INNOVATORS’ 

GUIDE TO 

NAVIGATING 

MEDICARE

Version 2.0

2010
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

2

Table of Contents

OVERVIEW...................................................................................................................... 3

CMS Relevant Components............................................................................................ 6

Openness and Transparency of Processes....................................................................... 9

Contact Information...................................................................................................... 10

COVERAGE ................................................................................................................... 11

National Coverage Determination (NCD) .................................................................... 11

Local Coverage Determination (LCD) ......................................................................... 13

National Coverage Determination Process................................................................... 16

CODING.......................................................................................................................... 17

Statutory Authority - HIPAA........................................................................................ 17

ICD-9-CM and HCPCS Coding Systems..................................................................... 18

HCPCS.......................................................................................................................... 22

HCPCS Coding Guidance............................................................................................. 29

CODE SET COMPARISON CHART.......................................................................... 30

PAYMENT ...................................................................................................................... 31

Inpatient Prospective Payment System......................................................................... 32

Hospital Outpatient Prospective Payment System........................................................ 36

Physician Fee Schedule................................................................................................. 42

Part B Drugs in the Physician’s Office ......................................................................... 45

Clinical Laboratory Services......................................................................................... 46

Durable Medical Equipment, Prosthetics, Orthotics, and Supplies.............................. 47

Inherent Reasonableness............................................................................................... 48

A Look to the Future..................................................................................................... 50

Value-based Purchasing................................................................................................ 50

Rulemaking Cycles of Medicare Payment Systems ..................................................... 54
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

3

OVERVIEW

With a Medicare budget of approximately $460 billion and serving nearly 46 million 

beneficiaries, the Centers for Medicare & Medicaid Services (CMS) plays a key role in the 

overall direction of the health care system. From the beginning of the Medicare program, 

one of the most important program goals for CMS has been to make “the best of modern 

medicine'' available to Medicare beneficiaries. Over the last 40 years, significant advances in 

medical science have offered improved health for beneficiaries and others. Many of these 

advances have involved the use of new technologies, such as prescription drugs and medical 

devices. 

CMS, through its Council on Technology and Innovation (CTI), has developed the 

Innovators’ Guide to Navigating Medicare1 to assist stakeholders in understanding the 

processes used to determine coverage, coding, and payment for new technologies under the 

Medicare fee-for-service program. This guide is only intended as a general summary. The 

information provided is not intended to grant rights or impose obligations. While a chapter 

may contain references or links to statutes, regulations, or other policy materials, it is not 

intended to take the place of applicable statutory law or regulations. We encourage readers 

to review the specific statutes, regulations, and other interpretive materials for a full and 

accurate statement of their contents.

In recent years, CMS has made substantial progress in defining the coverage, coding, and 

payment processes and how they relate to each other. In order to improve stakeholder 

understanding and consider how these processes might be further improved, CMS has made 

the requirements of these processes, including how decisions are made, more transparent and 

provided opportunities for public input to facilitate dialogue between CMS and interested 

stakeholders. This better enables stakeholders to develop a strategy for working with CMS to 

support timely introduction of innovative technology to the Medicare marketplace, allowing

Medicare beneficiaries timely access to advances in health care.

Payment for many technological advances can be made under one of Medicare’s payment 

methodologies without being preceded by an explicit coverage determination, coding change, 

and/or payment decision by CMS. However, the Agency will specifically evaluate issues 

involving coverage, coding, and/or payment with respect to certain technological advances. 

The basic analytical framework that CMS uses for each of these issues is as follows:

1) Coverage

Medicare’s authority to cover or exclude certain items or services is governed by the 

Social Security Act (the Act) and implementing regulations. 

• Benefit Category – Does the new technology fall into at least one defined benefit 

category or categories under the Act? 

• Statutory Exclusion – Does the new technology involve an item or service that is 

specifically excluded by the Act?

 1 Title change in 2010 -- previously entitled “Innovators’ Guide to Navigating CMS”.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

4

• Reasonable and Necessary – Is the new technology “reasonable and necessary”

for the diagnosis or treatment of illness or injury, or to improve the functioning of 

a malformed body member?

2) Coding

• Clinically Different – Are changes in coding needed to accommodate the new 

technology? In most cases, new items and services are adequately described in 

existing codes. However, some new technologies may warrant differentiation 

through the creation of new codes.

3) Payment

• Payment System – Which fee-for-service payment system(s) does the new 

technology fit into (e.g., hospital inpatient prospective payment system, physician

fee schedule)? 

• Payment Amount – If the new technology warrants a new code, how will the 

payment amount be determined? 

Coverage 

CMS and its administrative contractors, i.e., fiscal intermediaries (FIs), carriers, and 

Medicare Administrative Contractors (MACs)

2

, have the authority to develop coverage 

determinations for particular items or services or to decide claims on a case-by-case basis. 

The Agency may choose to develop a national coverage policy to ensure that similar claims 

will be adjudicated under uniform criteria. Coverage policies are more likely to be 

developed when the item or service produces significant clinical consequences for 

beneficiaries, when the medical community is divided about the merits of an item or service 

for a particular population, or when the item or service has a significant impact on the 

Medicare program. 

