal year cycle. To make that
per diem amount is $698.51.
departments than in other IPFs. An outlier
change, the IPF PPS RY2012 was established as
policy for high-cost cases is included. Patients
a 15 month period from July 1, 2011 to
who are discharged from an IPF and return
September 30, 2012.
within three days are considered readmissions
of the same case. IPFs also receive an additional
In FY2013, CMS finalized a new quality data
payment for each eletroconvulsive therapy
reporting program for IPFs that would reduce
treatment furnished to a patient. The cost of
the IPF-PPS annual payment update by 2.0
certain services, including Medicare
percentage points for IPFs that do not comply
beneficiaries’ bad debt, are reimbursed outside
with quality data submission requirements,
of IPF-PPS. MCTRJCA reduced reimbursement
starting for the FY2014 payment update.
on bad debt for hospital services provided to
beneficiaries from 70% to 65%, starting in
FY2013.
CRS-16

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
Children’s and cancer
Children’s and cancer hospitals are paid on a
An update factor for reimbursement of
The update for FY2012 was 3.0%.
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 FY2013 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. MCTRJCA reduced reimbursement
for the treatment of
on bad debt for hospital services provided to
and research on
beneficiaries from 70% to 65%, starting in
cancer (not as a
FY2013.
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-17

Medicare Payment Updates and Payment Rates

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 are 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 are 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. MCTRJCA
operated by a CAH
reduced reimbursement on bad debt for CAH
do not count toward
services provided to beneficiaries from 100% to
the bed limit.
88% in FY2013, 76% in FY2014, and 65% in
FY2015 and subsequent fiscal years.
CRS-18

Medicare Payment Updates and Payment Rates

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 FY2012, SNFs received a MB increase of
Facility (SNF) care
system (PPS) which is composed of a daily (“per
rates are increased annual y by an update factor
2.7%, adjusted by a negative 1 percentage point
diem”) urban or rural base payment amount
determined, in part, by the projected increase
productivity adjustment, and a case-mix
adjusted for case mix and area wages. The per
in the SNF market basket (MB) index. This
adjustment of -12.8%, for a total net decrease
diem payment is intended to cover all the
index measures changes in the costs of goods
of 11.1%.
services provided to the beneficiary that day,
and services purchased by SNFs. Each year, the
including room and board, nursing, therapy, and
update may include an adjustment to account
According to the FY2010 CMS Final SNF rule,
prescription drugs. Some costs are excluded
for the MB forecast error for previous years.
the SNF RUG-III methodology was to be
from PPS and paid separately such as physician
Since FY2008, when the difference between the
replaced with a revised RUG-IV methodology.
visits, dialysis, and certain high cost prosthetics
estimated MB update and the actual increase is
And, the Minimum Data Set (MDS) 2.0 patient
and orthotics.
greater than 0.5 percentage point, payments to
assessment tool, used to calculate RUG
SNFs are updated to account for this forecast
categories, among other things, is replaced with
The case-mix adjustment to the base per diem
error. When the difference is less than 0.5
the MDS 3.0 system on October 1, 2010. Due
rate adjusts payments for the treatment and
percentage point, no adjustments are made.
to unexpected utilization patterns with the
care needs of beneficiaries and categorizes
implementation of the MDS 3.0 system, CMS
individuals into groups called resource
Starting in FY2012, all SNF MB updates will be
applied a case-mix adjustment of -12.8% for
utilization groups (RUGs). The RUGs system
subject to the productivity adjustment.
FY2012. The case-mix adjustment recalibrates
uses patient assessments to assign a beneficiary
therapy RUGs to achieve parity in
to one of 66 categories and to determine the
reimbursement rates between the prior RUG-
payment for the beneficiary’s care. Patient
III methodology and the current RUG-IV
assessments are done at various times during a
methodology.
patient’s stay and his or her RUG may change.
The per diem is also adjusted to account for
For FY2013, SNFs receive a MB increase of
area wage variation, using the hospital wage
2.5%, reduced by a productivity adjustment of
index.
0.7 percentage points, for a total net increase of
1.8%.
Starting in FY2005, MMA increased payments
for AIDS patients in SNFs by 128%. Unlike

other PPSs, the SNF PPS statute does not
include an adjustment for extraordinarily costly

cases (an “outlier” adjustment). MCTRJCA

reduced reimbursement on beneficiaries’ bad

debt for SNF services from 70% to 65%,
starting in FY2013. Bad debt reimbursement for

SNF services provided to a beneficiary is
reduced from 100% to 88% in FY2013, 76% in
FY2014, and 65% in FY2015 and subsequent
fiscal years.
CRS-19

Medicare Payment Updates and Payment Rates

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
For FY2012, the hospice MB update increased
separate components that are adjusted annually.
annual y. The prospective payment rates are
payment rates by 3%. The FY2012 payment
These components are the payment rates, the
updated by the increase in the hospice market
rates were: routine home care—$151.03 per
hospice wage index, and the cap amount.
basket (MB). Since FY2003 updates have been
day; continuous home care—$881.46 for 24
Limited cost sharing applies to outpatient drugs
at the full hospital MB percentage increase.
hours or $36.73 per hour; inpatient respite
and respite care.
care—$156.22 per day; and general inpatient
However, for FY2013, the MB update will be
care—$671.84 per day. The BNAF reduction of
Payment rates are based on one of four
reduced by 0.3% and adjusted by the
15% in FY2012 reduced wage index values,
prospectively determined rates which
productivity factor. For FY2014 – FY2019, a
lowering aggregate hospice payments by 0.5% in
correspond to four different levels of care (i.e.,
0.3% reduction to the MB will be contingent
FY2012.
routine home care, continuous home care,
upon the level of the insured population relative
inpatient respite care, and general inpatient
to the projection of the insured population for
For FY2013, the hospice MB update is 2.6%.
care) for each day a beneficiary is under the
2009. Only if the level of the non-elderly
The MB update is reduced by the statutorily
care of the hospice. The hospice wage index,
insured population is 5 or fewer percentage
required 0.3 percentage points and a
established using the most current hospital
point above the projections will the MB be
productivity adjustment of 0.7 percentage
wage data available, is used to adjust payment
reduced by 0.3%.
points. The net MB update increases payment
rates to reflect differences in area wages.
rates by 1.6%. The FY2013 payment rates are as
The hospice wage index is updated to reflect
follows: routine home care—$153.45 per day;
Total payments to a hospice are subject to an
updates in the hospital wage index and any
continuous home care—$895.56 for 24 hours
aggregate cap that is determined by multiplying
changes to the definition of Metropolitan
or $37.31 per hour; inpatient respite care—
the cap amount for a given year by the number
Statistical Areas (MSAs). In 1997, a hospice
$158.72 per day; and general inpatient care—
of Medicare beneficiaries who received hospice
wage index budget neutrality adjustment
$682.59 per day. The BNAF reduction of 15%
services during the cap year (November 1 to
factor (BNAF) was instituted to account for
reduces wage index values, lowering aggregate
October 31). For purposes of this cap,
differences in hospice payments as a result of a
hospice payments by 0.7% in FY2013.
beneficiaries are counted as fractions should the
change in the data source used to adjust for
hospice care overlap across cap years. The
geographic differences in labor from the 1983
The latest hospice cap amount for the cap year
fraction is the number of days the beneficiary
Bureau of Labor Statistics data to the hospital
November 1, 2011, through October 31, 2012,
received hospice services within the cap year as
wage index. The final rule for FY2010 phases-
is an aggregated $25,377.01 per beneficiary. For
a divided by his or her total days receiving
out the BNAF over 7 years. As a result, the
the year ending on October 31, 2011, it was an
hospice services. Medicare hospice payments
BNAF was reduced by 10 percent in FY2010,
aggregated $24,527.69 per beneficiary.
that exceed this cap must be returned to the
and will be reduced by an additional 15 percent
Medicare program. Additionally, the number of
each year from FY2011 through FY2016.

