Medicare Managed Care Manual 
Chapter 17, Subchapter B 
Payment Principles for Cost-Based HMO/CMPs 
 
Table of Contents 
(Rev. 86, 04-27-07) 
 
Transmittals for Chapter 17B
 
10 - Provider Principles Applicable to Cost-Based Medicare Health Maintenance 
Organizations and Competitive Medical Plans (HMO/CMPs) - General 
20 - Payment Procedures for Provider Services Paid for Directly by the HMO/CMP
30 - Data Collection Requirements 
40 - Filing Requirements for Providers Using Form CMS-2552 
50 - Filing Requirements for Providers Using Other Cost Report Forms 
60 - Fee-For-Service (FFS) System Final Settlement With the Provider 
70 - Provider Receiving Payment Under the Prospective Payment System PPS 
80 - Summary of Provider Reimbursement Principle Topics 
90 - Provider Service Through Arrangements 
100 - Payments to Providers Participating Under 1886 of the Act 
110 - Infrequently Purchased Provider Services 
120 - Physician Services- General 
130 - Physician and Other Part B Services Furnished Directly by the HMO/CMP 
140 - Physician and Other Part B Supplier Services Furnished Under Arrangements
150 - Physician and Other Part B Supplier Services Not Furnished Under Arrangements
150.1 - Payment for Services Rendered On or After April 1, 1994, by 
Noncontracted Medicare Participating Physicians 
150.2 - Payment for Services Rendered On or After April 1, 1994, by 
Noncontracted, Nonparticipating Physicians 
160 - Enrollment and Marketing Costs 
170 - Initial Enrollment 
180 - Membership Costs 
190 - Reinsurance 
190.1 - Self Insurance 
200 - Special Costs Paid In Full 
210 - Beneficiary Liability 
210.1 - Under and Over Collection of Premiums  220 - Determining Deductibles and Coinsurance 
220.1 - Payment for Bad Debts 
230 - Limitation on Payment 
240 - End Stage Renal Disease (ESRD) 
250 - Limitations on Costs 
260 - Physical and Other Therapy Services Furnished Under Arrangements 
270 - Allowable Cost for Drugs in Provider Setting 
280 - Lower of Costs or Charges 
290 - The Prospective Payment System (PPS) 
300 - Duplicate Payment Detection for Cost Contracting HCPPs and HMOs/CMPs
300.1 - Coordination of Benefits 
300.1.1 - Definition of Certain Terms Used in Coordination of Benefits
300.2 - The Medicare HMO/CMPs Obligations 
300.3 - General Fee-For Service (FFS) Coordination of Benefits Rules 
300.4 - Other Provisions 
300.5 - Conflicting Claims by Medicare and Other Third Parties 
300.6 - Coordination with Workers Compensation 
300.6.1 - Definitions Under WC 
300.7 - Additional Processing Instructions 
310 - Coordination for ESRD Patients 
310.1 - Definition of Employer Group Health Plan (EGHP) or Employer Plan
310.2 - Additional Processing Instructions 
320 - Coordination With No-Fault Insurance 
320.1 - Definition of Automobile and No-Fault Insurance 
320.2 - Additional Processing Instructions 
330 - Benefit Coordination for Services Reimbursable Under Liability Insurance 
330.1 - Definition Under Liability Insurance 
330.2 - Additional Processing Instructions 
340 - Benefit Coordination for Working Aged Individuals Entitled to Medicare 
340.1 - Application of 20 Employee Threshold 
340.2 - Definition Under EGHP 
340.3 - Additional Special Rules Applicable to EGHPs 
340.3.1 - Self-Employed Individuals 
340.3.2 - Members of Clergy and Religious Orders Who Have Not Taken 
a Vow of Poverty 
340.3.3 - Members of Religious Order Who Have Taken Vow of Poverty
340.4 - Individuals Who Receive Disability Payments 
350 - Additional Processing Instructions  350.1 - Benefit Coordination with a Large Group Health Plan 
350.2 - A Nonconforming LGHP 
350.3 - Definition of an Active Individual 
350.4 - Definition of an Employee 
350.5 - Special Rules for Individual Employee Status 
350.5.1 - Individuals Not Subject to This Limitation Payment 
350.6 - Failure to Pay Primary Benefits 
360 - Additional Processing Instructions 
360.1 - Federal Governments Right to Sue and Collect Double Damages 
370 - Excise Tax Penalties for Contributors to Nonconforming Group Health Plans
370.1 - Working Aged 
370.2 - Disability 
370.3 - End Stage Renal Disease (ESRD) 
380 - Applying Recoveries to the Cost Report 
390 - Alternative Method for Cost Report Treatment of Employer Health Plans 
400 - Determining Total Costs for Comparison with Capitation Limits 
410 - Taxes Assessed Against the Medicare Cost-Based HMO/CMP 
410.1 - Premium Taxes Assessed Against the Medicare Cost-Based HMO/CMP
 
 
 
10 - Provider Principles Applicable to Cost-Based Medicare Health 
Maintenance Organizations and Competitive Medical Plans 
(HMO/CMPs) - General 
(Rev. 4, 10-01-01) 
Unless otherwise specified in this manual, costs generally incurred by providers of 
service (e.g., hospitals, Skilled Nursing Facilities (SNFs), Home Health Agencies 
(HHAs)) that are allowable under the principles of payment for providers (see 
42 CFR Parts 405, 412, and 413) are allowable when incurred by Health Maintenance 
Organizations and Competitive Medical Plans (HMO/CMPs). This also applies to costs 
incurred by providers of services and other facilities owned and operated by HMO/CMPs 
or related to the HMO/CMP by common ownership or control. An exception to the 
application of provider payment principles is available for the cost incurred by a 
HMO/CMP for covered services furnished by a provider under an arrangement with the 
cost-based HMO/CMP. In order to qualify for payment in excess of the amount 
authorized under 42 CFR Part 405, Subpart D, 412 and 413, the HMO/CMP must 
demonstrate to CMS satisfaction that the excess payment is justified on the basis of 
advantages gained by the HMO/CMP. (See 90 and 110 of this subchapter.) 
Under these principles, allowable costs are determined according to the Medicare 
principles of reimbursement as set out in the Provider Reimbursement Manual (Pub. 15)  and Generally Accepted Accounting Principles (GAAP), in that order. Contracting 
organizations will be furnished a copy of the Provider Reimbursement Manual, Pub. 15, 
for reference to the principles of provider reimbursement. 
20 - Payment Procedures for Provider Services Paid for Directly by the 
HMO/CMP 
(Rev. 4, 10-01-01) 
Unless the HMO/CMP elects to have CMS pay certain providers (hospitals and SNFs) 
directly for provider services, it is responsible for making payment directly to these 
providers. The payment to the HMO/CMP will be equivalent to what CMSs Fee-For-
Service (FFS) system would have paid for the service unless the organization 
demonstrates that additional payments are justified. (See Chapter 17.) 
Since certain additional work will be required by the provider in some cases, the 
organization must secure an agreement with the provider to accomplish all the things 
necessary to establish proper payment. Regardless of the billing option selected, all 
Medicare-covered services for which the HMO/CMP has financial liability are reviewed 
in the settlement process. (See 80.2 of Chapter 17, Subchapter A.) 
30 - Data Collection Requirements 
(Rev. 4, 10-01-01) 
A provider paid by Medicare on a reasonable cost basis which furnishes services to the 
Medicare HMO/CMP enrollees under an arrangement whereby the HMO/CMP pays the 
provider directly is required to maintain separate statistics for the HMO/CMPs Medicare 
enrollees. These statistics will be maintained in such type, detail, and form as required for 
the providers other Medicare patients. Separate statistics must be accumulated for each 
HMO/CMP with which the provider has an agreement to have payment made directly by 
the organization. 
40 - Filing Requirements for Providers Using Form CMS-2552 
(Rev. 4, 10-01-01) 
Providers using Form CMS-2552 will prepare their cost reports and submit them to the 
FFS system just as they now do, except that the cost of only Medicare patients who are 
not members of the HMO/CMP will be apportioned and submitted to the FFS system for 
payment. 
When an HMO/CMP has elected to have CMS process the bills for some hospitals and 
SNFs furnishing services to the organizations Medicare enrollees, the affected providers 
will prepare their cost reports and submit them to the FFS system just as they do now. 
The cost of the organizations enrollees should be included with the providers other 
Medicare patients, apportioned, and submitted to the intermediary for payment. 
In addition, the provider will prepare a separate set of apportionment and settlement 
worksheets apportioning the costs to the organizations Medicare enrollees. A separate 
set of worksheets will be needed for each organization with which the provider has an 
agreement to have payment made directly by the HMO/CMP. Each set of worksheets will  apportion each cost center between the applicable group of Medicare beneficiaries and all 
other provider patients. 
For example, HMO A has a bill processing contract with the provider. The provider will 
submit to the HMO the set of worksheets which will reflect the cost of providing covered 
services to the HMOs Medicare enrollees. The apportionment ratios by cost center 
would be: 
(Total Costs) times (Charges for the HMOs Medicare enrollees)  
= Total Charges 
Ratios by cost centers on the worksheets for non-HMO/CMP Medicare patients would 
be: 
(Total Costs) times (Charges for Medicare patients that are not members of the 
HMO/CMP)  
= Total Charges  
All other schedules currently required will be completed under existing instructions. 
Copies of all schedules will be sent to the FFS system for processing and settlement. 
50 - Filing Requirements for Providers Using Other Cost Report Forms 
(Rev. 4, 10-01-01) 
Providers using cost reports other than Form CMS-2552 will utilize the principles 
outlined for Form CMS-2552. That is, separate apportionment and settlement schedules 
will be prepared by the provider for each Medicare HMO/CMP processing the providers 
bills and for non-HMO/CMP beneficiaries. Each set of schedules will apportion the 
appropriate cost centers between the applicable groups of Medicare patients and all other 
provider patients. 
60 - Fee-For-Service (FFS) System Final Settlement With the Provider 
(Rev. 4, 10-01-01) 
In making final settlement with the provider, the FFS system will treat services furnished 
to Medicare HMO/CMP enrollees under arrangement as if the services were furnished to 
non-Medicare patients. The provider will be paid for such services under the terms of its 
arrangement with the organization, and payment to the provider might not be limited to 
cost. However, payment to the HMO/CMP for such services will be limited to the amount 
the FFS system would have paid the provider for furnishing the services. (See 
42 CFR 417.548(a) for an exception to this rule.) 
70 - Provider Receiving Payment Under the Prospective Payment 
System PPS 
(Rev. 4, 10-01-01) 
Payment to an HMO/CMP for provider services provided either directly or under 
arrangements shall be determined in accordance with 42 CFR Parts 405, 412, or 413, as 
appropriate, unless the organization can demonstrate in accordance with 42 CFR 417.548  that payment in excess of the amount authorized is justified on the basis of advantages 
gained by the organization. 
For example, for inpatient hospital services provided by a hospital participating under 
Medicares Prospective Payment System (PPS), the hospital is paid a predetermined 
amount for each inpatient stay by a Medicare patient based on the principal diagnosis or 
the inpatient stay. Additional payments are made for certain pass through costs, cost 
outliers, etc. 