A Medicare administrative contractor develops Local Coverage Determinations (LCDs) that 

apply only within the jurisdiction served by the individual contractor. Administrative Law 

Judges (ALJs) must give substantial deference to LCDs but are not bound to follow the 

policies. CMS makes National Coverage Determinations (NCDs) that are binding policies 

for all fiscal intermediaries, carriers, MACs, Quality Improvement Organizations (QIOs), 

Quality Independent Contractors (QICs), ALJs, and the Medicare Appeals Council.

Coding

Currently, CMS uses the International Classification of Diseases, 9th Edition, Clinical 

Modification (ICD-9-CM) and the Healthcare Common Procedure Coding System (HCPCS) 

 2 Historically, fiscal intermediaries and carriers contracted with CMS to process Medicare claims for Part A and 

Part B, respectively. Under contracting reform, mandated by the Medicare Modernization Act of 2003 (MMA), 

new contracting entities known as Medicare Administrative Contractors (MACs) will merge Part A and Part B 

claims processing under a single authority. Additional information on contracting reform is on the CMS 

website at: http://www.cms.hhs.gov/MedicareContractingReform/
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

5

for processing Medicare claims. The updated International Classification of Diseases, 10th

Edition (ICD-10) is scheduled for implementation on October 1, 2013. In contrast to 

coverage decisions, changes to coding systems are made strictly at the national level. In 

many instances new technologies are adequately described by existing codes. Under the 

Health Insurance Portability and Accountability Act of 1996 (HIPAA), contractors can no 

longer establish local codes, although new technologies are sometimes accommodated by 

‘not otherwise classified’ codes pending determination of a new code assignment. 

Payment

Payment levels for most of Medicare’s fee-for-service payment systems are structured to 

gradually adjust to the use of a new technology, and in general do not require major 

modifications. For example, many institutional payment systems calculate payments based 

on claims and other data. As a new technology is used to treat Medicare beneficiaries, its 

relative use will be reflected in payment for the service using the technology. 

In certain cases, payment adjustments for new technologies are appropriate. Medicare’s

inpatient and outpatient prospective payment systems include provisions designed to 

provide an extra payment amount for certain new technologies. To merit such additional 

payment, the new technology generally must represent a substantial clinical improvement 

relative to existing technologies and meet specific cost thresholds. However, for payment 

under the outpatient prospective payment system, a service may be assigned to a New 

Technology Ambulatory Payment Classification (APC) group and a new drug may 

receive pass-through payment without demonstrating substantial clinical improvement.

Timing of Policy Decisions

Coverage, coding, and payment decisions are not necessarily made in any particular order. 

For example, a manufacturer may have secured a new code before seeking Medicare 

coverage. In addition, while CMS will not generally accept a coverage determination request 

for a device or pharmaceutical that is not approved or cleared for marketing by the Food and 

Drug Administration (FDA), applicants may apply for a new technology hospital inpatient 

add-on payment several months prior to the technology’s receipt of FDA approval, as long as 

FDA approval is granted before CMS makes its decisions for the inpatient prospective 

payment system (IPPS) final rule. However, because CMS may add new services or passthrough items for payment on a quarterly (rather than annual) basis under the hospital 

outpatient prospective payment system (OPPS), OPPS applications for New Technology 

APCs or pass-through drugs, biologicals, or devices are not considered complete and may not 

be evaluated until the new technology is approved by the FDA.

Timelines for Medicare coding, coverage and payment decisions may often span a 12 month

period. A manufacturer should be cognizant of these different timeframes in order to 

navigate a technology’s adoption through the Medicare program. Local and national 

coverage decisions are made under specific timeframes to accommodate public notice and 

comment requirements. Coding changes are commonly made on an annual basis, while some 

payment changes may occur quarterly. For planning purposes, this guide contains a set of 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

6

charts that provide key milestones for coverage, coding, and payment decision-making 

processes including the many opportunities for public input.

CMS Relevant Components

In addition to understanding the various milestones, it is helpful to know which CMS 

components to contact regarding Medicare decisions for new technologies under the 

coverage, coding and payment processes. Each component’s responsibilities are described 

below. 

Office of Clinical Standards and Quality

The Office of Clinical Standards and Quality (OCSQ) oversees national quality initiatives 

and includes the Coverage and Analysis Group (CAG), which is responsible for developing 

national coverage policy. CAG also provides oversight of Medicare contractors to ensure 

that the local coverage determination process is properly followed. Within CAG, coverage 

determinations about drugs, non-implantable devices, and laboratory and diagnostic tests are 

referred to the Division of Items and Devices. Other coverage topics, including surgical 

procedures and implantable devices, are referred to the Division of Medical and Surgical 

Services. The Division of Operations and Information Management provides ongoing 

scanning of industry developments to keep CAG staff abreast of new and developing 

treatments and technologies that may result in national coverage issues and maintains liaisons 

with other Department components, such as the FDA. This Division is also responsible for 

oversight of the Medicare Evidence Development & Coverage Advisory Committee 

(MEDCAC) and public notice and comment processes. 

Center for Medicare 

The Center for Medicare (CM) develops payment rules and decisions, undertakes benefit 

category determinations, and formulates Medicare policy for the development and 

maintenance of new and revised codes. Within CM, the Hospital and Ambulatory Policy 

Group (HAPG) is responsible for refining hospital and most outpatient payment systems. 