inpatient care days is limited to no more than
20% of total patient care days. Days that exceed
The hospice cap amount is increased or
this limit wil be reimbursed under the routine
decreased annually by the same percentage as
home care rate.
the medical care expenditure category of the
CPI-U.
Not earlier than October 1, 2013, ACA
requires the Secretary to implement budget
neutral revisions to the methodology for
determining reimbursement for hospice care.
CRS-20

Medicare Payment Updates and Payment Rates

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
The TPTCCA and the MCTRJCA extended the
the basis of a fee schedule. The fee schedule
formula specified in law. The update percentage
SGR override through Dec. 31, 2012,
assigns relative values to services. These
equals the Medicare Economic Index (MEI,
maintaining Medicare physician fee schedule
relative values reflect differences in the
which measures inflation) subject to an
payments at the current level (i.e., payments are
physician work (based on time, skill, and
adjustment to match spending under the
frozen).
intensity involved), practice expenses (including
cumulative sustainable growth rate (SGR)
the cost of nurses and other staff), and
system. (The SGR is linked, in part, to changes
For many years, prior to the passage of MIPPA,
malpractice expenses required to produce the
in the gross domestic product per capita.) The
beneficiary payments for outpatient mental
service. The relative values are adjusted for
adjustment sets the conversion factor so that
health services equaled 50% of the fee schedule
geographic variations in the costs of the inputs
projected spending for the year will equal
amounts. MIPPA included a mental health parity
required to provide physician services. These
allowed spending by the end of the year.
provision to be phased in over 5 years. For
geographically adjusted relative values are
Application of the SGR system led to a 5.4%
services provided during calendar year 2011,
converted into a dol ar payment amount by a
reduction in the conversion factor in 2002.
beneficiaries paid 45% of the covered charges
conversion factor. Assistants-at-surgery
Additional reductions were slated to take effect
(after meeting their deductible); beginning Jan.
services (provided by physicians) are paid 16%
in subsequent years. However, P.L. 108-7
1, 2014, outpatient mental health services will
of the fee schedule amount.
allowed for revisions in previous estimates used
be covered at the same rate (80%) as other
for the SGR calculation, thereby permitting an
Part B services. A 5% add-on payment for
Anesthesia services are paid under a separate
update of 1.6% effective March 1, 2003. MMA
certain Medicare mental health services was
fee schedule (based on base and time units)
provided that the update to the conversion
paid through February, 2012, but was not
with a separate conversion factor.
factor for 2004 and 2005 could not be less than
extended.
Medicare payments for most professional
1.5%. DRA froze the 2006 rate at the 2005
services equal 80% of the fee schedule amount;
level, TRHCA froze the 2007 rate at the 2006
patients are responsible for the remaining 20%
level; and MMSEA provided that the level for
coinsurance payment.
the first six months of 2008 was increased by
0.5%. MIPPA extended this 0.5% increase
through the end of 2008 and provided for a
1.1% increase in 2009. For January 1 through
May 31, 2010, the update to the conversion
factor was set to 0% as a result of three
separate acts. For the 18 months from June 1,
2010 through December 31, 2011, the update
to the conversion factor was 2.2% as a result of
three additional acts. Under current law, the
conversion factor update can not be more than
three percentage points above nor more than
seven percentage points below the MEI,
CRS-21

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
however, each of the bills that have averted the
SGR reductions since DRA have included
language that has overridden this condition.
ACA included several modifications to
Medicare physician reimbursement, including
bonus payments for primary care services and
for successfully reporting quality measures as
well as many adjustments to the methodologies
for calculating payments. (See CRS report on
Medicare and ACA for details).
CRS-22

Medicare Payment Updates and Payment Rates

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. ACA 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-23

Medicare Payment Updates and Payment Rates

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 MCTRJCA (Section 3005) extended the
services
Medicare coverage for outpatient therapy
to be increased by the increase in the MEI
exceptions process through December 2012
services, including physical therapy, speech-
beginning in 2002; however, application of the
and created several additional requirements,
language pathology services, and occupational
limits was suspended until September 1, 2003.
including the modification that therapy services
therapy have limits or “caps.” To accommodate
At that time the limits were $1,590. MMA
provided in a hospital outpatient setting be
patients with therapy needs that exceed the
suspended the application of the limits
included in the limit. An annual threshold of
cap, Congress created an exceptions process
beginning December 8, 2003-December 31,
$3,700 is to be applied separately (1) for
that allows for specific diagnoses and
2005. The limits were restored January 1, 2006.
physical therapy services and speech-language
procedures to receive Medicare coverage even
DRA required the Secretary to establish an
pathology services, and (2) for occupational
after a beneficiary has met the therapy cap for
exceptions process for 2006 for certain
therapy services.
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. P.L. 111-309
hospital outpatient department. A separate
extended the exceptions process through
$1,500 limit applied to all outpatient
December 31, 2011, and the TPTCCA and the
occupational therapy services except for those
MCTRJCA extended the exceptions process
furnished by hospital outpatient departments.
through Dec. 2012. The limits have increased
CRS-24

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
Therapy services furnished as incident to
each year as a result of these acts and was
physicians professional services were included
$1,870 in CY2011.
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-25

Medicare Payment Updates and Payment Rates

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 is required to adjust
ACA modified provider updates based on the
laboratory services
area-wide fee schedules. The fee schedule
payments annually by the percentage change in
MB or CPI minus ful productivity estimates for
amounts are periodically updated. There is a
the CPI, together with such other adjustments
all Parts A and B providers and suppliers who
ceiling on payment amounts equal to 74% of
as the Secretary deems appropriate. Updates
are subject to a MB or CPI update. (See above
the median of all fee schedules for the test.
were eliminated for 1998 through 2002. MMA
for details.) For the clinical laboratory test fee
Assignment is mandatory. No cost sharing is
eliminated updates for 2004-2008.
schedule, the modification replaced the
imposed.
scheduled 0.5% payment reduction for CY2011
The annual clinical laboratory test fee schedule
through CY2013 with a ful productivity

update adjustment for 2009-2013 is the
adjustment for CY2011 and subsequent years.
percentage increase or decrease in the CPI-U
A 1.75 percentage point reduction to the
minus 0.5 percentage points. MIPPA repealed
update in CY2011 through CY2015 was
the Medicare Competitive Bidding
established, which may result in a negative
Demonstration Project for Clinical Laboratory
update. The update was -1.75% for 2011 and
Services.
0.65% for 2012.
MIPAA clarified the payment for clinical

laboratory services in CAHs. Beginning July 1,
2009, clinical diagnostic laboratory services
furnished by a CAH are reimbursed as
outpatient hospital services at 101% of costs
without regard to whether the individual who
receives the service is physically present in the
CAH, or in a skilled nursing home or a clinic
(including a rural health clinic) that is operated
by a CAH when the specimen is col ected.
The fee schedules were updated by 1.1% in
2003. Per MMA, no update was made until
2009. In 2009, the update was 4.5% and for
2010, the update was -1.9%.
ACA authorized a two-year demonstration
project, beginning on July 1, 2011, to make
separate payments to laboratories for complex
diagnostic laboratory tests provided to
Medicare beneficiaries. ACA also provided a
one year extension (that ended 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-26

