Medicare Payment Updates and Payment Rates

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PauletteC. Morgan, Coordinator
Specialist in Health Care Financing

Cliff Binder
Analyst in Health Care Financing

Patricia A. Davis
Specialist in Health Care Financing

Barbara English
Information Research Specialist

Jim Hahn
Specialist in Health Care Financing

Scott R. Talaga
Analyst in Health Care Financing

Sibyl Tilson
Specialist in Health Care Financing

Medicareis a federal insurance program that pays for covered health services for mostpersons 65 years of age and older and for most permanently disabledindividuals under the age of 65. Part A of the program, the HospitalInsurance program, covers hospital, post-hospital, and hospice services.Part B, the Supplementary Medical Insurance program, is optional and covers abroad 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 bothParts 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 basedon fee schedules. A fee schedule is a list of Medicare payments for specificitems and services, which are calculated according to statutorilyspecified formula and take into account the actual amount of care provided.Many services, including inpatient and outpatient hospital care, are paidunder different prospective payment systems (PPSs). A prospective paymentsystem is a method of paying hospitals or other providers amounts or ratesof payment that are established in advance for a defined period and are generallybased 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 thecost of providing a service) relative to a benchmark (the maximum amountMedicare will pay). Bids and benchmarks are used to determine payments inMedicare Parts C and D. Payments for some items of durable medicalequipment in specified locations are also based on the bids of competingproviders.

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 recognizedpayment levels. Unlike other services, Medicare’s outpatient prescription drugbenefit can be obtained only through private plans. Further, while all Part Dplans must meet certain minimum requirements, they differ in terms ofbenefit design, formulary drugs, premiums, and cost-sharing amounts.

Medicare payment policies and potential changes to these policies are ofcontinuing interest to Congress. The Medicare program has been a majorfocus of deficit reduction legislation since 1980. In each Congress sincethe 105th Congress, laws have been passed to both increase, but more oftenslow, the rate of growth of payments to Medicare providers and private plans.Perhaps of particular interest in the 112th Congress is the update to theMedicare physician fee schedule. The method for updating the physician feeschedule amount, known as the sustainable growth rate (SGR), would haveresulted in negative updates for physician payments in recent years, exceptthat Congress has stepped in to stop the updates. Physician payment rates arefrozen through December 31, 2012, after which point, rates will decreaseby 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 forpayment updates. This report will be updated twice a year to reflectrecent fiscal year and calendar year changes.


Date of Report: September 27, 2012
Number of Pages: 60
Order Number: RL30526
Price: $29.95

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