This group contains four Divisions: 

• The Division of Acute Care defines the scope of Medicare benefits for services provided 

by hospitals to inpatients, and develops, updates, and evaluates the hospital inpatient 

prospective payment system (IPPS) for payments to hospitals for inpatient services and 

associated capital costs. This Division considers applications for temporary supplemental 

payments for new technologies under the IPPS. It also develops and maintains new and 

revised codes for the ICD-9-CM coding system used for inpatient hospital services. 

• The Division of Ambulatory Services formulates payment policies for ambulance 

services, rural health clinics, clinical laboratory services, blood, blood products, and 

hemophilia clotting factors. This Division also develops payment policies for drugs 

provided under Medicare Part B including those drugs provided by physicians (e.g., 

injectable drugs, vaccines, chemotherapy agents), and drugs used in connection with 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

7

durable medical equipment. 

• The Division of Outpatient Care develops and maintains the hospital outpatient 

prospective payment system (OPPS) and the ambulatory surgical center (ASC) payment 

system. This Division considers applications for temporary supplemental payments for 

new technologies and new drugs, biologicals, and radiopharmaceuticals used within a 

hospital outpatient department that are payable under the OPPS and may be payable 

under the ASC payment system and payment adjustments for new technology intraocular 

lenses provided in ASCs. This Division also staffs biannual meetings of the Advisory 

Panel on Ambulatory Payment Classification (APC) Groups whose purpose is to advise 

the Secretary of the Department of Health and Human Services and the Administrator of 

CMS about the clinical integrity of the APC groups and their associated weights.

• The Division of Practitioner Services develops, updates, and evaluates payment policies 

and systems for physicians and non-physician practitioners. As part of these 

responsibilities, the Division develops payment amounts for all services paid under the 

Medicare physician fee schedule. This fee schedule is used to pay physicians and many 

other non-physician practitioners (i.e., nurse practitioners, physician assistants, 

psychologists, social workers, physical and occupational therapists, audiologists, and 

others) for their services to Medicare beneficiaries. This fee schedule is based on the 

establishment of relative values for physician work, practice expense, and professional 

liability for each service. This Division also coordinates with the American Medical 

Association (AMA) through the Relative Value Update Committee (RUC) that makes 

recommendations to the Secretary regarding the relative value units (RVUs) that form the 

basis of Medicare payment for physician services.

Another group within CM, the Chronic Care Policy Group (CCPG), develops and maintains 

payment systems for post-acute care services (e.g., inpatient rehabilitation facilities, inpatient 

psychiatric facilities, skilled nursing facilities, home health agencies, and hospice care), renal 

dialysis, and durable medical equipment used outside of hospital outpatient departments and 

ambulatory surgical centers. This group contains six Divisions: 

• The Division of Home Health, Hospice, and HCPCS maintains and updates level II of the 

Healthcare Common Procedure Coding System (HCPCS) code set. The Level II HCPCS 

is a national standard code set adopted under HIPAA for use by all payers (Medicare, 

Medicaid, and private insurers) and used primarily to identify products, supplies, and 

services not included in the Current Procedural Terminology, 4th Edition (CPT-4) codes. 

This Division also develops and evaluates Medicare policies and standards on payment 

for the home health and hospice programs. 

• The Division of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 

(DMEPOS) Policy develops and evaluates Medicare policies and standards on payment 

methods for items and services furnished by DMEPOS suppliers and the scope of 

benefits for DMEPOS. In addition, the Division is responsible for developing, 

implementing, and maintaining national payment and operational policies for the 

Medicare DMEPOS competitive bidding program. 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

8

• The Division of Institutional Post-Acute Care develops and evaluates Medicare policies 

and standards on payment methods for services provided by skilled nursing facilities and 

inpatient rehabilitation facilities and the scope of benefits for both programs. 

• The Division of Chronic Care Management develops, evaluates, and reviews payment

policies, regulations, and instructions concerning services for renal dialysis, partial 

hospitalization at community mental health centers and hospitals, religious non-medical 

healthcare institutions, and the program of all-inclusive care for the elderly. In addition, 

this Division develops and evaluates Medicare policies and standards on payment 

methods for services provided by inpatient psychiatric facilities.

• The Division of Technical Payment Policy develops, updates, and evaluates policies 

designed to improve the functioning of the Medicare program, engages in activities that 

promote the efficiency and quality of services delivered by providers, and works on 

initiatives to facilitate beneficiary access to care. This Division develops policies 

concerning assignment and reassignment of benefits, mandatory claims submission, 

limiting charge, beneficiary signatures on claims, timely filing, and appeals before the 

Provider Reimbursement Review Board. The Division also is responsible for certain 

policies concerning reimbursement for costs claimed by organ procurement organizations 

(OPOs) and hospital-OPO designated service area waiver requests.

• The Division of Cost Reporting develops and evaluates national policies, regulations, and 

instructions for payment/reimbursement of the costs incurred by providers of services and 

other classes of facilities under the Medicare program. This Division develops policies 

pertaining to the use of all cost reporting forms, schedules, and related instructions 

necessary for paying health care institutions. 