Medicare Payment Updates and Payment Rates

Table 9. Preventive Services
Provider/service
General payment policy
General update policy
Recent update
Physician services
Payment is made under the physician fee
See physician fee schedule.
See physician fee schedule.
(some of which may
schedule. In general, no cost sharing is imposed
be provided by
for Medicare preventive services. Exceptions
certified non-
are discussed in table notes. Details of eligibility
physician providers)
requirements and coverage for 2012 are at
include:
CMS, “Medicare Preventive Services, Quick
Reference Information,” February, 2012,
-initial and annual
http://www.cms.gov/Outreach-and-Education/
wellness visits.
Medicare-Learning-Network-MLN/
-screenings for:
MLNProducts/downloads/
abdominal aortic
MPS_QuickReferenceChart_1.pdf.
aneurysm; bone mass;
cervical, breast,
colorectal,a and
prostate cancer
(digital rectal exam);
glaucoma;b and
depression.
(Procedures only. See
next row for
associated laboratory
services.)
-vaccines, and their
administration, for
influenza,
pneumococcus, and
(high-risk only)
Hepatitis B.
-training, counseling,
or behavioral therapy
for diabetes self-
management; medical
nutrition therapy;
tobacco cessation;
cardiovascular
disease; alcohol
misuse; obesity; and
prevention of sexually
transmitted infections
CRS-27

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
(STIs) (all high risk
only).
Clinical laboratory
Payment is based on the clinical diagnostic
See clinical laboratory fee schedule.
See clinical laboratory fee schedule.
services include:
laboratory fee schedule. In general, no cost
sharing is imposed for clinical laboratory
-screenings for
services. Details of eligibility requirements and
cervical, prostate
coverage for 2012 are at CMS, “Medicare
(prostate specific
Preventive Services, Quick Reference
antigen test), and
Information,” February, 2012,
colorectal cancer
http://www.cms.gov/Outreach-and-Education/
(fecal occult blood
Medicare-Learning-Network-MLN/
only); cardiovascular
MLNProducts/downloads/
disease and diabetes
MPS_QuickReferenceChart_1.pdf.
(blood tests only);
HIV and STIs (both
high-risk only).
a. Deductible, but not coinsurance, is waived for screening colonoscopy procedures in which an abnormality is found (i.e., the screening becomes a diagnostic
procedure).
b. Cost sharing for preventive services (both deductable and coinsurance) is waived if a covered service is recommended for routine use (i.e., with a grade of A or B) by
the U.S. Preventive Services Task Force (USPSTF), or, for a covered services not so recommended, if one of both forms of cost sharing are explicitly waived in statute.
Also, cost sharing is waived for clinical preventive services. Covered preventive services that are not recommended for routine use by the USPSTF include glaucoma
screening (for which both deductable and coinsurance apply); and prostate cancer screening (for which both forms of cost sharing apply for digital rectal exam, and
both are waived for prostate specific antigen (PSA) testing because it is a clinical laboratory service). For more information, see U.S. Preventive Services Task Force,
http://www.uspreventiveservicestaskforce.org/; and “Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Coverage of Preventive
Services Under the Patient Protection and Affordable Care Act,” 75 Federal Register 41726 ff., July 19, 2010.
CRS-28

Medicare Payment Updates and Payment Rates

Table 10. Telehealth
Provider/Service
General payment policy
General update policy
Recent update
Telehealth services
Medicare pays for services furnished via an
Current law established the payment amount
For CY2012, the MEI increase is 0.6%. The
interactive telecommunications system by a
for the Medicare telehealth originating site
telehealth originating site payment is 80% of the
physician or practitioner, notwithstanding the
facility fee for telehealth services provided from
lesser of the actual charge or $24.24.
fact that the individual providing the service is
October 1, 2001 through December 31, 2002 at
not at the same location as the beneficiary.
$20. The facility fee for telehealth services
Payment is equal to the amount that would be
provided on or after January 1 of each
paid under the physician fee schedule if the
subsequent calendar year is the amount for the
service had been furnished without a
previous year increased as of the first day of the
telecommunications system. A facility fee is paid
subsequent year by the percentage increase in
to the originating site (the site where the
the Medicare Economic Index (MEI).
beneficiary is when the service is provided).
MIPPA added certain entities as originating sites
eligible 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-29

Medicare Payment Updates and Payment Rates

Table 11. Durable Medical Equipment (DME)
Provider/service
General payment policy
General update policy
Recent update
Durable Medical
Except in designated Competitive Bidding
In general, fee schedule amounts are updated
The update for CY2003 was 1.1%. As required
Equipment (DME)
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 ACA 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. All items not subject to the 9.5%
assigned claims. Regular Part B cost sharing
reduction received a 5.0% update.
applies. MMA required the Secretary to begin a
For the CY2010 update, the CPI-U for the
program of competitive acquisition for DME,
applicable period was -1.4%, however Medicare
prosthetics and orthotics in which payments for
set the update at 0.0%.
these items would be based on the bids of
winning suppliers. Competitive acquisition was
The update for CY2011 was -0.1% (or a 0.1%
to begin in 10 metropolitan statistical areas
reduction). This represented a 1.1% increase in
(MSAs) in 2007, expanding to 80 MSAs in 2008,
the CPI-U for the applicable period and a
and additional areas in 2009. The first round of
negative multifactor productivity adjustment of
bids were submitted on September 25, 2007,
1.2%.
and the program began on July 1, 2008.
The update for CY2012 is a 2.4% increase over
However, MIPPA stopped the program,
the CY2011 amounts. This represented a 3.6%
terminated all contracts with suppliers and
increase in the CPI-U for the applicable period
required the Secretary to rebid the first round
and a negative multifactor productivity
in 2009. Expansion of the program was delayed
adjustment of 1.2%.
by two years until 2011. ACA 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-30

Medicare Payment Updates and Payment Rates

Table 12. Prosthetics and Orthotics
Provider/service
General payment policy
General update policy
Recent update
Prosthetics and
Except in designated competitive bidding areas
Fee schedule amounts are updated annual y by
The update for CY2003 was 1.1%. As required
orthotics
as described above, prosthetics and orthotics
the CPI-U. MMA eliminated the updates for
by MMA, there were no updates for CY2004,
are paid on the basis of a fee schedule. These
2004-2006.
CY2005 and CY2006. The update for
rates are established regionally and are subject
CY2007 was 4.3%. The update for CY2008
to national limits which have floors and ceilings.
Starting in 2011 ACA requires the fee schedule
was 2.7%. The update for CY2009 was 5.0%.
The floor is equal to 90% of the weighted
update for prosthetics and orthotics to be
For the CY2010 update, the CPI-U for the
average of all regional payment amounts and
subject to a productivity adjustment, which may
applicable period was -1.4%, however Medicare
the ceiling is equal to 120% of the weighted
result in negative update.
set the update at 0.0%.
average of all regional payment amounts.
Assignment is optional; balance billing limits do
The update for CY2011 was -0.1% (or a 0.1%
not apply on non-assigned claims. Regular Part
reduction). This represented a 1.1% increase in
B cost sharing applies.
the CPI-U for the applicable period and a
negative multifactor productivity adjustment of
1.2%.
The update for CY2012 is a 2.4% increase over
the CY2011 amounts. This represented a 3.6%
increase in the CPI-U for the applicable period
and a negative multifactor productivity
adjustment of 1.2%.

