How Does Medicare Reimburse Hospitals?

Medicare provides coverage for millions of Americans over the age of 65 or individuals under 65 who have certain permanent disabilities. Medicare recipients can receive care at a variety of facilities, and hospitals are commonly used for emergency care, inpatient procedures, and longer hospital stays. Medicare benefits often cover care at these facilities through Medicare Part A, and Medicare reimbursement for these services varies. Billing is based on the provider’s relationship with Medicare and the average cost of care for a specific diagnosis or procedure.

What Medicare Benefits Cover Hospital Expenses?

Medicare Part A is responsible for covering hospital expenses when a Medicare recipient is formally admitted. Part A may include coverage for inpatient surgeries, recovery from surgery, multi-day hospital stays due to illness or injury, or other inpatient procedures. Part A covers the first 60 days of a hospital stay after the associated deductible and coinsurance payments have been made. Part A also includes coverage for skilled nursing facilities and hospice care.

What Does it Mean for a Hospital to “Accept Assignment”?

Medicare determines reimbursement based on whether or not a provider participates in Medicare services. This is known as “accepting assignment.” Providers that fully accept assignment are known as participating providers. They agree to accept all of Medicare’s predetermined prices for all procedures and tests that are provided under Medicare coverage. This means that no matter what a hospital normally charges for a procedure, they agree to only charge Medicare recipients a set price. The majority of providers fall into this category.

If a provider is a non-participating provider, it means that they have not signed a contract with Medicare to accept the insurance company’s prices for all procedures, but they do accept assignment for some. This is mainly due to the fact that Medicare reimbursement amounts are often lower than those received from private insurance companies. For these providers, the patient may be required to pay for the full cost of the visit up front and can then seek personal reimbursement from Medicare afterwards.

The amount for each procedure or test that is not contracted with Medicare can be up to 15 percent higher than the Medicare approved amount. In addition, Medicare will only reimburse patients for 95 percent of the Medicare approved amount. This means that the patient may be required to pay up to 20 percent extra in addition to their standard deductible, copayments, coinsurance payments, and premium payments.

While rare, some hospitals completely opt out of Medicare services. This means that patients who obtain care at these facilities will not receive any Medicare reimbursement and will need to pay for the full cost of the procedure out of pocket. These providers are also not limited on the amount they can charge for their procedures.

Determining Medicare Reimbursement Rates

If a healthcare provider does accept assignment for some or all procedures, the billing is done based on a preset list of diagnoses and associated billing codes. Medicare uses a pay-per-service model that uses Diagnosis-Related Groups (DRGs). Each DRG is based on a specific primary or secondary diagnosis, and these groups are assigned to a patient during their stay depending on the reason for their visit.

Up to 25 procedures can impact the specific DRG that is assigned to a patient, and multiple DRGs can be assigned to a patient during a single stay. The DRGs assigned can also be influenced by patient age and gender.

Each DRG is rated based on severity with three levels: Major Complication, Complication, or Non-Complication. The highest level, Major Complication, often significantly contributes to a patient’s illness and also often requires significant hospital resources and is associated with a higher cost. Non-Complications are associated with fewer required resources and do not impact patient health as severely.

Reimbursement is based on the DRGs and procedures that were assigned and performed during the patient’s hospital stay. Each DRG is assigned a cost based on the average cost based on previous visits. This assigned cost provides a simple method for Medicare to reimburse hospitals as it is only a simple flat rate based on the services provided.

How Medicare Advantage Plans Reimburse Hospitals

Unlike Original Medicare, which pays hospitals directly using Diagnosis-Related Groups (DRGs), Medicare Advantage (Part C) plans are offered by private insurance companies. These plans receive a set payment from Medicare each month to manage a beneficiary’s care, including hospital stays. The plan then negotiates its own reimbursement rates with hospitals and healthcare providers.

This means that while a hospital may be reimbursed a flat DRG amount under Medicare Part A, a Medicare Advantage plan may pay different amounts depending on its contracts, the hospital network, and the type of plan (HMO, PPO, or Special Needs Plan). These arrangements can affect out-of-pocket costs, such as copayments and deductibles, for the patient.

Because of this variation, it’s important for beneficiaries to compare Medicare Advantage plans available in their area to see which ones contract with their preferred hospitals and offer the best coverage for inpatient and surgical care.

Compare Medicare Advantage plans and Special Needs Plans (SNPs) in your area to see how coverage and reimbursement may differ from Original Medicare.

Frequently Asked Questions About Medicare Hospital Reimbursement

Here are some of the most common questions people have about how Medicare and Medicare Advantage reimburse hospitals and what it means for patients.

How does Medicare reimburse hospitals?

Original Medicare reimburses hospitals based on Diagnosis-Related Groups (DRGs), which are flat-rate payments tied to the patient’s diagnosis, procedures, and severity of illness.

What does it mean when a hospital accepts Medicare assignment?

When a hospital accepts assignment, it agrees to charge only Medicare’s set amount for services. Patients are still responsible for deductibles, copayments, or coinsurance.

Can hospitals charge more than Medicare allows?

Participating hospitals cannot charge more than the Medicare-approved amount. Non-participating hospitals may bill up to 15% above Medicare’s approved rate, and patients must pay the difference.

How do Medicare Advantage plans reimburse hospitals?

Medicare Advantage plans receive a fixed monthly payment from Medicare and negotiate their own contracts with hospitals. Payment amounts and networks vary by plan.

Why compare Medicare Advantage plans for hospital coverage?

Because each plan has different hospital contracts and cost-sharing rules, comparing Medicare Advantage options can help patients find coverage that minimizes their out-of-pocket costs for inpatient and surgical care.

Popular Medicare Advantage Plans that Cover Hospital Costs

If you are considering a Medicare Advantage plan, do your homework. All plans offer the same inpatient hospital coverage as Original Medicare, however, out-of-pocket costs vary, so compare plans carefully.

Popular PPO Plans

Popular HMO Plans

Popular HMO-POS Plans