How Medicare Billing Works

Medicare was designed in 1965 as a single payer health system that is publicly funded. The funds to pay for Medicare services are collected from employers and self-employed individuals. The Federal Insurance Contributions Act taxes employers and employees a total of 2.9% of an individual’s income. Employees pay 1.45% and employers pay a matching 1.45% tax. Self employed individuals must pay the entire 2.9% tax themselves to contribute to the Medicare program. In a single payer health system, providers receive payment for services rendered from a general pool of funds that everyone contributes to through taxes.

The Medicare program has established a long list of services they will cover and the fee that Medicare will pay to a provider for a service provided to a beneficiary. Regardless of the cost the provider will charge for the services rendered, they will only receive the amount Medicare has determined the service is worth. Generally speaking Medicare providers will submit a bill to Medicare using the program’s coding system which identifies every service that could be provided to a beneficiary. Medicare then sends payment back to the provider for the services provided.

Medicare providers fall into two categories and these determine the manner in which billing is conducted. Participating Medicare providers are paid 80% of the Medicare allowed fee while the remaining 20% of the fee is paid for by the beneficiary. Non-participating Medicare providers will receive 80% of the Medicare determined fee and are allowed to bill 15% or more of the remaining amount to the beneficiary.

Medicare billing works differently for Part A (hospital) services and Part B (medical) services. Hospitals receive a set amount of money for each visit from a Medicare beneficiary that is not dependent on the level of care rendered to the individual. The exact amount of money paid to the hospital depends on an initial diagnosis from doctors when the patient arrives and that diagnosis is then compared to Medicare’s diagnosis related groups, which determines the amount of money passed along to the hospital for payment.

Billing for medical services rendered in a physician’s office or clinic is different however. Initially in 1965, doctors were simply reimbursed the fees they charged to Medicare. Over the decades different laws have been enacted to help balance the fees against the skyrocketing costs of medical care. The U.S. Congress has several times enacted different laws to control the rates at which doctor reimbursement fees grew from year to year. Several times during the mid 2000s the government acted to hold fees at the same level year after year. There have been many complaints in recent years that reimbursements for clinic fees are not paying doctors appropriately.

Medicare billing for medications dispensed by doctors in their offices reimburses physicians for those medications using an Average Sales Price. The ASP divides the number units of a drug sold nationwide by the dollar amount of sales to come up with a reimbursement rate. Currently doctors receive roughly 84.8% of the actual drug cost when they dispense treatments such as chemotherapy to Medicare beneficiaries. The remaining amount is paid for through copayments for those who can afford it or by Medicare Supplement Insurance plans.

The system of reimbursement for fees in Medicare is easily open to fraudulent billing and the practice is quickly becoming the biggest problem facing Medicare. Because there is no direct oversight of Medicare’s billing system doctors, sometimes in concert with patients, bill Medicare for services that were not rendered in order to get a larger reimbursement. Other fraudulent schemes include billing Medicare for durable medical goods such as wheel chairs multiple times for just one chair, and never even delivering the wheel chair.

Medicare billing has become a hot button topic in the United States. A lack of oversight on billing combined with ever increasing costs for medical services is causing problems with Medicare. As of 2008 Medicare cost the American public $386 billion which was roughly 13% of the total federal budget. While Medicare is project to take up only 12.5% of the federal budget in 2010, costs will rise to $452 billion.