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Medicare Payment Updates and Payment Rates

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 ACA requires the fee schedule
CY2007, and CY2008. The update for
equipment fee schedule (see above).
update for medical supplies to be subject to a
CY2009 was 5.0%. For the CY2010 update,
Assignment is optional; balance billing limits do
productivity adjustment, which may result in
the CPI-U for the applicable period was -1.4%,
not apply to non-assigned claims. Regular Part B
negative update.
however Medicare set the update at 0.0%.
cost sharing applies.
The update for CY2011 was -0.1% (or a 0.1%
reduction). This represented a 1.1% increase in
the CPI-U for the period and a negative
multifactor productivity adjustment of 1.2%.
The update for CY2012 is a 2.4% increase over
the CY2011 amounts. This represented a 3.6%
increase in the CPI-U for the applicable period
and a negative multifactor productivity
adjustment of 1.2%.

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Medicare Payment Updates and Payment Rates

Table 14. Parenteral and Enteral Nutrition (PEN)
Provider/service
General payment policy
General update policy
Recent update
Parenteral and
Except in designated competitive bidding areas
Fee schedule amounts are updated annual y by
In CY2009 Enteral nutrients, equipment and
Enteral Nutrition
as described above, parenteral and enteral
the CPI-U.
supplies were subject to the 9.5% reduction
(PEN)
nutrients, equipment, and supplies are paid on
while parenteral nutrients received a 5.0%
the basis of the PEN fee schedule. Prior to
MIPPA reduced the fee schedule update for
update.
2002, PEN was paid on a reasonable charge
2009 by 9.5% for al items, services and
basis (see below under Miscellaneous Items and
accessories included in round 1 of the
For the CY2010 update, the CPI-U for the
Services). The fee schedule amounts are based
competitive bidding program. Enteral nutrition
applicable period was -1.4%, however Medicare
on payment amounts made on a national basis
was included in the first round of competitive
set the update at 0.0%.
to PEN suppliers under the reasonable charge
bidding, and is thus subject to the 9.5% fee
The update for CY2011 was -0.1% (or a 0.1%
system. Assignment is optional; balance billing
schedule reduction in CY2009. Parenteral
reduction). This represented a 1.1% increase in
limits do not apply on non-assigned claims.
nutrition was not included in round 1.
the CPI-U for the applicable period and a
Regular Part B cost sharing applies.
Starting in 2011 ACA requires the fee schedule
negative multifactor productivity adjustment of
update for parenteral and enteral nutrition to
1.2%.
be subject to a productivity adjustment, which
may result in a negative update.
The update for CY2012 is a 2.4% increase over
the CY2011 amounts. This represented a 3.6%
increase in the CPI-U for the applicable period
and a negative multifactor productivity
adjustment of 1.2%.

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Medicare Payment Updates and Payment Rates

Table 15. 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 CY2011 update of 1.5% was subject to a
Centers (ASCs)
surgery-related facility services provided in an
FY2005 under the prior payment system,
multifactor productivity adjustment of 1.3
ASC using a payment system based on the
changed the update cycle to a calendar year
percentage points and a wage index budget
hospital outpatient prospective payment system
from a fiscal year, and eliminated the updates
neutrality factor of 0.9996. The CY2011 ASC
(OPPS). The new payment system will be
for calendar years 2006-2009. MMA also
conversion factor was established at $41.923.
implemented over a four-year transition period.
established that a revised payment system for
The ASC payment system uses the same
surgical services furnished in an ASC wil be
The CY2012 update of 2.7% is subject to a
payment groups (APCs) as the OPPS. Many of
implemented on or after January 1, 2006, and
multifactor productivity adjustment of 1.1
the ASC relative weights procedures will be the
not later than January 1, 2008. Total payments
percentage points and a wage index budget
same as in OPPS. Certain services will be
under the new system were established as
neutrality factor of 1.0004. The CY2012 ASC
eligible for separate payments. The relative
equal to the total projected payments under
conversion factor is established at $42.627.
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-34

Medicare Payment Updates and Payment Rates

Table 16. 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 CY2011, the MB update was 2.6% which,
Departments
August 2000, the unit of payment is the
year schedule. These annual updates are based
as directed by ACA, was reduced by 0.25
(HOPDs)
individual service or procedure as assigned to
on the hospital IPPS MB. As established by
percentage point to result in an increase of
one of about 570 ambulatory payment
TRHCA, starting in CY2009, the update for
2.35%. Hospitals that failed to submit the
classifications (APCs). To the extent possible,
hospitals that do not submit required quality
required quality data receive an update of
integral services and items are bundled within
data will be the MB minus 2 percentage points.
1.35%. This increase was adjusted by budget-
each APC, specified new technologies are
The reduction for not submitting quality data
neutrality factors associated with wage index
assigned to new technology APCs until clinical
would apply for the applicable year, and would
changes and pass through expenses. The final
and cost data is available to permit assignment
not be taken into account in subsequent years.
CY2011 conversion factor for hospitals that did
into a clinical APC. Medicare’s payment for
ACA established a schedule of annual
submit the required quality data was $68.876
HOPD services is calculated by multiplying the
reductions in the update for starting CY2010
and was $68.530 for those that did not submit
relative weight associated with an APC by a
through CY2019. The CY2010 update
the required data.
conversion factor. For most APCs, 60% of the
reduction is 0.25 percentage point. The update
conversion factor is geographically adjusted by
will include a productivity adjustment starting
For CY2012, the MB update is 3.0% which, as
the IPPS wage index. Except for new technology
January 1, 2012. The ACA update reductions
directed by ACA, is reduced by a productivity
APCs, each APC has a relative weight that is
may result in a negative update for that year.
adjustment of 1.0 percentage point and by a 0.1
based on the median cost of services in that
percentage point reduction to result in an
APC. Certain APCs with significant fluctuations
increase in 1.9%. Hospitals that did not submit
in their relative weights will have the calculated
required quality data receive a negative 0.1%
change dampened. The HOPD-PPS also includes
update. This increase is adjusted by the
budget-neutral pass-through payments for new
required budget neutrality factors for wage
technology and budget-neutral outlier
index changes (1.005), a cancer hospital
payments. Cancer and children’s hospitals have
payment adjustment (0.9978) and pass-through
a permanent hold harmless protection from the
expenses (0.07). The CY2012 conversion
HOPD-PPS. Starting January 1, 2012, cancer
factor is $70.016 for hospitals that submit
hospitals will receive additional payments to
required quality data and $68.616 for hospitals
reflect their higher costs. This cancer hospital
that did not submit this data. (The prior year’s
adjustment will be recalculated each year and is
update penalty for not submitting quality data is
implemented in a budget neutral basis. HOPDs
not taken into account in the next year.)
in rural hospitals with 100 or fewer beds (that

are not SCHs) receive at least 85% of the
payment it would have received under the prior
payment system during CY2012. All SCHs
received 85% of the payment difference for
covered HOPD services furnished during
CY2011. SCHs with no more than 100 beds
receive 85% of the payment difference for
covered HOPD services furnished during
CY2012 Starting for services on January 1,
2006, rural SCHs will receive a 7.1% payment
CRS-35

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
increase..
Over time, under Medicare’s prior payment
system, beneficiaries’ share of total outpatient
payments grew to 50%. HOPD-PPS slowly
reduces the beneficiary’s copayment for these
services. Copayments will be frozen at 20% of
the national median charge for the service in
1996, updated to 1999. Over time, as PPS
amounts rise, the frozen beneficiary
copayments will 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. MCTRJCA reduced reimbursement
on Medicare beneficiaries’ bad debt for HOPD
services from 70% to 65%, starting in FY2013.