Each hospital stay is grouped by principal diagnosis into one of the many Diagnosis 
Related Groups (DRGs). Based on the DRG, CMSs PPS determines the amount the 
hospital receives for the inpatient stay, with some exceptions (e.g., cost outliers and day 
outliers). Payment is made with no retrospective adjustments to the DRG payment. 
However, an adjustment to a particular prospective payment would be needed, for 
example, where, upon medical review, the payment made was found to be improper or 
inaccurate. 
The Medicare HMO/CMP will be paid the same amount that Medicare would otherwise 
pay that hospital under PPS. This would include all amounts paid by the intermediary to 
the hospital for services rendered to the organizations Medicare enrollees, including a 
proportionate share of pass through costs, payments for cost outliers, etc. 
Effective July 1, 1999, all Skilled Nursing Facilities (SNFs) are paid using the PPS. Prior 
to this date, some SNFs had the option to be paid on a prospective basis under 1888 of 
the Act. Payment to the HMO/CMP will be determined in accordance with the providers 
election. 
This rule applies to: 
  Inpatient hospital and SNF services provided by facilities owned or operated by 
the HMO/CMP;  
  Inpatient hospital and SNF services provided by facilities related to the 
HMO/CMP by common ownership or control; and  
  Inpatient hospital and SNF services provided by facilities with which the 
HMO/CMP has an arrangement.  
80 - Summary of Provider Reimbursement Principle Topics 
(Rev. 4, 10-01-01) 
The following list summarizes the general topics covered in the Provider 
Reimbursement Manual (Pub. 15). These principles will be used in determining the 
reasonableness of costs incurred by HMO/CMPs by providers of services and other 
facilities owned or operated by the cost-based HMO/CMP, and whether or not they are 
allowable costs. Principles relating to cost apportionment and the payment process are 
contained in Chapter 17 of this manual. Absent specific instructions in this manual, an 
HMO/CMP should apply those principles of reimbursement of provider costs contained 
in the Provider Reimbursement Manual (Pub. 15).  Topic  Chapter Reference in 
Provider 
Reimbursement 
Manual, Part I 
Depreciation  1 
Interest Expense  2 
Bad Debts, Charity, and Courtesy Allowances  3 
Cost of Educational Activities  4 
Research Costs  5 
Value of Services of Non-paid Workers  7 
Purchase Discounts and Allowances, and Refunds of 
8 
Expense 
Compensation of Owners  9 
Cost to Related Organizations  10 
Return on Equity Capital of Proprietary Providers  12 
Reasonable Cost of Therapy and Other Services 
14 
Furnished by Outside Suppliers 
Costs Related to Patient Care  21 
Determination of Cost of Services to Benefciaries 
22 
(Cost Apportionment Chapter) 
Adequate Cost Data and Cost Finding  23 
Payment to Providers (Payment Process Chapter)  24 
Limitations on Coverage of Costs Under Medicare 
25 
and Notice of Schedule of Limits on Provider Costs 
Lower of Cost or Charges  26 
ESRD Services and Supplies (Outpatient  27  Topic  Chapter Reference in 
Provider 
Reimbursement 
Manual, Part I 
Maintenance Dialysis Services) 
Prospective Payments  28 
 
90 - Provider Service Through Arrangements 
(Rev. 4, 10-01-01) 
At the option of the contracting cost-based HMO/CMP, CMS will pay (through the FFS 
system) hospitals and SNFs for covered services furnished the organizations Medicare 
enrollees in accordance with 1861(v) or 1886 of the Act, as applicable. In these 
circumstances, CMS will pay these providers for covered services furnished to the 
HMO/CMPs enrollees. 
Section 1876 of the Act offers the cost-based HMO/CMP the option of making direct 
payments to hospitals and SNFs through an arrangement (as defined in Chapter 17 
Subchapter C) for covered services furnished to the organizations Medicare enrollees. 
The cost incurred by the HMO/CMP through this arrangement is allowable to the extent 
that it does not exceed: 
1.  The reasonable cost of furnishing such covered services (as determined under 
1861(v) of the Act) for those providers currently paid on a reasonable cost basis, 
or  
2.  The payment amount determined under 1886 of the Act for those providers 
currently paid under Medicares PPS or under an approved State reimbursement 
cost control system.  
An exception is permitted if the cost-based HMO/CMP can demonstrate that payments in 
excess of reasonable costs or Medicares prospective payment, as applicable, are justified 
on the basis of advantages gained by the organization. Should the organization elect to 
pay its providers, it must adhere to the reporting requirements imposed on providers and 
the FFS system. 
100 - Payments to Providers Participating Under 1886 of the Act 
(Rev. 4, 10-01-01) 
An exception is available to a cost-based HMO/CMP with respect to the payment rates 
set by a State under an approved State reimbursement cost control system. Generally, 
under such a system, all third party payers must adhere to the inpatient hospital rates set 
by the State. Section 1886(c)(1)(D) of the Act allows an HMO/CMP to negotiate directly 
with such hospitals for the rate of payment for purchased inpatient hospital services.  110 - Infrequently Purchased Provider Services 
(Rev. 4, 10-01-01) 
If a provider infrequently furnishes services to cost-based HMO/CMP enrollees, it may 
be paid more than reasonable cost or the amount determined under 1886 of the Act for 
that provider service, if the organization can prove that a real and tangible benefit was 
received. 
For example, if the HMO/CMP has an arrangement with a provider (who is not related to 
the organization by common ownership and control) located outside the organizations 
service area, payment for the providers charges to the organization for covered services 
(rather than the providers reasonable costs or the amount determined payable under 
1886 of the Act) could be justified if: 
  The provider furnished services to the Medicare HMO/CMP enrollees on an 
infrequent basis;  
  The charges represent an insignificant amount of payment to the HMO/CMP by 
Medicare; and  
  The charges do not exceed the customary charges by the provider to other patients 
for similar services.  
The advantages gained in this example include a more timely final settlement with the 
HMO/CMP and the elimination of administrative costs necessary to determine the 
providers reasonable cost for these services. 
120 - Physician Services- General 
(Rev. 4, 10-01-01) 
Amounts paid by a cost-based HMO/CMP for physicians services are allowable to the 
extent they are reasonable. Different tests of reasonableness apply, depending upon 
whether the organization employs the physicians directly or pays for physicians services 
on a fee-for-service basis or some other basis. 
The allowability of physician and other Part B supplier services furnished directly is 
determined in accordance with 130 of this subchapter. 
The allowability of physician and other Part B supplier services furnished under 
arrangements is determined in accordance with the provisions of 140 of this subchapter. 
130 - Physician and Other Part B Services Furnished Directly by the 
HMO/CMP 
(Rev. 4, 10-01-01) 
Amounts paid by HMO/CMPs to physicians who are employees of the HMO/CMP or a 
related facility by common ownership or control will be found reasonable to the extent 
they commensurate with amounts paid for similar services performed by similar 
physicians in the same or similar locality. 
The amount paid (e.g., salaries, capitation, fixed sum, incentive payments) as well as 
fringe benefits will be compared in the aggregate to that received by physicians generally  in the community and amounts received by physicians in similar organizations. 
Compensation paid by the HMO/CMP for personal services of physicians (e.g., salaries, 
wages, incentive payments, fringe benefits) must be distinguished from payments to 
physicians for nonpersonal services (e.g., expenses attributable to facilities, equipment, 
support personnel, supplies), in determining whether compensation is allowable. 
Physician compensation may take various forms, but the aggregate compensation must be 
reasonable in relation to the services personally furnished. If aggregate physician 
compensation costs exceed what is normally incurred, the excess is not considered 
reasonable. Costs incurred for other Part B items and services, including payments to 
physicians for nonpersonal services, will be found to be reasonable to the extent they: 
  Are commensurate with amounts paid for similar items and services furnished by 
similar personnel and suppliers in the same or similar locality;  
  Do not exceed those that a prudent and cost conscious buyer would incur to 
purchase those services.  
140 - Physician and Other Part B Supplier Services Furnished Under 
Arrangements 
(Rev. 4, 10-01-01) 
The amount the HMO/CMP pays to a physician, physician group, or supplier for 
physician and other Part B supplier services furnished under arrangements is an allowable 
cost to the extent it is reasonable. Costs are considered reasonable if they: 
  Do not exceed those that a prudent and cost conscious buyer would incur to 
purchase those services; and  
  Are comparable to costs incurred for similar services furnished by similar 
physicians or other suppliers in the same or similar geographic area.  
150 - Physician and Other Part B Supplier Services Not Furnished 
Under Arrangements 
(Rev. 4, 10-01-01) 
Section 1876(j) of the Act places a limit on the charges of noncontracted physicians and 
suppliers of End Stage Renal Disease (ESRD) services for enrollees of HMO/CMPs with 
1876 of the Act contracts. The HMO/CMP is allowed to use the Medicare FFS payment 
limits for these services rendered on or after April 1, 1990. This provision does not 
preclude the HMO/CMP from negotiating charges less than the Medicare limits. 
150.1 - Payment for Services Rendered On or After April 1, 1994, by 
Noncontracted Medicare Participating Physicians 
(Rev. 4, 10-01-01) 
The limit of the HMO/CMPs liability for services rendered by a physician with whom it 
does not contract depends on whether the physician is a Medicare participating physician 
(i.e., has agreed to accept assignment on all Medicare claims submitted to Medicare). The 
Medicare participation agreement is deemed to apply to such a physicians services in the 
sense that the physician may not bill the HMO/CMP, the beneficiary, or any other party  for any amount in excess of the Medicare allowed amount (the fee schedule amount or 
the actual charge, if lower). 
However, the HMO/CMP has financial responsibility for the amount that would have 
been the beneficiarys liability in FFS Medicare (the 20 percent coinsurance and any 
unmet deductible). 
NOTE: The financial responsibility of the HMO/CMP applies only when the 
services are covered by the HMO/CMP, i.e., for emergency or urgently 
needed services or when the HMO/CMP refers the enrollee to the non-
network physician. 
150.2 - Payment for Services Rendered On or After April 1, 1994, by 
Noncontracted, Nonparticipating Physicians 
(Rev. 4, 10-01-01) 
If a noncontracted physician provides a service to one of the cost-based HMO/CMPs 
enrollees, and the physician is not a Medicare participating physician, the limit of the 
HMO/CMPs liability is the lower of the actual charge or the limiting charge permitted 
under the statute for FFS Medicare. The HMO/CMP is responsible for beneficiary 
coinsurance and deductible payments. 
160 - Enrollment and Marketing Costs 
(Rev. 4, 10-01-01) 
Enrollment and marketing costs are those necessary and proper costs incurred in offering 
the cost-based HMO/CMP to potential enrollees. These costs include selling, advertising, 
and promotional activities incurred directly by the organization or under contract with 
outside specialists. Enrollment and marketing costs are allowable to the extent they are 
reasonable and do not exceed an amount that would be incurred by prudent and cost 
conscious management. 
These costs do not include membership costs (see 180) or special costs (see 200). 