 

Center for Program Integrity

The Center for Program Integrity (CPI) is responsible for utilization management and 

providing national instructions and directions to the Medicare contractors that are responsible 

for performing these functions. Although exact numbers vary from year-to-year, at the time 

of publication of this guide, these contractors included FIs, carriers, MACs, Program 

Safeguard Contractors (PSCs), and Recovery Audit Contractors (RACs). 

Center for Strategic Planning

The Center for Strategic Planning (CSP) designs and conducts research on health care 

programs and studies their impact on beneficiaries, providers, plans, and other partners and 

customers. As part of this research, CSP sometimes develops new tools to measure the 

quality and efficiency of care. CSP is also the component responsible for designing and 

conducting demonstrations to test innovations in payment policy.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

9

Council on Technology and Innovation

The CTI was established in 2004 under Section 942(b) of the Medicare Prescription Drug 

Improvement and Modernization Act of 2003 (MMA) to serve as a coordination point for 

those components of CMS that are responsible for policy development and implementation 

affecting new and emerging medical technology, and to coordinate the exchange of 

information on new technology between CMS and other entities that make similar decisions. 

The CTI is composed of senior CMS staff and clinicians and is chaired by an Executive 

Coordinator appointed by the Secretary of the Department of Health and Human Services. 

CTI facilitates discussions on coverage, coding, and payment issues of unusual complexity or 

controversy; accelerates and improves coordination of these processes; improves supply of 

evidence for new medical technologies; and facilitates the exchange of information with 

other federal agencies to devise clinical trials or registries that better meet the evidence needs 

to support coverage, coding and payment decisions. 

Openness and Transparency of Processes

CMS maintains open channels of communication between outside entities and the CMS 

components charged with making coverage, coding, and payment decisions. CMS continues

to preserve liaisons with beneficiaries, provider groups, industry associations, patient 

organizations, medical associations, investors, and other parties that relate to their assigned 

subject areas. 

CMS periodically hosts Open Door Forums or Town Hall Meetings in order to better hear 

from and interact with those providers, beneficiaries, manufacturers, and other stakeholders 

interested in coverage, coding, payment, and other issues. These forums encourage dialogue 

between CMS officials and stakeholders about policies under development or issues that 

arise with existing procedures. Notice of Town Hall Meetings is published in the Federal 

Register and specific information about Open Door Forums can be found on the CMS 

website at: http://www.cms.hhs.gov/opendoorforums/.

Many CMS policies are developed with the assistance of advisory committees or in 

collaboration with outside groups. Meetings of these groups are usually held in a public 

forum and interested parties may be invited to participate or comment. These groups include, 

but are not limited to, the Medical Evidence Development & Coverage Advisory Committee

(MEDCAC), the Advisory Panel on Ambulatory Payment Classification Groups (APC 

Panel), the National Committee on Vital and Health Statistics (NCVHS), and the American 

Hospital Association Editorial Advisory Board for the Coding Clinic. Activities of these and 

other groups that help CMS develop policies for new health care technologies and ways that 

interested parties may stay informed of their activities are described in more detail in

subsequent chapters of this guide.

Coordination with Outside Entities

CMS is strengthening its ties to health care technology stakeholders by developing 

collaborations with organizations that facilitate health care innovation. Collaborations help 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

10

provide early insights into emerging technologies that may play a major role in reducing 

disease burden or improving health in the future. 

CMS is working to speed Medicare beneficiary access to new and innovative medical 

products through closer coordination with the FDA. The Agencies are also exploring ways 

to ensure that when CMS needs to make coverage, coding, and/or payment decisions, it has 

access to timely and accurate FDA information regarding the technology at issue. 

Increased Beneficiary Involvement

CMS has taken steps to encourage communication with beneficiary advocates in order to 

inform policy decisions. In June 2005, CMS appointed six patient advocates to the 

MEDCAC as voting members, at least one of whom sits on each MEDCAC panel. Industry

representatives maintain their non-voting status and also participate in the MEDCAC

reviews. 

The patient advocacy coordinator, from the CMS Office of External Affairs and Beneficiary 

Services, orchestrates all patient advocate activities throughout the Agency. Providing a 

direct link between patient advocacy groups and CMS, this position is responsible for 

communicating coverage and payment regulatory decisions and issues to Agency 

constituents and special interest populations affected by these policies.

Contact Information

Information on CTI initiatives and activities is located on the CMS website at 

http://www.cms.hhs.gov/CouncilonTechInnov/01_overview.asp . 

Stakeholders with further questions about Medicare's coverage, coding, and payment 

processes, or who want further guidance about how they can navigate these processes, can 

contact the Council at CTI@cms.hhs.gov .
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

11

COVERAGE

 For information on Coverage:

http://www.cms.gov/CoverageGenInfo/

http://www.cms.gov/center/coverage.asp

Medicare covers various items and services for its beneficiaries. The vast majority of 

coverage policy is determined on a local level by the Medicare contractors that pay Medicare 

claims. However, in certain cases, Medicare deems it appropriate to develop criteria for 

coverage via a national coverage determination (NCD). National coverage policies are more

likely to be developed when the item or service produces significant clinical consequences 

for beneficiaries, when the medical community is divided about the merits of an item or 

service for a particular population, or when the item or service has a significant impact on the 

Medicare program. 