CRS-36

Medicare Payment Updates and Payment Rates

Table 17. 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 CY2011, the RHC upper payment limit
(RHCs) and Federally
all-inclusive rate for each beneficiary visit for
year by the Medicare economic index (MEI)
was $77.99, the urban FQHC limit was
Qualified Health
covered services. An interim payment is made
which measures inflation for certain medical
$126.10, and the rural FQHC limit was
Center (FQHCs)
to the RHC or FQHC based on estimates of
services.
$109.14.
services
allowable costs and number of visits; a
reconciliation is made at the end of the year
ACA provided for the development and
For CY2012, the RHC upper payment limit is
based on actual costs and visits. Per-visit
implementation of a prospective payment
$78.54, the urban FQHC limit is $126.98, and
payment limits are established for all RHCs
system (PPS) for Medicare FQHCs to be
the rural FQHC limit was $109.90.
(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,
MCTRJCA reduced reimbursement on
upper payment limits, and productivity
Medicare beneficiaries’ bad debt for RCH and
guidelines currently in effect.
FQHC services from 100% to 88% in FY2013,
76% in FY2014, and 65% in FY2015 and
subsequent fiscal years.




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Medicare Payment Updates and Payment Rates

Table 18. 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-38

Medicare Payment Updates and Payment Rates

Table 19. Part B Drugs and Biologicals Covered Incident to a Physician’s Visit
Provider/service
General payment policy
General update policy
Recent update
Medicare covers
Drug products, except for pneumococcal,
The Secretary updates ASP quarterly. Payments
According to CMS, Part B drugs’ ASPs continue
certain outpatient
influenza, and hepatitis B vaccines, those
under the ASP methodology may be lowered by
to be stable. CMS sets Part B drug payment
drugs and biologicals
associated with certain renal dialysis services,
the Secretary if the ASP exceeds either the
rates quarterly based on ASP data reported by
under the Part B
blood products and (hemophiliac) clotting
widely available market price or Average
manufacturers approximately six months
program that are
factors, and radiopharmaceuticals, are paid
Manufacturer Price (AMP) by a specified
earlier. CMS updated Part B drug prices,
authorized by statute,
using a methodology based on drugs’ average
percentage (5% in 2006 to present, as
including FY2012 fourth quarter prices
including those that
sales prices (ASP).
determined by the Secretary). In cases where
September 6, 2012. Prices for the majority
are: (1) covered if
ASP exceeds the market price, CMS’s Part B
(64%) of the top 50 high volume drugs changed
they usual y are not
The ASP methodology is the volume-weighted
drug payment would equal the lesser of the
less than 2% between the 4th quarter and the
self-administered and
average of each manufacturer’s ASPs reported
widely available market price or 103% of AMP.
3rd quarter of 2012 (June 30th compared to
are provided incident
to CMS for all National Drug Codes (NDCs)
September 30th, 2012). Overall, high volume
to a physician’s
assigned to the same payment and billing code,
The Department of Health and Human Services
Part B drug prices decreased an average of 1.7%
services; (2)
usual y from the Healthcare Common
Office of Inspector General (OIG) is required
for the fourth quarter of 2012. There are a
necessary for the
Procedure Coding System (HCPCS). Drugs
to monitor and report on Part B drug prices as
number of factors that affect the overall average
effective use of
general y have unique NDC codes for each
well as other drug prices regularly. OIG reports
decreases in Part B drug prices, such as multiple
covered DME; (3)
dose (strength) and package size available for a
have found that ASP exceeded the 5% AMP
manufacturers, alternative therapies, new
certain self-
product. Manufacturers’ reported ASP excludes
threshold for some drugs (see Memorandum
product entrants, recent generic versions
administered oral
nominal price transactions, such as drug sales
Report, Comparison of Fourth-Quarter 2011
entering the market, or market shifts to lower-
cancer and anti-
subject to the Medicaid rebate, the 340B
Average Sales Prices and Average Manufacturer
priced products.
nausea drugs (with
discount program, TRICARE, and the Veterans
Prices: Impact on Medicare Reimbursement for
injectable
Health Administration. Drug makers are
Second Quarter 2012, OEI-03-12-00410). CMS
equivalents); (4)
required to report ASP and sales volume data
has elected not to lower payment rates for
erythropoietin
to CMS.
these drugs, because, they argue that these
stimulating agents
prices are due to temporary price fluctuations,
In general, Medicare’s Part B drug payments are
(ESAs) used to treat
even though the OIG estimated that Medicare
set at 106% of ASP for multiple and single
anemia; (5)
expenditures would be substantial y lower.
source drugs. Medicare’s payment covers the
immunosuppressive
drug’s acquisition cost as well as administrative
CAP payment amounts are updated annually,
drugs after covered
overhead attributable to procurement, storage,
and may be adjusted more frequently, but not
Medicare organ
and handling of the drug. In general, health
more often than quarterly, for the following
transplants; (6)
professionals receive separate payments for
situations: (1) introduction of new drugs, (2)
hemophilia clotting
Part B drug administration, which vary
expiration of a drug patent or availability of a
factors; and (7)
depending on the entity administering the drug
generic drug, (3) material shortage that results
vaccines for influenza,
(i.e., physicians, hospital outpatient
in a significant price increase for the drug, or
pneumonia, and
departments, and DME suppliers). Medicare
(4) withdrawal of a drug from the market.
hepatitis B.
beneficiaries are responsible for regular cost
Throughout this
sharing for Part B drugs, except for
CAP vendors’ reasonable net acquisition costs
table, all references
pneumococcal and influenza virus vaccines.
are used, in part, to set payment amounts, but
to Part B drugs also
are limited by the weighted payment amounts
include biological
Part B Drugs Competitive Acquisition Program
established under SSA Sec. 1847A.
products.
(CAP) Alternative. MMA required the Secretary
to establish a CAP program for Medicare Part B
In September 2008, CMS “postponed” the 2009
CRS-39

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
drugs which are not paid on a cost or
CAP contract, because of issues with qualified
prospective payment system basis. Part B drug
bidders. New CAP contracts have not been
payment amounts furnished during the first year
approved since 2009 contract was postponed.
for an approved CAP vendor were set through
a competitive process based on each bidder’s
prices. BioScrip was the only bidder under the
Part B drug CAP. BioScrip’s contract expired
September 10, 2008.












CRS-40

Medicare Payment Updates and Payment Rates

Table 20. 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.




CRS-41

Medicare Payment Updates and Payment Rates

Table 21. Partial Hospitalization Services Connected to Treatment of Mental Illness
Provider/service
General payment policy
General update policy
Recent update
Partial hospitalization
Medicare provides Part B hospital outpatient
See physician fee schedule and hospital
See physician fee schedule and hospital
services connected to
care payments for “partial hospitalization”
outpatient services.
outpatient services.
treatment of mental
mental health care. The services are covered
illness
only if the individual would otherwise require
inpatient psychiatric care. Services must be
provided under a structured program which is
hospital-based or hospital-affiliated and must be
a distinct and organized intensive ambulatory
treatment service offering less than 24-hour
daily care. The program may also be covered
when provided in a community mental health
center. Payment for professional services is
made under the physician fee schedule. Other
services are paid under the hospital outpatient
prospective payment system. Regular Part B
cost sharing applies; balance billing is prohibited.

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Medicare Payment Updates and Payment Rates

Table 22. 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 CY2011, 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 1.1% which was subject to a multifactor
The fee schedule establishes seven categories of
ending in June. The update is referred to as the
productivity adjustment of 1.2 percentage
ground ambulance services and two categories
ambulance inflation factor (AIF). Under ACA,
points. Medicare set the AIF for CY2011 a
of air ambulance services. The ground
starting January 1, 2011, the AIF is adjusted by
-0.1%.
ambulance categories are: basic life support
changes in economy wide productivity.