170 - Initial Enrollment 
(Rev. 4, 10-01-01) 
Cost-based HMO/CMPs, which offer Medicare benefits for the first time, are likely to 
incur relatively higher marketing and enrollment costs in offering their HMO/CMPs to 
Medicare beneficiaries. In determining whether these higher costs are reasonable, CMS 
may allow them if they do not exceed what prudent and cost conscious management 
would incur. 
180 - Membership Costs 
(Rev. 4, 10-01-01) 
The cost-based HMO/CMPs cost of maintaining and servicing subscriber contracts for 
prepayment enrollees, including but not limited to the reasonable cost of maintaining 
statistical, financial, and other data on members, are allowable to the extent they are  reasonable. Membership expenses should not be included with allowable enrollment and 
marketing expenses. 
190 - Reinsurance 
(Rev. 4, 10-01-01) 
Reinsurance is the transfer of all or part of the risk a cost-based HMO/CMP assumes in 
agreeing to deliver health care to its enrollees. Reinsurance costs are not allowable. 
190.1 - Self Insurance 
(Rev. 4, 10-01-01) 
If the cost-based HMO/CMP self-insures for the cost of services by maintaining 
independently, or as part of a group or pool, a self insurance fund, the costs of payments 
into such a fund are not allowable. Other types of self-insurance funds are subject to the 
rules contained in Chapter 21 of the Provider Reimbursement Manual (Pub. 15), Part I. 
200 - Special Costs Paid In Full 
(Rev. 4, 10-01-01) 
CMS will pay in full the total reasonable cost incurred by the HMO/CMP for services 
that are solely for the purposes of the Medicare program and unique to cost-based 
organization Medicare provisions. These special costs will be taken into account in the 
HMO/CMPs monthly per capita rate. Special costs must be shown separately in the 
organizations operating budget and approved by CMS in advance of the contract period 
for which they are claimed subject to retrospective adjustment at the end of the contract 
period. These special costs do not include management service costs or the normal 
administrative costs incurred by the organization in obtaining payment from the Medicare 
program for example, such as the cost of maintaining and reporting statistical and 
actuarial data needed to determine the amount of payment due the organization, costs of 
accumulating accretion and deletion data, marketing, enrollment, and the cost of 
preparing cost reports. Such costs are apportioned to the Medicare program in accordance 
with Chapter 17, Subchapter C as applicable, so that the Medicare program pays its 
proportionate share of these costs. 
The following types of costs incurred by the HMO/CMP will be paid in full by CMS: 
  Medicare Enrollment Data - This is the reasonable cost of reporting individual 
Medicare beneficiary enrollment accretion and deletion data;  
  Special Program Evaluation and Planning Data - This is the reasonable cost of 
special data required by CMS solely for Medicare program evaluation and 
planning purposes. However, unless specifically provided for, this data does not 
include the data the organization is required to maintain and furnish under other 
sections of this manual;  
  Certification of Cost Report - This is the reasonable costs of certifying the 
organizations cost report. However, as indicated above, the reasonable cost of 
preparing this cost report is apportioned in accordance with Chapter 17, 
Subchapter C as applicable. CMS will pay in full under this section only those  additional costs incurred by the organization that are related to the certification of 
that report.  
210 - Beneficiary Liability 
(Rev. 4, 10-01-01) 
CMS will pay the HMO/CMP for the reasonable cost of providing covered services to 
Medicare enrollees less an amount representing the actuarial value of the deductible and 
coinsurance the Medicare enrollee otherwise would have been liable for had they not 
enrolled in the current HMO/CMP or in another Medicare HMO/CMP. The organization 
may charge Medicare enrollees up to this aggregate amount in the form of premiums, 
membership fees, copayments, charge per unit of service, or similar charges. Another 
individual, organization, or entity may pay premiums on behalf of the Medicare enrollee. 
In addition, a Medicare beneficiarys private health insurance may be the primary payer 
under certain circumstances. 
The HMO/CMP may offer the Medicare beneficiaries supplemental benefit plans to 
cover deductibles and coinsurance amounts, services not covered under Medicare, or 
both. If a supplemental benefit plan premium (or other payment method) includes charges 
for both noncovered services and the deductible and coinsurance amounts applicable to 
covered services, the portion of the premium representing deductibles and coinsurance 
must be computed separately, and disclosed to the beneficiary prior to his/her election of 
such coverage options during the enrollment process. 
The Medicare beneficiary may, at his/her option, choose coverage under such a plan. If 
so, he/she is liable for payment for the supplemental benefit plan. In addition, the sum of 
the amounts the HMO/CMP charges its Medicare enrollees for such supplemental benefit 
plan services that are not covered under Part A or Part B of Medicare may not exceed the 
Adjusted Community Rate (ACR) for these services. (See Chapter 8 of this manual for a 
discussion of the ACR.) For Medicare enrollees entitled to Part B services only, the 
HMO/CMP premium (or other payment structure) for Medicare Part A type services 
offered under a supplemental benefit plan to such individual may not exceed the ACR for 
these services. 
210.1 - Under and Over Collection of Premiums 
(Rev. 4, 10-01-01) 
The HMO/CMP is responsible for computing any over or under collection of premiums. 
All over collections of premiums must be returned to the Medicare enrollee. The 
HMO/CMP may select, with prior approval, one of the following three methods to refund 
over collections: 
  Adjust future years premiums;  
  Provide a lump sum payment to the enrollee; or  
  A combination of premium adjustment and lump sum payment.  
Unintentional (or involuntary) under collections of premiums may be collected from the 
HMO/CMPs Medicare enrollees by an adjustment to its Medicare enrollees future 
premiums. However, the HMO/CMP must collect the under collections through premium  adjustments no later than the end of the contract period following the contract period 
during which they were found to be due. Intentional (or voluntary) under collections of 
premiums cannot be recouped by the HMO/CMP from the Medicare enrollee. 
220 - Determining Deductibles and Coinsurance 
(Rev. 86; Issued:  04-27-07; Effective/Implementation Dates:  04-27-07) 
In determining the amount due the cost-based HMO/CMP, CMS will deduct from the 
reasonable cost actually incurred by the organization in furnishing Medicare covered 
services to Medicare enrollees, an amount equal to the value of the Medicare deductible 
and coinsurance amounts which would have been payable if the Medicare beneficiary had 
not elected the HMO/CMP. However, this amount which becomes the Medicare 
enrollees liability for covered services, cannot exceed, on the average, the actuarial value 
of the deductible and coinsurance the Medicare enrollees otherwise would have been 
liable for had they not elected the HMO/CMP or another Medicare HMO/CMP. This 
actuarial value is provided by CMSs actuaries on a calendar year basis and is the same 
amount used for M+C organizations. 
The monetary amounts for the Medicare deductible and coinsurance for Part A, which are 
applied to each benefit period, change each calendar year. In addition, Part A does not 
pay any non-replacement fees for the first three pints of unreplaced blood in each benefit 
period. 
During each calendar year, Part B pays 80 percent of the reasonable charges after the 
deductible has been met per beneficiary. However, Part B cannot pay for the first three 
pints of blood a beneficiary receives on an outpatient basis in a calendar year. Starting 
with the fourth pint per beneficiary, Part B pays 80 percent of the reasonable charge after 
the deductible has been met. 
At the time the HMO/CMP prepares its budget and enrollment forecast (90 days prior to 
each contract period), the HMO/CMP must calculate the Medicare enrollees estimated 
deductible and coinsurance amounts for the upcoming contract period. The following 
method, known as the actuarial method, is used for premium determination, budget 
forecasting, and final settlement purposes. 
The HMO/CMPs use of this method will involve three major computations. The 
organization will first list the actual Part A deductible and coinsurance and Part B 
coinsurance for each provider furnishing services to its Medicare enrollees. Next, the 
organization will calculate the Part B deductible amount by multiplying the Medicare 
Part B monthly standard deductible amount (determined by CMS) by the organizations 
Part B Medicare enrollee months. The actuarial values of the Medicare Part B monthly 
deductible for the years 1985 through 2007, as determined by CMS, are: 
Year  Actuarial Value 
1985  $5.03 
1986  $5.05  Year  Actuarial Value 
1987  $5.00 
1988  $5.28 
1989  $5.41 
1990  $5.29 
1991  $6.65 
1992  $6.92 
1993  $7.08 
1994  $7.23 
1995  $7.22 
1996  $7.46 
1997  $7.48 
1998  $7.51 
1999  $7.71 
2000  $7.58 
2001  $7.56 
2002  $7.64 
2003  $7.54 
2004  $7.54 
2005  $8.85 
2006  $9.88 
2007  $10.69   
In the third major computation, the cost-based HMO/CMP will compute the Part B blood 
deductible amount, the Mental Health Copayment, and all Part B coinsurances applicable 
to carrier and intermediary paid bills. The sum of these three computations gives the 
Medicare Part A and Part B deductible and coinsurance amounts 
To compute the HMO/CMP Medicare enrollees premiums, add the total Part A and Part 
B deductible and coinsurance for the organizations incurred costs, and the Part A and 
Part B deductible and coinsurance for costs paid by the fee-for-service system on the 
organizations behalf. 
From this total, subtract the HMO/CMPs Medicare enrollees copayments, if any. The 
resulting figure is then divided by the organizations Medicare enrollee months to 
produce a monthly premium. The following is an example of the formula: 
1. Factors  
a = Total Part A and Part B deductible and coinsurance on the organizations 
incurred costs;  
b = Total Part A and Part B deductible and coinsurance on fee-for-service system 
incurred costs;  
c = Total HMO/CMP Medicare enrollee copayments;  
d = HMO/CMP Medicare enrollee months  
e = Monthly deductible and coinsurance amount to be recovered through 
Medicare beneficiary premiums and cost sharing  
2. Computation  
(a + b - c) divided by d = e 
220.1 - Payment for Bad Debts 
(Rev. 4, 10-01-01) 
Bad debts are deductions from revenue and may be included in allowable costs only if: 
  They are attributable to Medicare deductible and coinsurance amounts for which 
the Medicare enrollee is liable; and  
  The cost-based HMO/CMP has made a reasonable, but unsuccessful, effort to 
collect these amounts based on Chapter 3 of the Provider Reimbursement 
Manual (Pub. 15), 300.  
The amount included in allowable cost for bad debt expense is limited. If the beneficiary 
deductible and coinsurance amounts payable to the cost-based organization are made on a 
monthly premium or other periodic basis, the amount allowed as a bad debt may not 
exceed three times the monthly rate for the actuarial value of the deductible and 
coinsurance amounts. If the beneficiary deductible and coinsurance amounts payable to 
the organization are made on other than a monthly basis, the amount allowed as a bad 
debt may not exceed the amount equivalent to that indicated above.  Any bad debt related to a service furnished to a Medicare enrollee of the cost-based 
HMO/CMP, and claimed on a cost report submitted for payment by a provider or other 
facility paid on a cost basis, may not be claimed as a bad debt by the HMO/CMP. 
