143
Appendix: Synopsis of
the Medicare Program’s
Payment Systems
e Medicare program leads the way in developing, implementing, and rening various types of
payment systems for a wide variety of healthcare providers and healthcare services. e following
provides a summary of the dierent payment systems and associated payment mechanisms. Each of
these systems has been discussed to some level of detail in one or more of the four volumes comprising
this series of books. Note that private third-party payers may use these approaches on a modied basis.
Hospital Payment
Inpatient
Short-term acute care hospitals are paid through the MS-DRGs (Medicare Severity Diagnosis
Related Groups). MS-DRGs represent a complicated prospective payment system (PPS). ere are
certain exceptions to the IPPS (inpatient prospective payment system):
◾ Critical access hospitals (CAHs): Cost-based reimbursement is used.
◾ Cancer hospitals: Cost-based reimbursement is used.
◾ Children’s hospitals: Cost-based reimbursement is used.
Certain specially designated hospitals receive additional payments. Each of these designations
requires meeting certain special requirements. ese include:
◾ Medicare-dependent hospital (MDH)
◾ sole community hospital (SCH)
◾ rural referral center (RRC)
◾ low-volume hospital
ere are also a few special cost pass-through payments:
a. Direct Graduate Medical Education (DGME)
b. Organ procurement costs
144 ◾ Appendix: Synopsis of the Medicare Program’s Payment Systems
c. CRNAs (certied registered nurse anesthetists) for small rural hospitals
d. Nursing and allied health (NAH) education costs
e. Hemophilia clotting factors
Generally, for pass-through payment calculation a distinction is made between routine costs
and ancillary costs, and dierent cost-to-charge ratios (CCRs) are used.
e IPPS payment calculation addresses the costs for hospitals in two basic parts:
1. Capital costs
2. Operating costs
A number of other payment issues are involved with payment for cost outliers and transfers
of various types (e.g., transfer from PPS hospital to another PPS hospital or transfer from a hos-
pital to a subacute provider such as skilled nursing). MS-DRGs are totally code dependent with
the use of ICD-10 (International Classication of Diseases, Tenth Revision) for both procedure and
diagnosis coding.
Certain hospitals do not use the IPPS. Instead, they have their own special PPSs. Currently,
these are
◾ psychiatric hospitals or distinct part units,
◾ rehabilitation hospitals or distinct part units, and
◾ long-term care hospitals (LTCHs).
MS-DRGs and associated hospital payment mechanisms are discussed in Prospective Payment
Systems.
Outpatient Services
Payment for hospital outpatient services is more varied than for inpatient payments. is vari-
ability simply reects the enormous range of outpatient services. For lack of a better denition,
hospital outpatient services are all those services that hospitals can provide that are not inpatient
services.
For many outpatient services, Ambulatory Payment Classications (APCs) are used. APCs
cover surgeries, outpatient diagnostic testing, emergency room (ER) services, therapeutic radia-
tion, chemotherapy, and oncology, to name a few. ere are some signicant exceptions. For
instance, laboratory services are paid through a separate fee schedule, as are durable medical
equipment (DME) and ambulance services. Also, physical therapy and occupational therapy are
not under APCs and are paid through the Medicare Physician Fee Schedule (MPFS). Services such
as speech language pathology (SLP) and pathology may be paid under APCs or through the MPFS
depending on the specic service.
APCs have a number of special features, including cost outliers, discounting of multiple ser-
vices, bundling of inexpensive supplies and drugs, coinsurance, and cost-based pass-through pay-
ments for certain items. Both CPT (Current Procedural Terminology) and HCPCS (Healthcare
Common Procedure Coding System) coding sets are used for APCs. ere is signicant use
of the CMS National Correct Coding Initiative (NCCI) edits and associated coding policy
guidelines.
Appendix: Synopsis of the Medicare Program’s Payment Systems ◾ 145
APCs are also used with outpatient provider-based operations.* For hospitals, these are typi-
cally provider-based clinics in which there is both a technical component (i.e., hospital outpatient)
claim led and a professional component (i.e., physician) claim led. e technical component
claim is paid under APCs, while the professional component is paid under the MPFS at a reduced
rate. e reduction in payment for the physician claim is called the site-of-service (SOS) dieren-
tial. e reduction in payment is made because the physicians and practitioners at such provider-
based clinics have reduced overhead expenses.
APCs are discussed in Prospective Payment Systems.
Skilled Nursing Facilities
For Medicare, skilled nursing facilities (SNFs) have their own PPS, namely, RUGs or Resource
Utilization Groups. A patient assessment instrument (PAI) is used to develop dierent payment
levels through the RUGs. In addition, SNFs are subject to extensive consolidated billing require-
ments that delineate exactly which services are a part of the SNF PPS payments.
See the third volume in this series, Prospective Payment Systems, for further information.
Home Health Agencies
Home health agencies (HHAs) have their own Medicare PPS, which uses an extensive patient assess-
ment instrument called OASIS (Outcome and Assessment Information Set) to establish the level
of payment. ere are HHRGs, which are the Home Health Resource Groups. Episodes of care of
sixty days are the units for payment. Adjustments can be made for short periods (less than sixty days)
and for cost outliers. Supplies are generally included, although routine and ancillary supplies are
separately addressed. DME is not a part of the home health prospective payment system (HHPPS).