(BLS), both emergency and nonemergency;
Specifically, the AIF is subject to a 10-year
In CY2012, the CPI-U for the applicable period
advanced life support Level 1 (ALS1), both
moving average of changes in annual economy
is 3.6% which is subject to a multifactor
emergency and nonemergency; advanced life
wide private nonfarm business multifactor
productivity adjustment of 1.2 percentage
support Level 2 (ALS2); specialty care transport
productivity.
points. Medicare set the AIF for CY2012 at
(SCT); and paramedic ALS intercept (PI). The
2.4%
air ambulance categories are: fixed wing air

ambulance (FW) and rotary wing air ambulance

(RW).

For air ambulance services, the national fee
schedule is fully phased-in. For ground
ambulance services, payments through 2009
were 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 was 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, 2012, 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, 2012, mileage payments are
increased by 22.6% for ground ambulance
services originating in rural, low population
density areas. MIPPA as extended by ACA (and
subsequent legislation) specifies that any area
designated as rural for the purposes of making
CRS-43

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
payments for air ambulance services on
December 31, 2006, will be treated as rural for
the purpose of making air ambulance payments
during the period July 1, 2008-December 31,
2012. Regular Part B cost sharing applies.
Assignment is mandatory.

CRS-44

Medicare Payment Updates and Payment Rates

Parts A and B
Table 23. 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 CY2011, the HH MB update is 1.1% 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,
-0.9% for those that do not. This update
of care for beneficiaries, subject to several
in part, by the projected increase in the HH
reflects the HH MB update minus 1 percentage
adjustments, with unlimited episodes of care in
market basket (MB) index. This index measures
point, per ACA. The CY2011 base payment
a year. The payment covers skilled nursing,
changes in the costs of goods and services
amounts for the 60-day episode were adjusted
therapy, medical social services, aide visits,
purchased by HHAs.
downward by 3.79% as a result of case-mix
medical supplies, and others. Durable medical
refinements.
equipment is not included in the home health
DRA specified that HHAs that submit health
(HH) PPS. The base payment amount is
care quality data, as specified by the Secretary,
For CY2012, the HH MB update is 1.4% for
adjusted for: (1) differences in area wages using
receive a full MB increase; while HHAs that do
HHAs that submit the required quality data and
the hospital wage index; (2) differences in the
not submit such data receive an update
-0.6% for those that do not. This update
care needs of patients (case-mix) using “home
equivalent to the MB minus 2 percentage
reflects the home health market basket update
health resource groups” (HHRGs); (3) outlier
points. This requirement was applicable for
minus 1 percentage point, per ACA. The
visits (for the extraordinarily costly patients);
CY2007 and each subsequent year.
CY2012 base payment amounts for a 60-day
(4) a partial episode for when a beneficiary
episode are adjusted downward by 3.79% as a
In CY2010, HHAs received the ful MB update.
transfers from one HHA to another during a
result of case-mix refinements.
As specified in ACA, the MB updates will be
60-day episode; (5) budget neutrality; and (6) a
reduced by 1.0% for al HHAs in CY2011

low utilization payment adjustment (LUPA) for
through CY2013. For CY2014, HHAs will
beneficiaries who receive four or fewer visits.
receive the full MB. Starting in CY2015, the MB

The HHRG applicable to a beneficiary is
update will be subject to the productivity factor
determined fol owing an assessment of the
adjustment.
patient’s condition and care needs using the
In CY2008, refinements to the Medicare HH
Outcome and Assessment Information Set
PPS included a reduction in the national
(OASIS). After the assessment, a beneficiary is
standardized 60-day episode payment rate to
categorized in one of 153 HHRGs that reflect
account for changes in case-mix that are not
the beneficiary’s clinical severity, functional
related to home health patients’ actual clinical
status, and service requirements.
conditions; among other things. This resulted in
Starting in CY2010, outlier payments are
a downward payment for a 60-day episode of
capped at 10% of total payments per HHA, and
care of 2.75% for CY2008 through CY2010,
no more than 2.5% of total aggregate PPS
and 3.79% for CY2011 and CY2012.
payments for all Medicare HH payments.
Starting in CY2014, ACA requires the
HHAs are paid 60% of the case-mix and wage-
Secretary to rebase HH payments by an
adjusted payment after submitting a request for
appropriate percentage to, among other things,
anticipated payment (RAP). The RAP may be
reflect the number, mix and level of intensity of
CRS-45

Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
submitted at the beginning of a beneficiary’s
HH services in an episode, and the average cost
care once the HHA has received verbal orders
of providing care. Any adjustments that result
from the beneficiary’s physician and the
must be made before the annual payment
assessment is completed. The remaining
updates are applied for that year (see next
payment is made when the beneficiary’s care is
column regarding MB updates). A four-year
completed or the 60-day episode ends.
phase-in, ending in 2017, will be implemented,
in equal increments, each increment may not
For visits ending on or after April 1, 2010, and
exceed 3.5% of the HH PPS base payment
before January 1, 2016, HHAs will receive a
amount as of March 23, 2010. ACA also
3% increase to the national standardized 60-day
requires the Secretary to reduce the standard
episode rate for services provided to
HHRG amounts such that the aggregate
beneficiaries in rural areas.
reduction in payments will equal 5% of total PPS
payments for a period.
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Table 24. 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
As required by MIPPA, estimated Medicare
For facilities receiving the blended payment
disease (ESRD)
failure, that must be treated either with a
total dialysis payments for 2011 equaled 98% of
amount, the composite rate for CY2011
kidney transplant or by dialysis. Because of the
payments that would have been made if the
increased by 2.5% to $138.53. For purposes of
scarcity of available kidneys for transplant,
ESRD PPS had not been implemented.
the composite rate portion of the blended
dialysis is the treatment option for most ESRD
payment amount, an add-on of $0.49 was added
beneficiaries. Dialysis treatment removes
Section 1881(b)(14)(F) of the SSA, as added by
to the adjusted composite payment to account
excess fluid and toxins from the patient’s blood.
section 153(b) of MIPPA and amended by
for ESRD related drugs and biologicals that
section 3401(h) of ACA requires that the ESRD
were separately paid under Part D and are now
Section 153(b)(1)(E) of MIPPA requires the
PPS base rate and composite rate portion of
included in the ESRD PPS. There was a further
Secretary to phase-in the ESRD prospective
the blended payment amount be increased by
reduction in the wage index floor from 0.65 to
payment system (ESRD PPS) on January 1, 2011
the annual change in the ESRD market basket
0.60. Then, after applying a budget neutrality
to January 1, 2014. The ESRD PPS payment is a
(MB). The ESRD market basket increase factor
adjustment of 1.056929, the wage index floor
single “bundled” payment for Medicare renal
is subject to a productivity adjustment,
under the blended payment was 0.64320 for
dialysis services per treatment. The ESRD PPS
beginning in 2012.
CY2011.
broadens the prior payment system’s base rate,
or “composite rate”, to include items and
The ESRD wage index floor will be reduced by
Under the ESRD PPS, the base rate was
services such as, erythropoiesis stimulating
0.05 percentage point for each calendar year
adjusted downward by 1% to allocate ESRD
agents (ESAs), diagnostic laboratory tests
until CY2014.
payments to an outlier pool. The base rate was
among other items. The new ESRD PPS does
Beginning in January 1, 2012, providers of renal
also adjusted downward by2% to ensure
not adjust reimbursement for the provider’s
dialysis services and renal dialysis facilities are
aggregate PPS payments equaled 98% of
facility type (i.e., hospital, home, independent
subject to quality incentive requirements and a
payments under the prior composite payment
facility). MIPPA allows providers to make a one-
reduction of up to 2% if they do not meet these
system. The ESRD PPS base rate effective
time election to be paid under the ESRD PPS
requirements.
January 1, 2011 was $229.63. The base rate was
prior to 2014 or to receive a blended payment
wage adjusted, any applicable patient-level
amount of the prior payment system and the
adjustments, facility-level adjustments, outlier
ESRD PPS.
adjustments, and training add-on payments
were applied to determine the payment rate for
Payments include adjustments for case mix,
a dialysis treatment. The wage index floor
wage differences, high cost outliers (including
under the ESRD PPS was reduced from 0.65 to
variations in the amount of ESAs), training, and
0.60.
costs in rural, low-volume facilities (with a
minimum payment adjustment of 10% for
For facilities receiving the blended payment
services furnished between January 1, 2011, and
amount, the composite rate for CY2012 is
January 1, 2014), among others. The wage
$141.94. The composite rate includes a market
index, which adjusts payments for national wage
basket update of 3.0% reduced by a 0.9%
differences, includes a minimum value, or
productivity adjustment. Similar to the prior
“floor”, for Medicare ESRD payments. This
year, the composite rate includes an add-on of
floor has been gradual y reduced since CY2006.
$0.49 to account for ESRD related drugs and
biologicals that are separately paid under Part D
MCTRJCA reduced reimbursement on
and are now included in the ESRD PPS. Under
beneficiaries’ bad debt for ESRD services from
the blended payment system, the wage index
100% to 88% in FY2013, 76% in FY2014, and
floor is 0. 552. For CY2012, the ESRD PPS
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Medicare Payment Updates and Payment Rates