230 - Limitation on Payment 
(Rev. 4, 10-01-01) 
Unless otherwise specified, the payment limitations imposed on the amounts payable to 
providers of services (and other health care facilities) under Medicare reimbursement 
principles apply to amounts payable for covered services furnished by: 
  Providers of services owned and operated by a cost-based HMO/CMP;  
  Providers related to a cost-based HMO/CMP by common ownership or control; or  
  Providers or other health care facilities which furnish services that are paid on a 
reasonable cost basis.  
The payment limitations applicable to cost-based HMO/CMPs include (but are not 
limited to) those described in 250 through 300. 
240 - End Stage Renal Disease (ESRD) 
(Rev. 74, Issued: 10-14-05, Effective Date: 10-14-05) 
Individuals who have been medically determined to have ESRD are not eligible to elect 
to enroll in a cost-based HMO/CMP. However, individuals already enrolled in the 
organization who subsequently become eligible for Medicare because of ESRD, and aged 
Medicare enrollees who subsequently develop ESRD, cannot be disenrolled from the 
organization as a result of the development of ESRD. Special limitations apply to 
Medicare program payment for ESRD services.  For dialysis and related services, CMS 
carriers process physician claims and CMS intermediaries process facility claims. 
The amount CMS pays to a cost-based HMO/CMP for services rendered to individuals 
with ESRD will be limited to the amount CMS would otherwise pay for services rendered 
to these individuals if they were not enrollees of the organization. Generally, effective on 
or after August 1, 1983, Medicare payment for ESRD services is made to the dialysis 
facility on the basis of one of two prospective composite rates: one rate for hospital-based 
ESRD facilities and one rate for independent dialysis facilities. Patients dialyzing at 
home have the option of having these services paid for under the composite rate system 
or dealing directly with the Medicare program to receive payment on a FFS basis for 
items and services provided. 
For a full discussion of ESRD reimbursement under Medicare, see Chapter 27 of the 
Provider Reimbursement Manual (Pub. 15), Part I. In addition, general information on 
coverage, entitlement, and billing for ESRD services under Medicare can be obtained 
from either the Renal Dialysis Facility Manual or the Hospital Manual.  250 - Limitations on Costs 
(Rev. 4, 10-01-01) 
The limitations on cost provisions contain special rules for evaluating allowable provider 
costs that apply in addition to certain Medicare reimbursement principles. Specifically, 
these rules deal with the cost limits that apply to hospitals exempt from PPS. The rules do 
not apply to hospitals, SNFs, and HHAs paid under PPS. 
For a detailed discussion of the limitation on costs provision, see Chapter 25 of the 
Provider Reimbursement Manual (Pub. 15), Part I. 
260 - Physical and Other Therapy Services Furnished Under 
Arrangements 
(Rev. 4, 10-01-01) 
The reasonable cost of physical, occupational, speech, and other therapeutic services, or 
services of other health-related specialists (except physicians) performed by outside 
suppliers for providers of services, clinics, rehabilitation agencies, public health agencies, 
or Medicare HMO/CMPs may not exceed the sum of: 
  Amounts equivalent to the salary and other costs that would have been incurred 
by the provider or other entity if the services had been performed in an 
employment relationship and  
  An allowance to compensate for other costs an individual not working as an 
employee might incur in furnishing services under arrangements.  
However, this reasonable cost may be determined on the basis of a reasonable rate per 
unit of service: 
  When the services of a therapist or other health-related specialist are required only 
on a limited part-time basis or only intermittently and  
  When aggregate reimbursement on this per unit of service basis is less than what 
the provider would have paid a salaried employee therapist or other health-related 
specialist on a full-time or regular part-time basis. (See 42 CFR 413.106.)  
In no case, though, may reasonable cost exceed the amount actually paid the outside 
supplier for services rendered. 
For a detailed discussion of reasonable cost, see Chapter 14 of the Provider 
Reimbursement Manual (Pub. 15), Part I. 
270 - Allowable Cost for Drugs in Provider Setting 
(Rev. 4, 10-01-01) 
The allowable cost to the cost-based HMO/CMP for any multiple source drug may not 
exceed the lesser of: 
  The actual cost;     The amount which would be paid by a prudent and cost conscious buyer for the 
drug if obtained from the lowest priced source that is widely and consistently 
available; or  
  The maximum allowable cost limit.  
The Department of Health and Human Services (DHHS) publishes in the Federal 
Register a list of specific multiple source drugs and their maximum allowable costs 
limitations. For these drugs, the allowable cost to the Medicare program may not exceed 
the drug ingredient cost incurred in purchasing the drugs that would be paid by a prudent 
and cost conscious buyer if obtained from the lowest priced source that is widely and 
consistently available (whether sold by generic or trade name). Moreover, the drug 
ingredient cost cannot exceed the maximum allowable costs published in the Federal 
Register. For a more detailed discussion of this provision, see the Provider 
Reimbursement Manual Part I. 
280 - Lower of Costs or Charges 
(Rev. 4, 10-01-01) 
Payment to providers (including Medicare cost-based HMO/CMP Providers) for services 
provided to Medicare beneficiaries will be based upon the lower of the reasonable cost of 
providing those services or the customary charges for the same services. However, in the 
case of Hospital Part A services, this provision will not apply to cost reporting periods 
beginning on or after October 1, 1982, for any hospital that is subject to the rate of 
increase ceiling under 1886(b) of the Act. The lower of cost or charges provision also 
will not apply with respect to Hospital Part A services furnished by a hospital that is 
subject to the PPS pursuant to 1886(d) of the Act for cost reporting periods beginning 
on or after October 1, 1983. Providers entitled to recapture previously disallowed costs 
will continue to be able to do so during this time. 
Payments to providers will be based on the interim rate that approximates reasonable cost 
as nearly as practicable, but cannot exceed 100 percent of the customary charges for the 
same services. 
HMO/CMPs should exercise care in the application of the lower of costs or charges 
provisions due to its limited applicability. 
The principle will be applicable to services rendered by providers other than those public 
providers that render services free of charge or at a nominal charge. When such public 
providers render services to beneficiaries, they will be paid full reasonable cost for those 
services. 
Lower of costs or charges rules apply to services obtained by the cost-based HMO/CMP 
from outside providers, and to services furnished to the HMO/CMPs Medicare enrollees 
by providers owned and operated by the HMO/CMP or related to the HMO/CMP by 
common ownership and control. Rules applicable to related organizations are discussed 
in Chapter 10 of the Provider Reimbursement Manual (Pub. 15), Part I. 
For a more detailed discussion of the lower of costs or charges provision, see Chapter 26 
of the Provider Reimbursement Manual (Pub. 15), Part I.  290 - The Prospective Payment System (PPS) 
(Rev. 4, 10-01-01) 
The Social Security Amendments of 1983 (P.L. 98-21) provided that, effective with cost 
reporting periods beginning on or after October 1, 1983, most Medicare payments for 
Part A hospital inpatient operating costs are to be made prospectively on a per discharge 
basis. Part A Inpatient Hospital operating costs include costs (including malpractice 
insurance cost) for general routine services, ancillary services, and intensive care type 
unit services. However, they exclude capital-related costs incurred prior to October1, 
1991, when capital-related costs began to be paid based on a separate prospective 
payment rate and direct medical education costs (which are paid using a different 
method). Part B inpatient ancillary and outpatient service will continue to be paid 
retrospectively on a reasonable cost basis. 
The following hospitals and hospital units are exempt from the PPS: 
  Hospitals located outside the 50 States and the District of Columbia;  
  Psychiatric hospitals;  
  Rehabilitation hospitals  
  Long term hospitals;  
  Childrens hospitals;  
  Psychiatric and rehabilitation units of general hospitals which meet the separate 
entity requirement of the Provider Reimbursement Manual, Part I, or 1814 or 
1886(c); of the Act; and  
  Hospitals subject to State rate setting authority operated under 1814 or 1886(c) 
of the Act.  
These hospitals will continue to be paid on the basis of reasonable costs, subject to 
applicable target rate ceilings contained in 1886(b) of the Act. 
NOTE: The exemption is not optional on the part of the provider but is required as long 
as the hospital or hospital unit meets the definition for exemption. 
In addition, other entities are paid on a prospective basis (including SNFs, Outpatient 
Hospitals, etc.) under 1888(d) of the Act. Payments made for services will be governed 
by the same rules that are used for Medicare beneficiaries not enrolled in a HMO/CMP. 
For a detailed discussion of the PPS provision, see the Provider Reimbursement Manual 
and the Intermediary Manual. 
300 - Duplicate Payment Detection for Cost Contracting HCPPs and 
HMOs/CMPs 
(Rev. 63, 11-12-04) 
Several entities may have jurisdiction over the processing and payment of Part B bills for 
an HMOs/CMPs members. This could result in duplicate payments to either the  physician, supplier, or to the enrollee. It is incumbent that HCPPs and HMOs/CMPs 
establish a system to preclude or detect duplicate payments. 
Regardless of the claims option selected, HMOs/CMPs are required to process all non-
provider Part B bills, with some exceptions. These exceptions, as noted below, are 
processed by the carrier or intermediary: 
 
 
 
  Claims for services by an independent physical therapist;  
  Claims for outpatient blood transfusions;  
  Claims from physicians for dialysis and related services provided through an 
approved dialysis facility;  
  Claims for home health services received under cost reports beginning on or after 
January 1, 2005; and  
  Hospice care by Medicare participating hospices, except:  
a.  Services of the enrollees attending physician if the physician is an 
employee or contractor of the organization and is not employed by or 
under contract to the members hospice; and  
b.  Services not related to the treatment of, or a condition related to, the 
terminal condition.  
Duplicate payment detection is the responsibility of the HCPP or HMO/CMP, not the 
carrier. The HCPP or HMO/CMP should perform several duplicate check functions after 
it receives paid claims information. If the HCPP or HMO/CMP has not previously paid 
the claim, a copy of the claims information is filed in the beneficiarys history file. If the 
duplicate payment check reveals that the HCPP or HMO/CMP has already paid for the 
services: 
  Contact the physician/supplier or enrollee to retrieve the overpayment; 
  Record any collections as credits on the cost report; 
  Notify CMS of unresolved overpayment situations; and 
  Do not return payment to the carrier. 
300.1 - Coordination of Benefits 
(Rev. 4, 10-01-01) 
The Medicare program is usually the primary payer for covered Medicare services 
provided to Medicare members of a Medicare cost-based HMO/CMP; however, there are 
six categories of services for which Medicare is the secondary payer if a timely filed 
claim was submitted to the primary payer. These are: 
  Services covered by a State or Federal Workers Compensation law (WC);     Services covered by no fault insurance;  
  Services covered by any liability insurance;  
  Services covered by Employer Group Health Plans (EGHPs) in the case of ESRD 
beneficiaries during a period of generally 30 months;  
  Services covered by EGHPs in the case of employed beneficiaries age 65 and 
over and the spouses age 65 and over, of employed individuals; and  
  Services covered by Large Group Health Plans (LGHPs) in the case of certain 
disabled Medicare beneficiaries who are covered by reason of their employment 
or the employment of a family member.  
No payment will be made to a cost-based HMO/CMP for services to the extent that 
Medicare is not the primary payer under the provisions of 1862(b) of the Act. 