This chapter provides general and historical information concerning the NCD process, and 

summarizes the local coverage determination (LCD) process. 

National Coverage Determination (NCD)

NCDs are developed by CMS to describe the nationwide conditions for Medicare coverage 

for a specific item or service. NCDs generally outline the conditions for which an item or

service is considered to be covered (or not covered) under §1862(a)(1) of the Act or other 

applicable provisions of the Act. NCDs are issued as program instructions. Once published in 

a CMS program instruction, an NCD is binding on all Medicare Administrative Contractors

(MACs), fiscal intermediaries, carriers, Quality Improvement Organizations (QIOs),

Qualified Independent Contractors (QICs), Administrative Law Judges (ALJs), and the 

Medicare Appeals Council.

3 Similarly, an NCD is binding on Program Safeguard 

Contractors (PSCs).4

Medicare Advantage (Part C) health plans are required to cover all items and services that are 

offered under Part A and Part B. Thus, plans must cover items and services that are covered 

under an NCD. NCDs do not apply to Part D plans. 

NCDs should not be confused with "National Coverage Requests" or "Coverage Decision 

Memoranda." 

NCD Process

The NCD process consists of three major steps: 1) initiation, 2) review, and 3) completion. 

 3 See 42 CFR §405.732, 42 CFR §405.860, and 42 CFR §405.1060

4 See Program Integrity Manual, Chapter 13, §13.1.1
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

12

CMS initiates the NCD process by “opening” the NCD. This is announced to the public by 

posting a “tracking sheet” on the CMS coverage web site. NCD reviews pertain to reviews of 

particular items and services to determine whether they meet the statutory requirements. 

Development of a complete, formal request for an NCD can be initiated either by an outside 

party or internally by CMS staff. Please refer to the following link which outlines how to 

request a complete and formal NCD: 

http://www.cms.hhs.gov/DeterminationProcess/02_howtorequestanNCD.asp

Time Frames

Time frames required for the NCD process are statutory, as mandated by the MMA. The 

time frame does not begin until CMS formally accepts an NCD request. When the volume of 

formal requests is heavy, CMS may set priorities – reviewing applications for technologies 

likely to have a greater impact on the Medicare program and its beneficiaries before those 

with lesser impacts. Once a completed request is accepted, CMS notifies the requester and 

posts a tracking sheet announcing the NCD review on the CMS coverage website. 

For NCD requests not requiring an external technology assessment (TA) or Medicare 

Evidence Development & Coverage Advisory Committee (MEDCAC) review, CMS must 

post a proposed decision no later than six months after the date CMS accepts the completed 

formal request. For NCDs that require either a TA or MEDCAC review, or both, the 

proposed decision must be posted no later than nine months after the date CMS accepts the 

completed request. The NCD process timeline is illustrated in a schematic located at the end 

of this chapter and also at http://www.cms.hhs.gov/DeterminationProcess/Downloads/8a.pdf

The NCD process can be found at http://www.cms.hhs.gov/DeterminationProcess/. Note: 

CMS refers to the national coverage analysis (NCA) process as the NCD process.

Technology Assessments (TAs)

TAs are systematic reviews of evidence, conducted and coordinated by CMS staff to review 

relevant evidence and inform a determination if the item or service is reasonable and 

necessary. To minimize bias, systematic reviews emphasize a comprehensive search of all 

potentially relevant medical and scientific articles and use explicit, reproducible criteria in 

the selection of articles for review. Primary research designs and study characteristics are 

appraised in accordance with a hierarchy of medical evidence. Data are summarized and the 

evidence is appraised to assess its validity (how credible it is), clinical relevance (its 

applicability in real health care settings), and weight (magnitude of effect). 

CMS staff generally performs TAs internally but may contract with an external party to 

perform a TA. A guidance document on the CMS website describes the factors CMS 

considers in commissioning external TAs, posted at 

http://www.cms.hhs.gov/mcd/ncpc_view_document.asp?id=7

Medicare Evidence Development & Coverage Advisory Committee (MEDCAC)
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

13

For coverage topics that are highly controversial or have a major potential impact on the 

Medicare program or its beneficiaries, CMS may draw on the expertise of the MEDCAC. 

The primary role of the MEDCAC is to provide independent, expert advice to assist CMS in 

making sound coverage decisions for the topic under review. The MEDCAC reviews and 

evaluates medical literature and TAs, listens to testimony, deliberates, and provides CMS 

with recommendations as to the strength of the evidence reviewed. 

The CMS website contains an overview of the MEDCAC; a guidance document entitled 

Factors CMS Considers in Referring Topics to the Medicare Evidence Development & 

Coverage Advisory Committee; the MEDCAC's charter; the 1998 Federal Register notice 

that established the MEDCAC (formerly known as the MCAC); the current roster of 

MEDCAC members; and other informational materials. Additional information regarding 

MEDCAC can be found at http://www.cms.hhs.gov/FACA/02_MedCAC.asp#TopOfPage

Decision Memoranda

CMS posts on its website proposed and final decision memoranda. The decision memoranda 

inform interested parties of CMS’ analysis, describe the clinical position that CMS intends to 

implement, and provide background on how CMS reached its decision.