Provider/service
General payment policy
General update policy
Recent update
65% in FY2015 and subsequent fiscal years.
base rate is $234.81, which includes a 0.1%

upward budget neutrality adjustment rate, a
market basket update of 3.0%, and a 0.9%
productivity adjustment. The wage index floor
under the ESRD PPS base rate is reduced from
0.60 to 0.55.
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Medicare Payment Updates and Payment Rates

Part C
Table 25. Managed Care Organizations
Provider/service
General payment policy
General update policy
Recent update
(a) Medicare
In general, Medicare makes a monthly risk-
The MA payments are determined annual y by
For CY2010, MA benchmarks were not
advantage contracts
adjusted payment in advance to Medicare
the method described under “General Payment
rebased. Al benchmarks were updated by the
Advantage (MA) plans for each enrolled
Policy.”
increase in the national MA growth percentage
beneficiary in a payment area. In exchange, the
(0.81%), adjusted for budget neutrality (1.001),
plans agree to provide all Medicare-covered
For CY2004 through CY2009, plan benchmarks
and the phase-out of IME (a maximum
items and services (except hospice) to each
were updated annually by the minimum
reduction of approximately 0.6%).
enrollee. In general, the actuarial value of basic
percentage increase, or in certain years, 100%
cost sharing may not exceed the actuarial value
of FFS spending in the area (the rebased
Also for CY2010, a uniform 3.4% reduction was
of cost sharing under original Medicare.
amount). The minimum percentage increase
applied to the risk scores of all MA plan
was the prior year’s benchmark increased by
enrol ees to account for differences in coding
MMA made substantial changes to Medicare
the national MA growth percentage (projected
patterns between MA plans and providers
Part C. It created the Medicare Advantage (MA)
increase in Medicare per capita expenditures). In
under Parts A and B of original Medicare.
program, (replacing the Medicare+Choice
years when the Secretary rebased rates, the
program) and introduced several changes
benchmark for each county was updated by the
As required by ACA, the benchmarks for
designed to increase plan availability. The MMA
greater of either the national MA growth
CY2011 were the same as those in CY2010.
introduced regional plans that operate like
percentage, or 100% of FFS spending adjusted
In CY2012, MA benchmarks begin the phase-in
Preferred Provider Organizations. Additionally,
to exclude the value of direct medical education
to rates based on a percent of FFS spending in
the MMA created the Part D program
payments, as explained below. Beginning in
each county. For the portion of the benchmark
(discussed below) to provide outpatient
2004 and at a minimum every third year, the
based on the pre-ACA methodology, the
prescription drugs through some MA plans, but
Secretary is required to rebase FFS payment
benchmarks were rebased. This means that that
also through stand-alone Part D plans.
rates. Rebasing is updating FFS rates to reflect
part of the county benchmarks are set at the
recent growth in health care expenditures.
In 2006, the Secretary began determining MA
greater of the new estimate of FFS spending in
plan payments by comparing plan bids to a
The update to the benchmark for regional plans
the county, or the previous year’s benchmark
benchmark. A plan’s bid is its estimated revenue
has both a statutory increase and a competitive
increased by the national MA growth
requirement of providing covered Part A and B
increase. The statutory component is similar to
percentage (-0.16%), and adjusted to phase-out
services to beneficiaries (including cost of
the update for other MA plans and the
IME. For the portion of the benchmark based
services, administration, and profit). A
competitive component is based on a weighted
on the ACA methodology, the base amount
benchmark is the maximum amount CMS will
average of plan bids.
was set at the rebased FFS estimate for each
pay a plan for providing these required benefits.
county, adjusted to phase-out IME.
If a plan’s bid is less than the benchmark, its
DRA made additional changes to the
Additional adjustments include: (a) an
payment is equal to its bid plus a rebate equal
benchmark calculation. Beginning in 2007, DRA
adjustment to reflect the amount of additional
to a percentage of the difference between its
added two new adjustments to calculating the
payments that would have been made if
bid and the benchmark. (Before 2012, the
benchmark: (1) an adjustment to exclude
beneficiaries had not received services from
rebate was equal to 75%; starting in 2012, the
budget neutrality in risk adjustment, and (2) an
facilities of the Department of Defense, and the
size of the rebate is contingent of plan quality,
adjustment to account for coding intensity
Department of Veterans Affairs, (b) a uniform
as explained below.) The remaining amount is
differences between MA plans and original
Medicare for years 2007 through 2010. The
3.41% reduction applied to plan risk scores to
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Provider/service
General payment policy
General update policy
Recent update
retained by the federal government. If a plan’s
adjustment to exclude budget neutrality in the
account for differences in coding patterns
bid is greater than the benchmark, its payment
risk adjustment was completed in 2010. DRA
between MA plans and providers under Parts A
is equal to the benchmark and the plan must
required the Secretary to conduct a study of
and B of original Medicare, and (c) quality bonus
make up the difference between its bid and the
the difference between treatment and coding
payment demonstration.
benchmark by charging a beneficiary premium.
patterns between MA plans and providers
In general, the Secretary has the authority to
under Parts A and B of Medicare. The findings
For CY2012 and CY2013, the quality bonus
review and negotiate plan bid amounts to
were to be incorporated into calculations of
demonstration increases to the benchmarks are
ensure that the bid reflects revenue
MA benchmarks in 2008, 2009, and 2010,
5% for 5-star plans, 4% for 4-star and 4.5-star
requirements. At least one plan offered by an
however they were first incorporated in 2010.
plans, 3.5% for 3.5-star plans, and 3% for 3-star
MA organization must be an MA-PD plan, one
plans.
that offers Part D prescription drug coverage.
Beginning in 2010, MIPPA requires that the
MA organizations offering prescription drug
value of indirect medical education (IME) be
coverage receive a direct subsidy for each
phased-out of al benchmarks. The amount
enrol ee in their MA-PD plan, equal to the
phased-out each year is based on a ratio of (1) a
plan’s risk adjusted standardized bid amount
specified percentage (0.60% in the first year),
(reduced by the base beneficiary premium). The
relative to (2) the proportion of per capita
plans also receive a reinsurance payment
costs in original Medicare in the county that
amount for the federal share of their payment
IME costs represent. The effect of the ratio is
as wel as premium and cost-sharing
to phase-out a higher proportion of IME costs
reimbursements for qualified low-income
in areas where IME makes up a smaller
enrol ees.
percentage of per capita spending in original
Medicare. After 2010, the numerator of the
Also beginning in 2006, the MA program began
phase-out percentage is increased by 0.60
offering regional plans covering both in- and
percentage points each year.
out-of-network required Medicare services. To
encourage regional plan participation in the
CY2011 benchmarks were frozen at the
program additional payments were authorized
CY2010 level.
in certain circumstances for hospitals that
Starting in CY2012, a new benchmark
would not otherwise join a private plan’s
calculation based on a percentage of fee-for-
network.
service spending in each county began to be
Beginning in 2012, for MA plans that bid below
phased-in. In CY2012, for the portion of the
the benchmark, the rebate will be contingent on
benchmark based on the new methodology, the
plan quality as measured by a 5-star quality
“base rate” equals 100% FFS spending in the
rating system established by the Secretary. The
area and is updated each year by either the
calculation will be phased in over three years
increase in the national MA growth percentage,
from 75% for al MA plans that bid below the
or rebased FFS amounts. County benchmarks
benchmark for years prior to 2012, to a rate of
are set at either 95%, 100%, 107.5% or 115% of
70% for plans with a star rating of 4.5 or higher,
the base rate, with higher percentages applied
65% for plans with a star rating of 3.5 or
to counties with the lowest FFS spending. In
greater, but below 4.5 stars, and 50% for plans
other words, the 25% of all counties with the
with less than 3.5 stars. The rebate based on
lowest FFS spending have their base rate
plan quality will be fully phased-in by 2014.
adjusted by 115%, while the 25% of counties
with the highest FFS spending have their base
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Provider/service
General payment policy
General update policy
Recent update
rate adjusted by 95%. The phase-in will take
place over 2 to 6 years, with a larger phase-in
period for areas where the new methodology
would result in larger benchmark decreases.
Under the ACA, starting in CY2012,
benchmarks are increased based on plan quality
with higher increases in qualifying areas.
However, for CY2012 through CY2014, the
Secretary is implementing a quality bonus
demonstration program which increases the
size of the quality bonus adjustments specified
in the ACA, expands the number of eligible
plans, and changes how the adjustment applies
to the benchmark. Also, under the
demonstration, the bonuses may result in
benchmarks that are higher than the pre-ACA
benchmarks. The coding intensity adjustment
first specified in DRA continues after CY2010
with specified minimum adjustments starting in
CY2014.
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Provider/service
General payment policy
General update policy
Recent update
(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.
A portion of Medicare beneficiaries’ bad debt
(beneficiaries’ cost sharing obligations that the
plan has been unable to collect) are reimbursed
by Medicare, with certain restrictions.
MCTRJCA reduces reimbursement on bad debt
for Cost plans from 70% to 65%, starting in
FY2013.
Beginning January 1, 2013, cost contracts can
not be extended or renewed in a service area if,
during the entire previous year, the service area
had two or more MA regional plans or two or
more MA local plans offered by different
organizations.
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Medicare Payment Updates and Payment Rates

