But that may need to change. As the baby boomer healthcare market grows, that method could result in decreased affordability for both employers offering coverage and for the privately insured.
Understanding the current reimbursement process
When providers opt to participate with Medicare, they first accept to take assignment, meaning that they agree to accept Medicare-established fees as reimbursement. Providers then bill Medicare directly based on those accepted rates. As a policy, CMS sets reimbursement rates according to the Current Procedural Terminology (CPT) codes, which are numeric values assigned by CMS for services and equipment used to treat Medicare patients.
CMS uses a standard formula to determine reimbursement rates for allowable medical charges, known as the Customary, Prevailing, and Reasonable Charge (CPR) method. Under Medicare, a “reasonable” or “allowed” charge is the lowest of any of the following:
- The actual charge made by the physician for a given service
- The physician’s customary charge (the physician’s 50th percentile) for that service
- The prevailing charge (the physician’s 75th percentile) in a given locality for that service
Increases to prevailing charges—the maximum Medicare allows—are typically limited to an economic index that adjusts for budgetary changes to the cost of providing patient care. In many cases, patients will pay their provider any associated deductibles or coinsurance, in addition to receiving reimbursement for administered services or equipment. Other participants or facilities involved with patient care that receive Medicare reimbursement may include hospitals, outpatient rehabilitation facilities, skilled nursing facilities, etc., as noted in the 2020 Physician Fee Schedule Guide.
The amount of money reimbursed to providers also depends on the provider designation. Participating providers sign Medicare form CMS-460 and agree to charge no more than Medicare-approved amounts as listed in the MPFS. In many cases, the patient seeing a participating provider will have some form of cost share, such as coinsurance.
For nonparticipating providers who do not sign form CMS-460, Medicare reduces the reimbursement amounts by 5%.
There are notable variations in average reimbursements for provider services, including the demographics and geography of the Medicare beneficiary. Although Medicare premiums and deductibles are consistent, reimbursement rates vary based on the specific location and the prices charged by local physicians or other accepted care providers.
As an alternative to traditional Medicare, qualifying patients have the option to receive coverage through Medicare Advantage plans. These private health plans agree to receive capitated payments for Medicare-covered services. In this case, approved Medicare Advantage providers are paid set amounts for each enrolled person, regardless of whether that person seeks care during a given period of time. CMS calculates the payments based on the average expected healthcare utilization of a typical patient. More remuneration is paid for patients with extensive or complicated medical histories, and other factors considered include age, race, sex, type of employment, and geographic location.
What’s next for Medicare reimbursement?
The cost of healthcare is increasingly harder to afford for both privately insured individuals and employers who offer health insurance coverage. Over the past 50 years, private insurers paid higher prices for patient care versus Medicare, and this gap continues to grow. Reducing the prices that private insurers pay for healthcare services could help alleviate the financial burden for employers and individuals with private insurance, but it would also reduce revenue for hospitals and other providers with uncertain effects on patient care.
One option before Congress is reimbursement for private insurers, hospitals, and other providers at Medicare rates. According to a March 2021 study by the Kaiser Family Foundation:
“Total health care spending for the privately insured population would be an estimated $352 billion lower in 2021 if employers and other insurers reimbursed health care providers at Medicare rates. This represents a 41% decrease from the $859 billion that was projected to be spent in 2021."
Other possible ways to make healthcare more affordable include reducing the private insurer price gap by lowering private-sector healthcare prices to some multiple of current Medicare rates or phasing in lower rates gradually; enacting legislation that limits the prices that providers charge private insurers; and bundling a payment model that rewards providers with integrated service models that emphasize greater efficiency and care coordination.
Another government healthcare issue affecting provider reimbursement concerns Medicare sequestration—a mandated spending restriction that would reduce federal spending for Medicare services by a set percentage (2% prior to 2022). Following the passage of the American Rescue Act, Congress agreed to reduce the sequester to 1% for both participating and non-participating providers through the end of March 2022.
All of these options point to the same underlying need: In the future, payers have to focus on cutting-edge trends to follow technology’s trajectory and better serve the demands of their burgeoning baby boomer market.