NCD Implementation

The NCD is the formal instruction to the Medicare claims processing contractors regarding 

how to process claims (e.g., when to pay, when not to pay, pay only when certain clinical 

conditions are met). Appropriate payment or other changes to accommodate the coverage 

decision are effective at the time a final decision is posted to the CMS website. In most 

instances CMS implements an NCD through the change management process and provides 

detailed coding and billing instructions. The instructions specify appropriate coding and 

detail how the NCD criteria are to be implemented in the claims processing systems. Those 

instructions have a specific effective date dictating when claims will be processed according 

to the new criteria. The contractors implement the NCD within their own jurisdictions and 

may subsequently develop LCDs or policy articles to supplement the NCD. 

Coverage with Evidence Development

Coverage with Evidence Development (CED) is a coverage decision made through an NCD. 

These NCDs require additional data collection, such as data collected in a clinical trial, as a 

condition of coverage. The purpose of CED is to provide Medicare coverage for a particular 

item or service and to develop evidence of its impact on the health of Medicare beneficiaries. 

Examples of NCDs that require CED are Continuous Positive Airway Pressure Therapy for 

Obstructive Sleep Apnea and Positron Emission Tomography for Solid Tumors and 

Myeloma. For more information on CED see 

http://www.cms.hhs.gov/mcd/ncpc_view_document.asp?id=8 

Local Coverage Determination (LCD)
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

14

Section 522 of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 

Act of 2000 (BIPA) created and defined the term “local coverage determination” (LCD) as a 

decision by a contractor whether to cover a particular service on a contractor-wide basis in 

accordance with Section 1862 (a)(1)(A) of the Social Security Act (i.e., that the item or 

service is reasonable and necessary). LCDs may be developed in the absence of an NCD or 

as a supplement to an NCD as long as the LCD policy does not conflict with national policy. 

Medicare contractors previously developed Local Medical Review Policies (LMRPs) as 

vehicles for local policy. In 2003, as required by BIPA, CMS instructed the contractors to 

create LCDs and convert all LMRPs into LCDs. The difference between LMRPs and LCDs 

is that LCDs consist of only “reasonable and necessary” information, while LMRPs may also 

have contained benefit category and statutory exclusion provisions. Therefore, CMS further 

instructed that all other guidance from contractors should be published in a contractor article.

Local Coverage Determination Time Frames

Unlike the NCD time clock that begins with the acceptance of a formal request to open an 

NCD, the time clock for an LCD begins with the initiation of a minimum 45-day comment 

period following publication of a draft LCD. During this time, comments on the draft LCD 

must be solicited from several outside parties, including affected health professionals, other 

contractors, providers, and QIOs. In addition to the draft LCD comment period, contractors 

provide open meetings for the purpose of discussing draft LCDs prior to presenting the 

policy to the Contractor Advisory Committee (CAC). Once the contractor has considered all 

the comments and developed the final LCD, it must be published on Medicare’s coverage 

website. A minimum notice period of 45 days is required prior to the effective date of 

implementation. 

Reconsiderations of NCDs and LCDs 

Any interested party may request a reconsideration of the benefit category determination or 

any provision of an existing NCD or LCD by submitting a formal request in writing to CMS 

or the local contractor, respectively. A formal request for reconsideration must include either 

(1) new information that was not considered during the initial determination, or (2) 

arguments that the NCD or the LCD decision materially misinterpreted the applicable 

statutory provisions, the applicable regulatory provisions, or the existing evidence at the time 

the determination was made. Contractors must consider all LCD reconsideration requests 

from beneficiaries residing or receiving care in the contractor’s jurisdiction; providers doing 

business in the contractor’s jurisdiction; and any interested party doing business in the 

contractor’s jurisdiction. A reconsideration request – once accepted– goes through the same 

process as an initial NCD or LCD. The reconsideration process permits experts to reevaluate the evidentiary basis for a decision. 

Appeals of NCDs and LCDs

Distinct from reconsiderations of NCDs and LCDs or appeals of claims denials, section 

1869(f) of the Act creates a process of independent review for beneficiaries to challenge 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

15

NCDs and LCDs. These independent reviews are subject to strict limitations. Only an 

aggrieved party may seek review of an NCD or LCD. An “aggrieved party” is a beneficiary 

(or the estate of a beneficiary) who is entitled to Part A benefits, enrolled under Part B, or 

both, and is in need of coverage for an item or service that is denied based on the applicable 

NCD or LCD (regardless of whether or not the item or service was received) and has 

received written documentation from the treating physician of the need for the item or 

service.5

Regulations governing the review of NCDs and LCDs are established at 42 CFR Part 426. 

Appeals of Claim Denials

Any beneficiary has the right to appeal a claim denial. This process, established at 42 CFR 

Part 405, Subpart I, results in the review of an individual claim denial, but it does not include 

a review of the validity or underlying evidentiary basis for an NCD and LCD.