Part D
Table 26. 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 CY2012, “standard coverage” has a $320
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 $320 and $2,930 (the initial coverage
prescription drug
alternative coverage, with at least actuarial y
previous July.
period). From this point, there is limited
coverage is provided
equivalent benefits. For 2012, most plans offer
coverage, until the beneficiary has total out-of-
through private
actuarial y equivalent benefits or enhanced
ACA, phases out the Part D doughnut hole.
pocket costs of $4,700 (about $6,657.50 in
prescription drug
coverage rather than the standard package. A
Beginning in 2011, manufacturers are required
total spending)a; this coverage gap has been
plans (PDPs) or MA
number of plans have reduced or eliminated the
to provide a 50% discount on brand-name
labeled the “doughnut hole.” In 2012, non-LIS
prescription drug
deductible. Many plans offer tiered cost sharing
drugs during the coverage gap to participate in
enrol ees receive a 50% discount off of brand
(MA-PD) plans. The
under which lower cost sharing applies for
the Part D program. The law phases in
name drugs and a 14% Medicare subsidy for the
program relies on
generic drugs, higher cost sharing applies for
Medicare coverage for generic drugs during the
cost of their generic drugs purchased during the
these private plans to
preferred brand name drugs, and even higher
coverage gap starting in 2011, and for brand
coverage gap period. Once the beneficiary
provide coverage and
cost sharing applies for non-preferred brand
name drugs in 2013. When the doughnut hole
reaches the catastrophic limit, the program pays
to bear some of the
name drugs.
is fully phased out in 2020, Part D enrollees will
all costs except for nominal cost sharing.
financial risk for drug
be responsible for 25% of the cost of brand
costs; federal
name and generic drugs during the coverage

subsidies cover the
gap (the same as in the initial coverage phase).
bulk of the risk.
The catastrophic coverage limit will also be
Unlike other
reduced to a smal extent in years 2014 through
Medicare services,
2019.
the benefits can only

be obtained through
private plans. While
al plans have to meet
certain minimum
requirements, there
are significant
differences among
them in terms of
benefit design,
beneficiary premiums,
drugs included on
plan formularies (i.e.,
list of covered drugs)
and cost sharing
applicable for
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Provider/service
General payment policy
General update policy
Recent update
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. Certain
individuals with
incomes below 150%
of poverty may qualify
for the low-income
subsidy (LIS) which
covers most or all of
their premiums, cost
sharing, and drug
costs during the
coverage gap.
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
2012 plan year. The national average monthly
to plans consistent with an overall subsidy level
Policy.”
bid amount for 2012 is $84.50.
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 ($4,700 in 2012). Plans that
enroll individuals eligible for the low-income
subsidy (LIS) receive an additional subsidy to
cover most of the premiums and cost sharing
and for drug coverage in the coverage gap for
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Provider/service
General payment policy
General update policy
Recent update
these individuals.
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
2012 plan year. The base beneficiary premium
beneficiary premium is calculated based on the
Policy.”
for 2012 is $31.08. (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. Additionally,
since 2011, Part D enrol ees with higher
incomes pay higher premiums. The premium is
the same for all individuals in a particular plan
(except those entitled to a low income subsidy
and those subject to high-income premiums).
Risk corridors
The federal government and plans share the
In 2006 and 2007, plans were at ful risk for
The 2012 risk corridors are unchanged from
risk for costs within specified “risk corridors.”
costs within 2.5% above or below the target. If
contract year 2011.
”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.
a. The actual amount of total spending will depend on the mix of brand name and generic drugs used by the beneficiary during the coverage gap.
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Acknowledgments
The authors wish to thank C. Stephen Redhead, Specialist in Health Policy; Sarah Lister, Specialist in
Public Health and Epidemiology; and David Newman and Mark Newsome, former Specialists in Health
Care Financing, for their contributions to this report.
Congressional Research Service
56