If a Medicare enrollee receives covered services from the cost-based HMO/CMP for 
which the enrollee is entitled to benefits under one of the preceding categories, the 
HMO/CMP may charge or authorize a provider that furnished the service to charge: 
  An insurance carrier, employer, or other entity that is the primary payer for these 
services; or  
  The Medicare enrollee, to the extent that he/she has been paid by such a primary 
payer.  
300.1.1 - Definition of Certain Terms Used in Coordination of Benefits 
(Rev. 4, 10-01-01) 
  CMSs claim is the amount that is determined to be owed to the Medicare 
program. This is the amount that was paid out by Medicare, less any prorated 
procurement costs (see 42 CFR 411.37) if the claim is in dispute.  
  An Employer, as used in these instructions, means not only individuals and 
organizations engaged in a trade or business, but also includes organizations 
exempt from income tax, such as religious, charitable, and educational 
institutions, as well as the governments of the United States, the States, Puerto 
Rico, Guam, the Virgin Islands, American Samoa, the Northern Mariana Islands, 
and the District of Columbia, including their agencies, instrumentalities, and 
political subdivisions.  
  A secondary payer for purposes of this instruction, when used with respect to 
Medicare payment, means that Medicare incurs a legal obligation to pay only 
after other primary third party payers satisfy their payment responsibilities. If the 
primary payer covers all expenses, Medicare has no payment obligation. If the 
primary payer covers part of the expenses, Medicare may pay for the residual, 
uncovered amounts. In certain instances when the primary payer does not pay 
promptly, CMS pays conditional primary benefits and later recovers them from 
the responsible party.  
  Subrogation means the substitution of one person or entity for another.   300.2 - The Medicare HMO/CMPs Obligations 
(Rev. 4, 10-01-01) 
When the Medicare program is not the primary payer for covered Medicare services 
provided to Medicare members of an HMO/CMP, the organization must: 
  Identify payers that are primary to Medicare under 1862(b) of the Act;  
  Determine the amounts payable by these payers; and  
  Take steps in accordance with these instructions and the instructions in 
3407-3419 and 3489-3492 of the Medicare Intermediary Manual to assure 
that Medicare pays only secondary benefits when another insurer is primary 
payer.  
In addition, in situations when the cost-based HMO/CMP may charge another 
HMO/CMP or the Medicare beneficiary for services when Medicare is not primary payer, 
it may also require the enrollee to sign a subrogation agreement under which the 
HMO/CMP is given the rights the beneficiary has against the third party. 
300.3 - General Fee-For Service (FFS) Coordination of Benefits Rules 
(Rev. 4, 10-01-01) 
All Medicare payments are contingent upon payment on reimbursement to the 
appropriate Trust Fund when notice or other information is received that payment for the 
same items or services has also been made, or could be made, by a primary payer. 
Section 1862(b) of the Act now expressly provides that: 
  CMS may bring an action against any entity which is required or responsible to 
pay primary in order to recover Medicare payments directly from that entity;  
  The government is subrogated to the right of any individual or entity to receive 
payment from a responsible third party. Under the Medicare subrogation 
provision, the government is given whatever rights the beneficiary or any other 
entity had against the responsible third party to the extent that Medicare has made 
payments to or on behalf of the beneficiary; and  
  The government may join or intervene in any action related to the events that gave 
rise to the need for the items or services for which Medicare paid.  
300.4 - Other Provisions 
(Rev. 4, 10-01-01) 
Any claimant, including an individual who received services and the provider or supplier, 
has the right to take legal action against an Employer Group Health Plan (EGHP) or 
Large Group Health Plan (LGHP) that fails to pay primary benefits for services covered 
by both the EGHP or LGHP, Medicare, and to collect double damages. (See 36.5.) 
According to 2000 of the Internal Revenue Code (IRC), an excise tax may be imposed 
on any employer or employee organization that contributes to the nonconforming EGHP 
or LGHP during a calendar year. The amount of tax is 25 percent of the total amount that  the employer or employee organization contributed to the EGHP or LGHP during that 
year. This tax penalty does not apply to Federal and other governmental entities. 
300.5 - Conflicting Claims by Medicare and Other Third Parties 
(Rev. 4, 10-01-01) 
Situations may arise in which both Medicare and another insurer or State Medicaid 
agency have conditionally or erroneously paid for services, and the amount payable by 
the third party payer is insufficient to reimburse both programs. Under 1862(b)(2)(B) of 
the Act, Medicare has the right to recover its benefits from the responsible third party 
before any other entity, including a State Medicaid Agency. Also, Medicare has the right 
to recover its benefits from any entity, including a State Medicaid Agency that has been 
paid by the responsible third party. In other words, Medicares recovery rights when 
another third party is primary payer take precedence over the rights of any other entity. 
The superiority of Medicares recovery right over those of other entities, including 
Medicaid, derives from the preceding cited statute. 
If Medicare and Medicaid both have claims against the responsible third party, 
Medicares right to recover its benefits from another insurer or from a beneficiary that 
has been paid by another third party is higher than Medicaids, notwithstanding the fact 
that Medicaid is the payer of last resort, and therefore, does not pay its benefits until after 
Medicare has been paid. 
Medicares priority right of recovery from insurance plans that are primary to Medicare 
does not violate the concept of Medicaid being payer of last resort. Under 1862(b) of the 
Act, Medicares ultimate statutory authority is not to pay at all (with a concomitant right 
to recover any conditional benefits paid) when payment can reasonably be expected by a 
third party which is primary to Medicare. If a third party that is primary payer pays 
promptly, Medicare makes no payment to the extent of the third party payment. Delay of 
the other payment does not change Medicares ultimate obligation to pay the correct 
amount, if any, regardless of any Medicare payments conditionally made. Thus, when a 
responsible third party pays the charges, or if it pays less and the provider is obligated to 
accept that amount as payment in full, Medicare may not pay at all. Pro rata or other 
sharing of recoveries with third parties would have the effect of creating a Medicare 
payment when none is authorized under the law, or improperly increasing the amount of 
any Medicare secondary payment. 
Moreover, the right of Medicaid agencies to recover their benefits derives from an 
assignment by Medicaid beneficiaries to the States of their rights to third party payment. 
Since the beneficiary can assign to the State a right no higher than his/her own, and since 
Medicares statutory right is higher than the beneficiarys, Medicares right is higher than 
that assigned to the State. 
300.6 - Coordination with Workers Compensation 
(Rev. 4, 10-01-01) 
Medicare may not pay for services that are payable under Workers Compensation (WC) 
laws. Where the Medicare cost-based HMO/CMP coordinates its own health organization 
with WC coverage, it will use the procedures developed by its own organization to  identify and recover costs for services furnished to Medicare members. When the 
Medicare cost-based HMO/CMP does not coordinate benefits for its own organization, it 
must establish reasonable screening procedures to identify potential WC liability 
situations. If it is determined that Medicare has paid for items or services which can be or 
could have been paid for under WC, the Medicare payment constitutes an overpayment. 
All WC acts require that the employer furnish the employee with necessary medical and 
hospital services, medicines, transportation, apparatus, nursing care, and other necessary 
restorative items and services. For specific information regarding the WC plan of a 
particular governmental entity, contact the appropriate agency of the governmental entity. 
If payment for services cannot be made by WC because they were furnished by a source 
not authorized by WC, the services can be paid for by Medicare. 
The beneficiary is responsible for taking whatever action is necessary to obtain payment 
under WC where payment under that system can reasonably be expected (e.g., timely 
filing of a claim, furnishing all necessary information). If failure to take proper and 
timely action results in a loss of WC benefits, Medicare benefits are not payable to the 
extent that payment could reasonably have been expected under WC. 
NOTE: When failure to file a proper claim is due to mental or physical incapacity of 
the beneficiary, and the provider could not have known that WC was involved, 
this rule does not apply. 
300.6.1 - Definitions Under WC 
(Rev. 4, 10-01-01) 
  A WC law or plan is a government supervised and employer supported system for 
compensating employees for injury or disease suffered in connection with their 
employment, regardless of whether the injury was the fault of the employer. WC 
does not usually cover agricultural employees, interstate railroad employees, 
employees of small businesses, employees whose work is not in the course of the 
employers business (e.g., domestic employees), casual employees, and self-
employed people. All States provide compensation for at least some occupational 
diseases. 
 
The definition also applies to the WC plans of the District of Columbia, American 
Samoa, Guam, Puerto Rico, and the Virgin Islands. It also applies to the Federal 
WC plans provided under the Federal Employees Compensation Act, the U.S. 
Longshoremens and Harbor Workers Compensation Act and its extensions, and 
the Federal Coal Mine Health and Safety Act of 1969 as amended (the Federal 
Black Lung Program). These Federal programs provide WC protection for 
Federal civil service employees and certain other categories of employees not 
covered, or not adequately covered, under State WC programs (e.g., coal miners 
totally disabled due to pneumoconiosis; maritime workers, with the exception of 
seamen; employees of companies performing overseas contracts with the United 
States government; employees of American companies who are injured in an 
armed conflict; employees paid from non-appropriated Federal funds, such as  employees of post exchanges; and offshore oil field workers). The Federal 
Employers Liability Act, which covers merchant seamen and employees of 
interstate railroads, is not a WC law or plan for purposes of this provision. 
Similarly, some States have employers liability acts. These also are not 
considered WC acts for purposes of this provision.  
  Workers Compensation Agency means any governmental entity that administers 
a Federal or State WC law. This term includes WC commissions, industrial 
commissions, industrial boards, WC insurance funds, WC courts and, in the case 
of Federal workers compensation programs, the U.S. Department of Labor.  
  Workers Compensation Carrier means any insurance carrier authorized to write 
WC insurance under the State or Federal law, the State compensation fund in 
which the State administers the WC program, and the beneficiarys employer in 
which the employer is self-insured.  
  Lump Sum Compromise Settlement is a settlement that provides less in total 
compensation than the individual would have received if the claim had not been 
compromised. This may occur when compensability is contested.  
300.7 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this Medicare secondary payer provision, 
refer to 3407.2 - 3417.2 of the Intermediary Manual. These sections include 
information regarding the method of calculating Medicare secondary payments, contested 
WC claims, lump sum commutations of future benefits, and the effect of a lump sum 
compromise settlement. 
310 - Coordination for ESRD Patients 
(Rev. 4, 10-01-01) 
Medicare is secondary to benefits payable under an EGHP in the case of individuals who 
are entitled to benefits solely or partly on the basis of ESRD during a period of 18 
months. During a period of 30 months, Medicare is secondary for all Medicare services, 
not just ESRD-related services. At the end of the coordination period, Medicare becomes 
the primary payer for these Medicare enrollees. 
The 30-month period begins with the earlier of the first month of Part A eligibility or 
entitlement based solely or partly on ESRD. 