 5 The aggrieved party may also be the estate of such a beneficiary who filed a timely complaint prior to death.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

16

National Coverage Determination Process

Staff 

Review

Draft 

Decision

Memorandum

Posted

National 

Coverage 

Request

Medicare 

Evidence 

Development 

& Coverage 

Advisory

Committee

External 

Technology 

Assessment

6 months

Reconsideration

Staff 

Review

Public 

Comments 

Due

Final Decision

Memorandum

and

Implementation 

Instructions

30 days 60 days

Preliminary 

Discussions

Benefit 

Category

Department 

Appeals 

Board

Start

9 months
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

17

CODING 

 For information on Coding:

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/

http://www.cms.hhs.gov/MedHCPCSGenInfo/

http://www.cms.hhs.gov/ICD10/

Each year CMS processes more than one billion health care claims, comprising 20 percent of 

all health care claims processed in the United States. Use of standardized coding systems is 

essential for Medicare and other health insurance programs to ensure that claims are 

processed in an orderly and consistent manner. Standardized coding systems provide a 

uniform language for nationwide communication of medical, surgical, and diagnostic items 

and services for use in medical education, research, and development of guidelines for 

medical care review. 

A major goal of an effective code set is to strike a balance that sufficiently identifies and 

differentiates items and services, and also results in a manageable system that health care 

professionals and administrative staff can efficiently use in submitting claims. Regular and 

other planned updates that accommodate new technology and changes in medical practice, 

without the administrative burden to health care providers of sporadic updates, increases 

confidence that the most current code sets are utilized. 

Coding is distinct from coverage of a new technology; assignment of a new code does not 

automatically imply coverage by any payer. However, for items and services newly covered 

by Medicare, CMS may assign either an existing code that describes a similar item or 

service, a miscellaneous code (e.g., a not elsewhere classified code or a not otherwise 

specified code), or a new code for payment purposes, whichever is appropriate based upon 

HCPCS coding criteria as applied to the individual technology.

This chapter discusses the coding systems used on Medicare claims; the statutory authority 

for coding use; general principles for coding updates; and a description of the ICD-9-CM and 

HCPCS code sets, including how to request a coding change, operational guidance, and a 

look to the future. A chart that compares the application cycles for new and revised code sets 

is located at the end of this chapter. 

Statutory Authority - HIPAA

Recognizing the increasing role of electronic transactions between providers and insurers and 

the confusion and inefficiencies resulting from diverse ways of handling these transactions, 

the Congress required, in the administrative simplification title of the Health Insurance 

Portability and Accountability Act of 1996 (HIPAA), adoption and use of national standards 

governing the nature and content of electronic transactions. This guide will focus on the 

HIPAA requirements related to national code sets, including associated operational 

guidelines.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

18

To meet the HIPAA requirements for the adoption of transaction and code set standards, the 

Secretary of the Department of Health and Human Services, in a final rule issued in the 

August 17, 2000 Federal Register, designated six code sets as national standard code sets for

use in standard electronic transactions throughout the United States:

• International Classification of Diseases, 9th Edition, Clinical Modification, (ICD-9-CM) 

Volumes 1 and 2 (tabular list and alphabetic index, respectively, of diseases); 

• ICD-9-CM, Volume 3, (tabular list and alphabetic index of procedures); 

• Healthcare Common Procedure Coding System (HCPCS);

• Current Procedural Terminology (CPT), 4th Edition

• National Drug Codes (NDC); and

• Code on Dental Procedures and Nomenclature.

All entities covered by the HIPAA administrative simplification requirements, including 

health plans and health care providers, were required to be in compliance with the electronic 

transactions code set standards by October 16, 2003.

ICD-9-CM and HCPCS Coding Systems

The following standardized coding systems are used for processing Medicare claims:

• ICD-9-CM; and

• HCPCS. HCPCS is divided into two principal subsystems:

o Level I, comprised of CPT codes

o Level II 

ICD-9-CM consists of codes for diagnoses and for hospital inpatient procedures. HCPCS 

consists of codes for items and services furnished in outpatient settings such as hospital 

outpatient departments, physicians’ offices, and patients’ homes.

General Principles for Coding Updates

The ICD-9-CM and HCPCS code sets are updated at least annually and in some cases more 

frequently. Each code set has a standardized, open process for developing new, unique codes 

as necessary. In most instances new technologies can be adequately described by existing 

codes, but in other cases new or revised codes may be warranted. The frequency of updates 

reflects a balance between the desire to rapidly recognize new technology within code sets 

and the need to provide users of the code sets with a stable, predictable update and business 

cycle. When code sets are updated, the updates must be disseminated, coding manuals 

revised, and medical records, billing software, and other systems changed to accommodate 

the new and revised codes. Coders must be educated on and prepared for changes in codes to 

ensure they are accurately utilizing the codes to best describe the diagnoses identified and the 

items and services delivered. Planned update cycles allow providers to prepare for and 

manage the necessary changes in coding practices and systems. The process for requesting 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

19

updates to each code set is described in greater detail below. Also, refer to the Code Set 

Comparison Chart at the end of this chapter for a timetable of key milestones for each code 

set.

ICD-9-CM

 For information on ICD-9-CM:

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/

The ICD-9-CM is a modified version of the ICD-9 system developed by the World Health 

Organization. CM refers to a “clinical modification” developed for the United States, where 

it has been in use since 1979. ICD-9-CM contains three volumes of information. Volume 1 

contains the diagnosis codes that every health care provider needs for billing. Volume 2 is an 

alphabetical index of Volume 1. Volume 3 contains procedure codes, which are used for 

billing inpatient hospital stays in the Medicare Severity-Diagnosis Related Group (MSDRG)6 payment system. ICD-9-CM procedure codes describe the procedure performed and 

may also indicate insertion of a device, such as a pacemaker or hip replacement. Procedure 

codes do not specifically describe all the devices and products used during a procedure, such 

as wound closing devices, specific catheters, or surgical tools. 