DME is paid through the DMEPOS (DME, prosthetics, orthotics, supplies) fee schedule.
e HHPPS is discussed in Prospective Payment Systems.
Critical Access Hospitals
CAHs are paid on a cost-based reimbursement basis. e basic payment for inpatient and outpa-
tient services is 101 percent of costs. Cost-based reimbursement is also used for swing beds (i.e.,
skilled nursing beds). Ambulance services can also be paid at 101 percent if the ambulance service
is provider-based to the given CAH.
ere are two general methods for payment involving a CAH and associated physicians/
practitioners.
◾ Method I payment methodology
− Hospital inpatient and outpatient services are billed in the normal fashion using the
UB-04. e 101-percent payment applies.
− Physician and practitioner billing is performed in the usual manner using the 1500 claim
form. e full 100 percent of the MPFS applies with standard reductions in payment for
nonphysician practitioners.
*
See the Provider-Based Rule (PBR), found generally at 42 CFR §413.65.
146 ◾ Appendix: Synopsis of the Medicare Program’s Payment Systems
◾ Method II payment methodology
− Hospital inpatient and outpatient services are billed in the normal fashion using the
UB-04. e 101-percent payment applies.
− For physicians and practitioners who agree to participate (i.e., le an appropriate CMS-
855-R for reassignment of payments), the hospital les claims for these professional out-
patient services on the UB-04. Payment is at 115 percent of the SOS reduced payment
under the MPFS.
Interim payment for CAHs:
1. For inpatient services, payment is based on a per diem cost.
2. For outpatient services, payment is based on charges multiplied by the hospital’s CCR as
determined from the cost report.
CAH payment is discussed in this fourth volume of the series. Additional information on the
MPFS is discussed in the second volume of this series, Fee Schedule Payment Systems.
Rural Health Clinics and Federally Qualified Health Centers
Both rural health clinics (RHCs) and federally qualied health center (FQHCs) are cost-based
reimbursed. Interim payment is based on visits or clinical encounters. is payment rate is called
the all-inclusive rate. ere is a nal reconciliation with their cost reports.
RHC and FQHC payment is discussed in this fourth volume of the series.
Physician and Practitioner Services
CMS (Centers for Medicare and Medicaid Services) has developed an extensive fee schedule for
physician and practitioner payment, the MPFS. MPFS payment is based on the resource-based
relative value scale (RBRVS). ere are numerous features associated with the MPFS that can
aect payment. Here are a few of the more important features:
a. ere are bonus payments available for health professional shortage areas (HPSAs) and phy-
sician scarcity areas (PSAs). ese bonuses apply only to designated geographic areas identi-
ed by ZIP code.
b. e relative value units (RVUs) have been developed for CPT and HCPCS codes. ere are
three dierent RVUs:
1. Work
2. Practice expense
3. Medical malpractice
e practice expense RVU is further divided into facility versus nonfacility. e facility
practice expense RVU is generally lower than the nonfacility RVU. e dierence in these
RVUs allows for the application of the SOS dierential, by which physician payment is
reduced if s ervices are provided in a facility setting.
Appendix: Synopsis of the Medicare Program’s Payment Systems ◾ 147
c. ere is an extensive global surgical package (GSP) that includes three separate parts:
1. Preoperative
2. Intraoperative
3. Postoperative
For the postoperative period, the length of time is zero days, ten days, or ninety days. ese
are discrete time periods.
d. Nonphysician practitioners are also paid through the MPFS, but there are reductionsin
payment.
1. Physician assistants: 85 percent of MPFS
2. Nurse practitioners: 85 percent of MPFS
3. Clinical nurse specialists: 85 percent of MPFS
4. Clinical psychologists: 100 percent of MPFS
5. Clinical social workers: 75 percent of MPFS
6. Nurse midwives: 100 percent of MPFS
7. Other limited license doctors: 100 percent of MPFS
e. ere are special payment processes for certain situations:
1. Assistant at surgery: 16 percent of MPFS
2. Cosurgery: one-half of 125 percent of MPFS (two surgeons)
3. Special payment calculation for certain endoscopic procedures
4. MD anesthesiologist and CRNAs are paid through a special fee schedule arrangement
using base units plus fteen-minute time units.
f. e NCCI edits and policies are used with MPFS.
g. Physician supervision for diagnostic services is delineated in RBRVS and applies to both
physicians and hospitals.
h. Surgical complications may invoke additional payment through a return-to-the-operating-
room criterion.
See Fee Schedule Payment Systems, for an extended discussion of MPFS.
Durable Medical Equipment
DME, or more correctly, DMEPOS, is paid under a fee schedule. A number of unusual items,
such as parenteral and enteral nutrition (PEN), surgical dressings, and therapeutic shoes,
are included as DME. Note that there are coverage issues for certain items relative to other
Medicare payment systems. Accommodations in the fee schedule are made for new, used, and
rented DME.
e DME fee schedule is discussed in Fee Schedule Payment Systems.
Clinical Laboratory
Clinical laboratory services are paid under the Clinical Laboratory Fee Schedule. In rare cases,
small hospitals may be paid on their costs.
See Fee Schedule Payment Systems, for further discussion.
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