If the basis for an individuals entitlement to Medicare changes from ESRD to age 65 or 
disability, the coordination period will continue. In like respects, if the individual is 
entitled to Medicare benefits for other reasons, the coordination period will apply once 
the individual is determined to have ESRD. The following steps are involved in 
determining Medicare responsibility as the secondary or primary payer: 
  Identify Medicare members entitled solely or partly because of ESRD;  
  Determine the period within which benefits must be coordinated; and  
  Determine if services rendered can be paid for by an EGHP.   310.1 - Definition of Employer Group Health Plan (EGHP) or Employer 
Plan 
(Rev. 4, 10-01-01) 
When used in context of entitlement to Medicare based solely on ESRD, these terms 
mean any health organization that: 
  Is paid for by, or contributed to by, an employer, and  
  Provides medical care, directly or through other methods such as insurance or 
reimbursement to current or former employees, or to current or former employees 
and their families.  
It includes the Federal Employees Health Benefits (FEHB) program. Employees pay all 
plans , i.e., group health plans under the auspices of an employer which do not receive 
any contributions from the employer, also meet the definition of EGHP. 
NOTE: Under this provision, Medicare is secondary to EGHPs, regardless of the 
number of employees who work for the employer. 
310.2 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this Medicare secondary payer provision, 
refer to 3490.3 - 3490.16 of the Intermediary Manual. These sections include, among 
other things, information regarding the implementation of this provision retroactively, the 
processing of current claims, the determination of the 18-month period in which 
Medicare may be secondary, and the method of calculating the Medicare secondary 
payment. 
320 - Coordination With No-Fault Insurance 
(Rev. 4, 10-01-01) 
Medicare may not pay for any items or services to the extent that payment has been 
made, or can reasonably be expected to be made, for the items or services, under any no 
fault insurance (including a self-insured organization). Medicare is secondary to no fault 
insurance even if State law or a private contract of insurance stipulates that Medicare is 
primary. If Medicare payments have been made, but should not have been because they 
are excluded under this provision, or if the payments were made on a conditional basis, 
they are subject to recovery. 
The issue in cases involving accident related medical expenses is whether no fault 
benefits can be paid for these particular services. If so, the no fault insurance is primary. 
If not, Medicare may be primary. Primary Medicare benefits cannot be paid merely 
because the beneficiary wants to save his/her no fault insurance benefits to pay for future 
services. Since no fault insurance benefits would be currently available in that situation, 
they must be used before Medicare. 
Expenses for services for which Medicare payment may not be made because payment 
has been made or can reasonably be expected to be made promptly under any no fault  insurance, are credited toward Part A or Part B deductible amounts. Inpatient care that is 
paid for by a third party payer is not counted against the number of days available to the 
beneficiary under Medicare Part A. 
320.1 - Definition of Automobile and No-Fault Insurance 
(Rev. 4, 10-01-01) 
  An automobile is defined for the purposes of this instruction, as any self-propelled 
land vehicle of a type that must be registered and licensed in the State in which it 
is owned.  
  No-Fault Insurance is insurance coverage (including a self-insured plan) that pays 
for all or part of the medical expenses for injuries regardless of who may have 
been responsible for causing the accident. (This insurance is sometimes called 
personal injury protection (PIP), medical payments coverage, or medical expense 
coverage.)  
320.2 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this Medicare secondary provision, refer to 
3489.3 - 3489.9 of the Medicare Intermediary Manual. These sections include, but are 
not limited to, information regarding the processing of claims, the necessary action to 
take if there is the possibility of payments under no fault insurance, and the method of 
calculating the secondary Medicare payment. 
330 - Benefit Coordination for Services Reimbursable Under Liability 
Insurance 
(Rev. 4, 10-01-01) 
Under 1862(b)(2)(A) of the Act (42 U.S.C. 1395y(b)(2)(A)), payment may not be made 
under Medicare for covered items or services to the extent that payment has been made, 
or can reasonably be expected to be made promptly, under a liability insurance policy or 
plan (including a self-insured plan). All Medicare payments are contingent upon payment 
to the Medicare program to the extent that payment with respect to the same items or 
services has been made, or could be made, under a liability insurance policy or plan 
(including a self-insured plan). Medicare is subrogated to the rights of the beneficiary and 
may also recover its benefits directly from liability insurance companies and self-insured 
plans, and from any entity, including the beneficiary, that has been paid by a liability 
insurer. Medicares right to recover its benefits from liability insurers, and from those 
who have been paid by liability insurers takes precedence over the claims of any other 
party, including Medicaid. 
Under this Medicare Secondary Payer (MSP) provision, the program is a claimant against 
the responsible party and the liability insurer, to the extent that Medicare has made 
payments to or on behalf of the beneficiary. Medicare can be a party to any claim by a 
beneficiary or other entity against a liability insurer, can participate in negotiations 
concerning the total liability insurance payment and the amount to be repaid to Medicare, 
and may seek recovery of conditional payments directly from the liability insurer. Section  1862(b) of the Act provides that any claimant has the right to take legal action against a 
liability insurer that fails to pay primary benefits for services covered by the insurer, and 
to collect double damages. 
330.1 - Definition Under Liability Insurance 
(Rev. 4, 10-01-01) 
  Liability Insurance is insurance (including a self-insured plan) that provides 
payment based on legal liability for injuries or illness or damages to property. It 
includes, but is not limited to, automobile liability insurance, uninsured and 
under-insured motorist insurance, homeowners liability insurance, malpractice 
insurance, product liability, insurance and general casualty insurance. It also 
includes payments under State wrongful death statutes that provide payment for 
medical damages.  
NOTE: This provision does not apply when the homeowner receives payment 
under his/her own homeowners insurance policy, since such a payment 
does not constitute a liability insurance payment.  
  A Self-Insured Plan is a plan under which an individual or other entity is 
authorized by State law to carry its own risk instead of taking out insurance with a 
carrier. Authorized by State law means not prohibited by State law. The plan 
established for the Federal government under the Federal Tort Claims Act is also 
a self-insured plan.  
  Uninsured Motorist Insurance is a liability insurance plan under which the 
policyholders insurer pays for damages caused by a motorist who has no 
automobile liability insurance or who carries less than the amount of insurance 
required by law.  
  Under-Insured Motorist Insurance is optional liability insurance available in some 
jurisdictions under which the policyholders level of protection against losses 
caused by another is extended to compensate for inadequate coverage in the other 
partys policy or plan.  
  An accident is any occurrence or activity that the individual believes resulted in 
injury or illness for which he/she holds another party liable.  
330.2 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this MSP provision, refer to 
3419.3 - 3419.10 of the Intermediary Manual. These sections include, among other 
things, information regarding billing rights and responsibilities, identification of liability 
situations, and actions to be taken when a liability claim has been filed.  340 - Benefit Coordination for Working Aged Individuals Entitled to 
Medicare 
(Rev. 4, 10-01-01) 
Under 1862(b)(1)(A) of the Act, if an employer has 20 or more employees (calculated 
as described below) and offers a group health plan (referred to here as an EGHP), the 
EGHP is the primary payer for individuals who are 65 or over, and who are covered 
under the plan based on current employment of the individual or the individuals spouse. 
(Medicare remains the primary payer for retirees.) 
Medicare is secondary only if the individual is entitled to Medicare Part A. Generally, 
Medicare is not secondary for persons over age 65 who have ESRD. The law also 
prohibits EGHPs from taking into account, in furnishing services, that an individual is 
entitled to Medicare benefits, and requires that employees or their spouses, who are 65 or 
over, be entitled to the same benefits under the same conditions as individuals under age 
65. If the EGHP violates either of these provisions, Medicare is entitled to collect primary 
payments from the organization as if the violations had not occurred. The nonconforming 
plan is also subject to an excise tax imposed under the Internal Revenue Code (IRC). 
340.1 - Application of 20 Employee Threshold 
(Rev. 4, 10-01-01) 
This requirement applies if an employer has 20 or more full-time or part-time employees 
on each working day in each of 20 or more calendar weeks in the current calendar year or 
the preceding calendar year. An employer who does not have 20 or more employees in 
the preceding year is required to offer employees and spouses age 65 or over, primary 
coverage beginning with the point in time at which the employer has had 20 or more 
employees on each working day of 20 calendar weeks of the current year. The employer 
is then required to offer primary coverage for the remainder of that year and throughout 
the following year, even if the number of employees later drops below 20 after the 
employer has met the threshold. If the individual receives the services for which 
Medicare benefits are claimed after the employer has met the 20 or more employees 
threshold in the current year or in the preceding calendar year, the EGHP is the primary 
payer. An employer that meets this threshold must provide primary coverage even if less 
than 20 employees participate in the employer plan. 
Self-employed individuals who participate in the plan are not counted as employees for 
the purpose of determining if the 20 or more employees requirement is met. There is no 
requirement that an employer provide coverage to self-employed individuals. However, 
any coverage provided to self-employed persons by an employer of 20 or more 
employees must be primary to Medicare. 
Assume for purposes of developing claims that, in the absence of evidence to the 
contrary, an employer in whose health organization a beneficiary is enrolled because of 
employment, meets the definition of employer and employs at least 20 people. An 
employers allegation that the 20-employee requirement is not met, or a multi-employer 
organizations statement identifying specific members as employees of employers of  fewer than 20 employees, can be accepted as a basis for making Medicare primary 
payments. Refer questionable cases to the CMS (RO). 
The following steps are involved in determining if Medicare is the secondary or primary 
payer: 
  Determine if the member (or spouse) is eligible for consideration;  
  Determine if the member or spouse is age 65 or over and entitled to Part A (this is 
shown on the reply listing);  
  Determine if the individual who is age 65 or over is covered under the employers 
health organization by reason of current employment;  
  Determine if the member or spouse has ESRD;  
  If the Medicare member age 65 or over is not covered due to current employment 
(including self-employment), determine if the spouse is covered by reason of 
current employment and, if so, whether the Medicare member is covered under 
the spouses EGHP; and  
  Determine if the services are covered under the employer plan.  
The HMO/CMP is responsible for identifying affected individuals as part of the 
enrollment process. Medicare payment is reduced to the extent that the expenses are 
payable under an employer plan. 
340.2 - Definition Under EGHP 
(Rev. 4, 10-01-01) 
A Medicare cost-based HMO/CMP, in making a decision as to whether Medicare is 
primary or secondary, must be aware of the definition of these terms: 
  Employed, for purposes of this discussion, encompasses not only employees. It 
also includes, subject to the special rules in this chapter, self-employed persons 
such as consultants, owners of businesses, directors of corporations, and members 
of the clergy and religious orders who are paid for their services by a religious 
body or other entity.  
  Employer means, in addition to individuals and organizations engaged in a trade 
or business, other entities exempt from income tax such as religious, charitable, 
and educational institutions, the governments of the United States, the individual 
States, Puerto Rico, the Virgin Islands, Guam, American Samoa, the Northern 
Mariana Islands, and the District of Columbia, and the agencies, instrumentalities, 
and political subdivisions of these governments.  
  EGHP for the working aged means any health organization that is paid for by or 
contributed to by an employer of 20 or more employees and which provides 
medical care, directly or through other methods, such as insurance or 
reimbursement, to current or former employees or to current or former employees 
and their families. This includes a multi-employer plan (i.e., a plan sponsored 
jointly by employers and unions) and a multiple employer plan (i.e., a plan 
sponsored by more than one employer) which is sponsored by or contributed to by  at least one employer that has 20 or more employees. Under 1862(b)(1)(A)(iii) 
of the Act, if a multi-employer plan or multiple EGHP can identify particular 
enrollees as employees of employers that do not meet the 20-employee threshold, 
the MSP rules do not apply to these enrollees and their spouses. However, the 
organization must elect this treatment for the exception to apply.  
