Medicare Reimbursement Information I

This week, I will be discussing Medicare Reimbursement in detail.  The Medicare Payment Advisory Commission (MedPAC) has a high-quality series of reports analyzing Medicare’s reimbursement system. Findings from these reports includes:

Physician Services

  • In 2006, about 569,000 physicians billed Medicare.
  • In 2007, Medicare paid $60 billion for physician services.
  • All physician services are reported to CMS according to the Healthcare Common Procedure Coding System (HCPCS), which contains codes for about 6,700 distinct services. Payment rates are based on RVUs.
  • Under the Medicare incentive payment program, physicians receive bonus payments when they provide services in health professional shortage areas (HPSAs).
  • For most physician services, Medicare pays the provider 80 percent of the fee schedule amount. The beneficiary is liable for the remaining 20 percent coinsurance.
  • Services billed separately and provided by nurse practitioners are paid at 85 percent of physicians’ fees.

Oxygen and Oxygen Equipment

  • “Beginning in January 2006, section 510(b) of the Deficit Reduction Act of 2005 (DRA) limited rental of oxygen equipment to a period of 36 months of continuous usage. After 36 months, Medicare only pays for contents and non-routine maintenance…According to the Office of Inspector General (OIG), 22 percent of beneficiaries who started renting equipment in 2001 rented for 36 months or longer.”
  • Medicare has instituted competitive billing for the purchase of Durable Medical Equipment. A demonstration showed that “competitive bidding lowered prices for home oxygen between 17 and 21 percent.”

Psychiatric Hospital Services

  • Medicare payments to psychiatric facilities are estimated to be $4.1 billion in 2007.
  • In 2006, 312,000 beneficiaries had 473,500 Medicare discharges from Inpatient Psychiatric Facilities (IPF) for a psychiatric or substance abuse disorder.
  • Beneficiaries treated in IPFs are responsible for a $1,024 deductible for the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
  • IPFs recieve a base payment rate of $638 per day (in 2009) which is increase with patient age, severity of diagnosis, and the presence of comorbidities and payment declines with the length of the hospital stay. Payments are also adjusted based on geographic factors, if the hospital is a teaching hospital, and whether or not there is an emergency room.

Inpatient Rehabilitation Facilities (IRFs) and Skilled Nursing Facilities, (SNFs) and

  • For treatment after an illness, injury or surgery, some patients need to visit an inpatient rehabilitation facility (IRF).
  • Medicare payments to IRFs were an estimated $5.6 billion in 2007. Medicare accounts for about 70 percent of IRF cases. In 2006, there were about 404,000 Medicare discharges from IRFs.
  • Similar to psychiatric services, beneficiaries are responsible for a $1,024 deductible as the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
  • Reimbursement is based on the severity of patient illness.  Patients are classified into one of 92 case mix categories and one of four tiers based on comorbidities.  Patients with very short stays (less than 4 days) receive a discounted rate and those with very long stays get more generous reimbursement.
  • To be considered an IRF, you must meet the 60% rule.  This means that 60% of all admissions must fall into one of these categories: stroke, spinal cord injury, congenital deformity, amputation, major multiple trauma, hip fracture, brain injury, neurological disorders, burns, severe arthritis conditions, joint replacement for both knees or hips.
  • Skilled Nursing Facilities (SNFs) are used for short-term inpatient skilled care a hospital stay. Medicare reimburses SNFs prospectively, giving them a flat rate for every day of care, up to 100 days in the facility. Payments for SNF are adjusted for: differences in local labor costs and type of patients through Resource Utilization Groups (RUGs). Patients with more severe conditions, worse ADL scores, and who need more therapy get higher RUGs scores and thus a higher reimbursement rate.


  1. Here is a quote from this article, found in the next to last bullet. “Skilled Nursing Facilities (SNFs) are used for short-term inpatient skilled care a hospital stay.”

    I do not understand this sentence. It looks like a word was left out of inadvertently. Please clarify.

    Thank you for this detail & the opportunity to interact.


  2. With respect to oxygen and durable medical equipment, it’s worth noting that Congress has already cut Medicare reimbursement rates for home oxygen therapy numerous times over the past 10 years — in 1997 (BBA), 2003 (MMA), 2005 (DRA), and 2008 (MIPPA). Reimbursement rates have been cut by nearly 50 percent over the past decade, so those savings from the bid program have been realized already through congressional action. Today, Medicare pays about $6 per day to provide a senior with home oxygen therapy, which about one million Medicare beneficiaries depend on in order to breathe. For comparison, an average Medicare day in a hospital costs more than $5,000. Unfortunately, the law only allows Medicare to reimburse of oxygen devices and the oxygen itself, but not for most of the essential services required for furnishing home oxygen therapy in the homes of seniors with COPD and other severe lung diseases.

    A similar history of cuts have been applied to durable medical equipment. According to the most recent National Health Expenditures data from CMS (2006-2007), the durable medical or home medical equipment sector is growing at less than one percent per year, compared to more than six percent for Medicare overall. So clearly, oxygen and durable medical equipment generally are not major cost drivers in Medicare. In fact, home medical care is an essential part of the solution to Medicare’s approaching funding crisis.

    See more information at the American Association for Homecare website, or

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