Medicare Payment System and Process

Last updated: July 2007

Medicare Payment System

Medicare is a federally-funded national health insurance program providing coverage to approximately 40 million Americans who are 65 years of age or older, certain younger people with disabilities and individuals with end-stage renal disease (ESRD) (permanent kidney failure with dialysis or a transplant).1 There are several payment systems within the Medicare program, including payment for inpatient hospital services, outpatient hospital services, home health, physicians and skilled nursing. This website contains information specific to hospital and physician payment systems.

Hospital Inpatient Payment

The hospital inpatient payment system is a prospective payment system (PPS) that classifies patients according to diagnosis, type of treatment, age and other relevant criteria using the ICD-9-CM coding system. Under this system, hospitals normally receive a predefined payment for treating patients within a particular category or Medicare Severity Diagnosis Related Group (MS-DRG).

Note: Medicare hospital inpatient information is effective for the fiscal year (FY) (October 1 through September 30).

Hospital Outpatient Payment

The hospital outpatient payment system is also a prospective payment system whereby hospitals receive a fixed payment called an Ambulatory Payment Classification (APC) for a specific procedure. Each procedure described by a CPT® (current procedural terminology) code groups into an APC. Unlike the inpatient (MS-DRG) payment system, if multiple procedures are performed, the hospital may be eligible to receive more than one APC payment per outpatient admission.

Note: Medicare hospital outpatient information is effective for the calendar (CY) (January 1 through December 31).

Physician Payment

Physicians receive a payment for each CPT procedure code based on a physician fee schedule. The physician fee schedule is based on a scale of national uniform values for all physician services, commonly referred to as the Resource-Based Relative Value Scale (RBRVS).

Note: Medicare physician information is effective for the CY (January 1 through December 31).

Note: Maryland hospitals are paid under a program waiver (section 1814(b)(3) of the Social Security Act), in which the state establishes hospital inpatient and outpatient payment rates for Medicare, Medicaid and private payers.2,3

Medicare Payment Process

All Medicare payment processes include these common steps:

1. Physician documentation in patient medical record
2. Transfer of information to billing/coding department
3. Selection of appropriate diagnosis and procedure codes
4. Submission of billing form to Medicare contractor
5. Review of coding and physician documentation for medical necessity
6. Payment from Medicare contractor to hospital or physician (if deemed medically necessary)

Payer Coverage + Correct Coding + Compliance = Payment

Note: ICD-9-CM codes and HCPCS/CPT codes are also recognized by non-Medicare payers.

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1. Centers for Medicare and Medicaid Services. Glossary (search "Medicare"). Last modified July 27, 2005. Available at: http://www.cms.hhs.gov/glossary/ Accessed September 27, 2005.
2. Centers for Medicare and Medicaid Services. Medicare Claims Processing. Effective October 1, 2004. CMS Manual System, change request 3200: Transmittal 156; CMS Pub. 100-04. April 30, 2004. Available at: http://new.cms.hhs.gov/transmittals/downloads/R156CP.pdf. Accessed January 11, 2006.
3. Health Services Cost Review Commission. About HSCRC. Available at: http://www.hscrc.state.md.us. Accessed January 17, 2005.