 
The Federal Employees Health Benefits (FEHB) program meets the definition of 
an EGHP. Employees that pay all plans, i.e., group health plans under the 
auspices of an employer which do not receive any contribution from the 
employer, also meet the definition of an EGHP. 
 
Assume, in the absence of evidence to the contrary, that any health plan 
(including a union plan) in which a beneficiary is enrolled because of the 
beneficiarys or the beneficiarys spouses employment meets this definition.  
NOTE: Medicare is secondary to EGHP coverage only if the EGHP coverage is by 
reason of the employees current employment. Health insurance plans for 
retirees or the spouses of retirees do not meet this condition and are not primary 
to Medicare. 
 
Multi-Employer Group Health Plan and Multi-Employer Plan are terms that refer to a 
multiple employer plan, which is a plan sponsored by more than one employer, or a 
multi-employer plan, which is sponsored jointly by employers and unions. 
340.3 - Additional Special Rules Applicable to EGHPs 
(Rev. 4, 10-01-01) 
There are additional rules that the Medicare cost-based HMO/CMP must follow in 
making EGHP coverage decisions. These rules are outlined in the following sections. 
340.3.1 - Self-Employed Individuals 
(Rev. 4, 10-01-01) 
These are currently employed persons. It includes not only employees, but also self-
employed persons such as directors of corporations and owners of businesses. If a self-
employed individual enrolls in an EGHP that meets the definition in this chapter, the 
employer plan is primary for that individual and the individuals spouse. 
340.3.2 - Members of Clergy and Religious Orders Who Have Not 
Taken a Vow of Poverty 
(Rev. 4, 10-01-01) 
The following general guidelines apply in determining the employment or retirement 
status of members of the clergy and members of religious orders when an EGHP alleges 
that such an individual is retired (members of clergy or members of religious order who 
have not taken vow of poverty). Such members are:    Considered employed if they are receiving from a church, religious order or other 
employing entity cash remuneration for services rendered regardless of whether 
their earnings are exempt from Social Security coverage; and  
  Considered retired if the church, religious order, or other employing entity states 
that the members are retired, and that they receive only retirement pay from the 
entity rather than remuneration for services rendered.  
340.3.3 - Members of Religious Order Who Have Taken Vow of Poverty 
(Rev. 4, 10-01-01) 
Medicare is not secondary for individuals who perform services as members of a 
religious order whose members are required to take a vow of poverty if those activities 
are considered employment only because of an election of Social Security coverage by 
the order under 3121(r) of the Internal Revenue Code. This means Medicare is primary 
to the group health coverage provided as a result of those activities. Those activities may 
not be considered in determining whether a member of the order is considered an 
employed individual for purposes of the working aged provision. 
This exception applies only to religious functionaries who are members of religious 
orders and who have taken a vow of poverty. It does not apply to Protestant and Jewish 
clergy, who do not take the vow of poverty. It does not usually apply to Catholic parish 
priests, most of who do not take vows of poverty, nor does it apply to any member of a 
religious order who has not taken a vow of poverty. Furthermore, the exception does not 
apply to group health coverage based on work performed by members of religious orders 
for employers outside of their orders. Also, the MSP definition of employed remains 
applicable to employees of religious orders who provide service and are reimbursed by 
the orders, but who are not themselves members of the orders. The usual MSP rules apply 
to such individuals. 
340.4 - Individuals Who Receive Disability Payments 
(Rev. 4, 10-01-01) 
A person receiving disability payments from an employer is considered employed if such 
payments are subject to taxes under the Federal Insurance Contributions Act (FICA). 
Employer disability payments are subject to FICA tax for the first 6 months of disability 
after the last calendar month in which the employee worked for that employer. 
EXAMPLE: 
Adam Green stopped working because of disability in December 1987 at age 66. His 
employer began paying him disability payments as of January 1988. Since sick pay is 
taxed under FICA for 6 months after the last month in which the employee worked, 
Medicare is the secondary payer through June 1988. Beginning with July 1988, Medicare 
becomes the primary payer as the sick payments are no longer considered wages under 
FICA.  350 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this Medicare secondary provision, refer to 
3491.3 - 3491.17 of the Medicare Intermediary Manual. These sections include, among 
other things, information regarding the individuals covered by this provision, the 
coordination of benefits with other insurers, the method of calculating the Medicare 
secondary payment, and special rules for services furnished by a source outside the 
prepaid EGHP. 
350.1 - Benefit Coordination with a Large Group Health Plan 
(Rev. 4, 10-01-01) 
Under 1862(b)(1)(B) of the Act, Medicare is secondary payer to LGHPs for active 
individuals under age 65 entitled to Medicare on the basis of disability. Under the law, an 
LGHP may not take into account that an active individual is eligible for or receives 
benefits based on disability. The individuals coverage under the LGHP must be based on 
the individuals employment or the employment of a family member. Refer to 3492 of 
the Medicare Intermediary Manual for processing claims where Medicare is secondary 
payer for disabled individuals. Where those sections refer to an EGHP of 20 or more 
employees, substitute the term large group health plan for purposes of applying them to 
disabled individuals. This provision is effective for items and services furnished on or 
after January 1, 1987, and before October 1, 1995. 
A large group health plan means any health plan that meets the following criteria: 
  Is paid for by or contributed to by an employer or by an employee organization, 
including a self-insured plan;  
  Provides health care directly or through other methods such as insurance or 
reimbursement to employees, the employer, other associated or formerly 
associated with the employer in a business relationship or their families; and  
  Covers employees of at least one employer that normally employed at least 100 
full or part-time employees on a typical business day during the previous calendar 
year. The term employer, for the purpose of this provision, includes the Federal 
government and other governmental entities.  
A group health plan that covers employees of at least one employer that had l00 or more 
employees on 50 percent or more of its business days during the preceding calendar year, 
is considered to meet the above definition of an LGHP. 
350.2 - A Nonconforming LGHP 
(Rev. 4, 10-01-01) 
A nonconforming LGHP means that at any time during the calendar year, it is taken into 
account that an active individual is eligible for or receives benefits based on disability, 
for example, an LGHP fails to pay primary benefits for disabled individuals under age 65 
for whom Medicare is secondary payer.  NOTE: Although the term large group health plan includes a plan for former 
employees or persons formerly associated with the employer in a business 
relationship or their families, these individuals are not included in the definition 
of active individual, i.e., Medicare is not secondary for them. These individuals 
are included within the definition of LGHP for tax purposes. 
350.3 - Definition of an Active Individual 
(Rev. 4, 10-01-01) 
An active individual is an employee, an employer, a self-employed individual (such as 
the employer), an individual associated with the employer in a business relationship (e.g., 
suppliers and contractors who do business with the employer and their employees), or a 
member of the family of any of these persons such as the spouse, parent or child of such 
an individual. 
The disabled individual may be the employee, a self-employed individual such as the 
employer or individual associated with the employer in a business relationship. Also, the 
disabled person may be the family member of the employee, a self-employed individual 
such as the employer, or an individual associated with the employer in a business 
relationship. 
350.4 - Definition of an Employee 
(Rev. 4, 10-01-01) 
An employee is an individual who is actively working for an employer or, since disabled 
persons are not usually working, a person whose relationship to an employer is indicative 
of employee status. Whether or not such a person is an employee is established by the 
facts applicable to the persons relationship to the employer. The question to be decided 
is whether the employer treats a disabled individual who is not working as an employee, 
in light of commonly accepted indicators of employee status rather than whether the 
person is categorized in any particular way by the employer. 
350.5 - Special Rules for Individual Employee Status 
(Rev. 4, 10-01-01) 
In general, an individual who is not actively working is considered to have employee 
status if the relationship is such that: 
  The individual is receiving payments from an employer which are subject to taxes 
under the Federal Insurance Contributions Act (FICA), or would be subject to 
such taxes except that the employer is one that is not required to pay such taxes 
under the IRC;  
  The individual is termed an employee under State or Federal law or in accordance 
with a court decision;  
  The employer pays the same taxes for the individual as he/she pays for actively 
working employees;  
  The individual continues to accrue vacation time or receives vacation pay;     The individual participates in an employers benefit plan in which only employees 
may participate;  
  The individual has rights to return to duty if his/her condition improves; and  
  The individual continues to accrue sick leave.  
350.5.1 - Individuals Not Subject to This Limitation Payment 
(Rev. 4, 10-01-01) 
Medicare is not secondary for: 
  Individuals entitled, or who would upon application be entitled, to Medicare 
under the ESRD provision that are not in the coordination period, i.e., individuals 
who have ESRD even though their current Medicare entitlement is on the basis of 
disability;  
  Individuals who are covered by an EGHP of employers of less than 100 
employees, unless the EGHP is a multi-employer plan in which there is at least 
one employer of 100 or more employees; and  
  Individuals whose coverage by an LGHP is not based on either employment or a 
relationship to an employee, employer, or an individual associated with an 
employer in a business relationship. For example, Medicare is primary for a 
disabled individual who is covered under an LGHP as a retired former employee, 
and who does not meet any of the criteria in 30.1 or who is the spouse of a 
retired former employee.  
350.6 - Failure to Pay Primary Benefits 
(Rev. 4, 10-01-01) 
Any claimant, including an individual who received services and the provider or supplier, 
has the right to take legal action against an LGHP that fails to pay primary benefits for 
services covered by both the LGHP and Medicare, and to collect double damages. 
360 - Additional Processing Instructions 
(Rev. 4, 10-01-01) 
For further information on how to implement this Medicare secondary provision, refer to 
3492.E - 3492.K of the Medicare Intermediary Manual. The following sections 
include, among other things, information regarding individuals subject to this provision, 
the legal action that may be brought against an LGHP, and the tax penalty for 
noncompliance by a LGHP. 
360.1 - Federal Governments Right to Sue and Collect Double Damages 
(Rev. 4, 10-01-01) 
Separate from its subrogation rights, the Federal Government has an independent right to 
take legal action to recover payments from entities that are required or responsible to pay 
benefits primary to Medicare, but fail to do so. The Federal Government may recover  double damages in this type of lawsuit pursuant to 1862(b)(2)(B)(ii) of the Act. Entities 
that are required or responsible to pay primary to Medicare include: 
  A group health plan, including insurers, employers, and third party administrators 
of such plans;  
  A LGHP, including insurers, employers, and third party administrators of such 
plans;  
  Any liability insurance policy or plan, including a self-insured plan;  
  A WC plan; and  
  An automobile or non-automobile no fault insurance plan.  
The Medicare cost-based HMO/CMP should refer any case in which an entity is required 
or responsible to make primary payment, but refuses to do so, to the CMS RO servicing 
the HMO/CMPs area. The HMO/CMP should include, in addition to the beneficiarys 
name, address, and SSN or HICN, the formal name and address of the insurer or 
HMO/CMP; the employee brochure that describes health benefits and coverage; the name 
and address of the entity required or responsible for making payment on behalf of the 
plan (e.g., the employer, an insurer or a third party administrator (TPA)); a copy of the 
employers agreement with the TPA; the name of the sponsoring or contributing 
employer or employee organization; the providers name, address, and identification 
number; the specific amount of mistaken primary benefits Medicare paid; the specific 
date(s) of service; the specific procedure or diagnosis code(s) the MSP type (e.g., ESRD 
or working aged); and a full explanation of the reasons for the referral. The CMS RO 
reviews the case file for completeness and obtains any needed additional information. 
When the file is complete, the CMS RO refers the case to CMS CO. CMS CO considers 
possible legal action to collect double damages from that entity. 
The governments right to sue and collect double damages is effective for items and 
services furnished on or after December 20, 1989, under all MSP provisions except the 
MSP for the disabled provision. The governments right to sue and collect double 
damages under the MSP for the disabled provision, is effective for items and services 
furnished on or after January 1, 1987. 
370 - Excise Tax Penalties for Contributors to Nonconforming Group 
Health Plans 
(Rev. 4, 10-01-01) 
Section 5000 of the IRC of 1986, imposes an excise tax penalty on employers and 
employee organizations that contribute to nonconforming group health plans. They are 
taxed 25 percent of the employers or employee organizations expenses incurred during 
the calendar year for each group health plan (conforming as well as nonconforming ) to 
which they contribute. This tax penalty does not apply to Federal and other governmental 
employers. 
The term nonconforming group health plan means a group health plan or LGHP that at 
any time during a calendar year, fails to comply with any of the following provisions of 
the working aged, disability, or ESRD Medicare secondary laws.  370.1 - Working Aged 
(Rev. 4, 10-01-01) 
Section 1862(b)(1)(A)(i)(I) of the Act provides that a group health plan may not take into 
account that a currently employed individual age 65 or over (or a spouse age 65 or over 
of an employed individual of any age) is entitled to Medicare. Further, 
1862(b)(1)(A)(i)(II) of the Act states that a group health plan must provide the same 
benefits under the same conditions to employees and employees spouses age 65 or over 
as it provides to employees and employees spouses under age 65. 
370.2 - Disability 
(Rev. 4, 10-01-01) 
Section 1862(b)(1)(B)(i) of the Act provides that a LGHP may not take into account that 
a disabled active individual is entitled to Medicare based on disability. The term active 
individual means an employee, the employer, self-employed individual (such as the 
employer), an individual associated with the employer in a business relationship, or a 
member of the family of any such persons. 
370.3 - End Stage Renal Disease (ESRD) 
(Rev. 4, 10-01-01) 
Section 1862(b)(1)(C) of the Act provides that a group health plan may not take into 
account that an individual is entitled to Medicare solely on the basis of ESRD during the 
period when Medicare is secondary payer. 
Further, a group health plan may not differentiate on the basis of the existence of ESRD, 
the need for renal dialysis, or in any other manner in the benefits it provides between 
individuals having ESRD, and other individuals covered by such plan. 
Examples of discriminatory actions by a group health plan or LGHP that constitute 
noncompliance with these provisions include: 
  Failure to make primary payment on behalf of an individual for whom Medicare 
is secondary;  
  Providing secondary or complementary coverage to such an individual;  
  Refusal to allow such an individual to enroll or re-enroll in the group health plan 
or large group health plan because of Medicare entitlement;  
  Providing a different level of benefits for individuals for whom Medicare is 
secondary than it provides for other persons enrolled in the plan;  
  Imposing limitations on benefits, exclusions of benefits, reductions in benefits, 
higher premiums, higher deductibles or coinsurance, longer waiting periods, 
lower annual or lifetime benefit limits, or more restrictive pre-existing illness 
limitations for persons for whom Medicare is secondary payer that are not 
applicable to others enrolled in the plan;  
  Terminating coverage because a person has become entitled to Medicare; or  
  Failure to cover routine maintenance dialysis services or kidney transplants.   The Medicare cost-based HMO/CMP should refer any case of a nonconforming group 
health plan to the RO servicing its area. The HMO/CMP should include, in addition to 
the beneficiarys name, address, and SSN or HICN, the formal name and address of the 
nonconforming group health plan; the name and address of the entity required or 
responsible for making payment on behalf of the plan (e.g., the employer, an insurer, or a 
third party administrator (TPA)); a copy of the employers agreement with the TPA; the 
name of the sponsoring or contributing employer or employee organization; the employer 
or employee organization taxpayer identification number; year(s) of violation; the 
providers name, address and identification number; the specific amount of Medicare 
payments associated with the nonconformance; the specific date(s) of service; the 
specific procedure or diagnosis code(s); the MSP type (e.g., ESRD or working aged); and 
a full explanation of the reasons for the referral. The CMS RO reviews the case file for 
completeness and obtains any needed additional information. When the file is complete, 
the RO refers the case to CMS CO. CMS CO reviews the case and refers it to the Internal 
Revenue Service (IRS) to impose the excise tax on employers and employee 
organizations that have contributed to the plan. 
The excise tax penalty for nonconformance with the working aged and ESRD MSP 
provisions can be imposed for acts of discrimination occurring on or after December 20, 
1989. The excise tax penalty for nonconformance with the disability MSP provision can 
be imposed for acts of discrimination occurring on or after January 1, 1987. 
380 - Applying Recoveries to the Cost Report 
(Rev. 4, 10-01-01) 
Total reimbursable Medicare enrollee costs must be reduced by the value of services for 
which Medicare is not the primary insurer. 
In addition, the Part A and Part B deductible should be computed based only upon 
amounts for which Medicare is the primary insurer. When the primary payer is a WC 
plan, a no fault insurer, or an EGHP, the amounts paid by the primary payer are credited 
to the deductibles. Therefore, the entire charge should be considered in computing the 
deductibles. The bases for offsets are: 
  The amount recoverable; or  
  A member month ratio  
390 - Alternative Method for Cost Report Treatment of Employer 
Health Plans 
(Rev. 4, 10-01-01) 
In the case of benefits covered by an employer plan for a Medicare member who is also a 
group member under the employers plan, the Medicare cost-based HMO/CMP may elect 
to identify the cost or charge for the service covered under that plan. However, instead of 
specifically identifying those services for which an employer health plan is primarily 
liable for payment, the HMO/CMP may elect to utilize a member month ratio to establish 
Medicares liability. This election must be made in writing at the time of a timely 
submitted budget. In addition, this election must be made for the groups of Medicare 
beneficiaries subject to the MSP provisions as described in this chapter.  Once the election is made, the election will remain in effect until it is revoked by the 
Medicare cost-based HMO/CMP in writing on a timely submitted budget. 
The member month ratio is developed by dividing the Medicare member months by the 
total Medicare member months. This ratio would then be applied to covered Medicare 
service costs resulting in those costs for which Medicare is the primary payer. 
400 - Determining Total Costs for Comparison with Capitation Limits 
(Rev. 4, 10-01-01) 
The total cost of services provided directly or arranged by the Medicare cost-based 
HMO/CMP, as well as emergency and urgently needed services, will be compared to 100 
percent of the weighted average of the capitation amounts, for the Medicare cost-based 
HMO/CMPs membership. This comparison will be used as a reasonable cost guideline. 
For comparison purposes, non-emergency or non-urgently needed out-of-plan care 
arranged independently by the Medicare enrollee would not be considered unless the 
HMO/CMP accepts financial responsibility for the service. 
CMS will use these comparisons to determine if further investigation of claimed costs is 
necessary. For example, CMS could require the Medicare cost-based HMO/CMP to 
supply additional information to verify the costs claimed on the cost report. In addition, 
CMS could use this information to establish the criteria used to select a cost report for 
audit potential. 
Costs will consist of those costs incurred directly by the HMO/CMP plus the costs 
incurred by CMS on behalf of the HMO/CMP. The bill summary report and the carrier 
payment report will be used to report the total cost for services furnished on behalf of the 
HMO/CMP. 
NOTE: 42 CFR 417.532(a)(3) applies the weighted average of the AAPCCs of each 
class of the HMOs or CMPs Medicare enrollees for that plans geographic 
area as an absolute limitation on the total amount payable. In October of 
1989, Ruling HCFAR-89-2 directed CMS not to use the AAPCC as an 
absolute limit; however, the AAPCC can be used as a reasonable cost 
guideline. 
 
410 - Taxes Assessed Against the Medicare Cost-Based HMO/CMP 
(Rev. 4, 10-01-01) 
The general rule is that taxes assessed against the Medicare cost-based HMO/CMP, in 
accordance with the levying enactments of the several States and lower levels of 
government, and for which the organization is liable for payment, are allowable costs. 
Tax expense should not include fines and penalties. 
Whenever exemptions to taxes are legally available, the Medicare cost-based HMO/CMP 
is expected to take advantage of them. If the HMO/CMP does not take advantage of 
available exemptions, the expenses incurred for such taxes are not recognized as 
allowable under the program.  More detail can be found in the Medicare Provider Reimbursement Manual, (Pub. 15), 
Part I, 2122ff. 
410.1 - Premium Taxes Assessed Against the Medicare Cost-Based 
HMO/CMP 
(Rev. 4, 10-01-01) 
Some State and local governments are assessing organizations a tax based on premium 
revenue. If there are no exemptions that could be used to legally avoid the assessment of 
this tax, CMS will recognize the expense as an allowable cost. 
However, the amount CMS should pay would be the amount of the assessment that is 
applicable to premiums charged to Medicare enrollees for covered services. This is 
accomplished by including total premium assessments in Plan Administration costs and 
using the Medicare to Total Member Month ratio to apportion cost. Payments by CMS to 
a cost contractor for covered services rendered to Medicare enrollees do not constitute 
premiums. Rather, CMS is buying each covered service at cost less applicable Medicare 
deductible and coinsurance. The only premium for covered services paid to the Medicare 
cost-based HMO/CMP is paid by the Medicare enrollee for Medicares deductibles and 
coinsurance. Therefore, the amount of the assessment to be paid by CMS should be 
limited to that amount applicable to Medicares deductible and coinsurance charged as a 
premium.  Transmittals Issued for this Chapter 
 
Rev #  Issue Date  Subject  Impl Date  CR# 
R86MCM 04/27/2007 Revisions to Chapter 17, Subpart B, Section  04/27/2007 N/A
220, Determining Deductibles and 
Coinsurance
R74MCM 10/04/2005 Changes in Manual Instructions for Payment  N/A N/A
Principles for Cost Based HMO/CMPs
R67MCM 08/12/2005 Changes in Requirements for Periodic  N/A N/A
Surveys of Current and Former Enrollees, and 
in the CMS Method for Calculating Interest 
on Overpayments and Underpayments to 
HMOs, CMPs and HCPPS.
R63MCM 11/12/2004 Home Health Services N/A N/A
R52MCM 05/07/2004 Payment Principles for Cost-Based  N/A N/A
HMO/CMPs
R17MCM 01/01/2003 Determining Deductible and Coinsurance; and N/A N/A
Duplicate Payment Detection
R04MCM 10/01/2001 Initial Issuance of Chapter N/A N/A