ICD-9-CM codes have a hierarchial 

structure using a framework that 

corresponds to body systems. The diagnosis 

codes contain 3, 4, or 5 numeric digits, with 

the longer codes providing greater detail. 

Procedure codes are limited to 3 or 4 digits, 

while diagnoses can be coded with up to 5 

digits. For FY 2010, the ICD-9-CM code 

set includes 14,315 diagnosis codes and 

3,838 procedure codes, or a total of 18,153

codes. The number of new or revised codes 

varies depending on the number of requests 

for codes. Since FY 2004, over 520 new 

procedure codes have been added to the 

code sets and over 98 additional codes have been refined to better describe the procedure. 

Responsibility for maintaining the ICD-9-CM is divided between two agencies in HHS: (1) 

the National Center for Health Statistics (NCHS) within the Centers for Disease Control and 

Prevention for maintenance of the classification of diagnoses, and (2) the CMS for 

maintenance of the classification of procedures. Since the federal government maintains the 

ICD-9-CM code set, it is in the public domain, and providers, insurers, and others can use the 

system without paying user fees. 

 6 DRGs are discussed in greater detail in the Payment chapter and also in the Acute Inpatient Prospective 

Payment System Fact Sheet located on the CMS website: 

http://www.cms.hhs.gov/MLNProducts/downloads/AcutePaymtSysfctsht.pdf.

Example of ICD-9-CM Codes

Diagnosis Code: xxx.xx

• First 3 digits – specifies disease

• 4th digit – gives additional detail 

• 5th digit – specifies subtype of disease

Procedure Code: xx.xx

• First 2 digits – specifies anatomical 

region

• Last 2 digits – specifies procedure
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

20

The ICD-9-CM Coordination and Maintenance Committee

 For information on the ICD-9-CM Coordination and Maintenance Committee, addenda, 

and summary reports:

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage

http://www.cdc.gov/nchs/icd9.htm

The ICD-9-CM Coordination and Maintenance (C&M) Committee, co-chaired by 

representatives from NCHS and CMS, considers requests to create new ICD-9-CM codes or 

to revise codes for greater utility. The C&M Committee holds public meetings twice a year, 

generally in March and September, to discuss proposed revisions. The C&M Committee's 

role is advisory, and no decisions are made at these meetings. The Director of NCHS and the 

Administrator of CMS make all final diagnosis and procedure coding decisions, respectively. 

Information on the C&M Committee meetings is posted on the CMS website. The agenda 

for upcoming meetings is posted approximately one month prior to the meeting. Official 

code revision packages, which are referred to as addenda, and summary reports are available 

on the CMS website for procedure codes and the NCHS website for diagnosis codes. 

Summary reports from the most recent meeting include the deadline for comments, the 

scheduled dates for the next meeting, the deadline for receipt of modification proposals, and 

the mailing address and e-mail address to submit either modification proposals or comments 

on proposals. 

Process for Requesting a Revision to ICD-9-CM

 For information on how to request new/revised ICD-9-CM procedure codes:

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/02_newrevisedcodes.asp#TopOf

Page

Interested parties are instructed to submit recommendations for ICD-9-CM modification to 

the C&M Committee two months prior to a scheduled meeting. Proposals for new codes 

should include a description of the requested code and the rationale for why the new code is 

needed. [See side box.] Supporting references and literature may also be submitted. 

Proposals should be consistent with the structure and conventions of the classification

system. 

Upon review of the request, a decision is made on whether to include the topic on the 

meeting agenda. If included, a lead coding analyst is assigned and will contact the requestor 

to discuss the submitted proposal. A background paper, including CMS recommendations on 

proposed coding revisions, is shared with the requestor prior to the meeting. The requestor is 

given the opportunity (or may select a speaker) to make a presentation on the clinical nature 

of the procedure at the upcoming C&M meeting. Speakers are allowed approximately 20 

minutes to present the topic. The lead coding analyst then leads a discussion of possible code 

revisions, including alternative suggestions for consideration. No decisions are made at the 

meeting.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

21

Public comments are encouraged both at the 

meetings and in writing. The meeting participants 

are encouraged to ask questions concerning the 

clinical and coding issues and to offer 

recommendations. A summary report is posted 

on the CMS website within approximately one 

month of the meeting. The public is offered an 

opportunity to make additional written comments 

by mail or e-mail before the end of the comment 

period imposed by the C&M Committee. 

Recommendations and comments are carefully 

reviewed and evaluated before any final decisions 

are made by NCHS or CMS. Finalized ICD-9-

CM code revisions and proposed DRG7

assignments are published in the inpatient 

prospective payment system (IPPS) notice of 

proposed rulemaking (NPRM) on or around April 

1 of each year. The public may not comment on 

the listed codes because they are final, but may 

comment on the proposed DRG assignments during the IPPS NPRM comment period. Due 

to timing constraints, proposals from the Spring C&M meeting may not be finalized for 

inclusion in the IPPS proposed rule. 

The IPPS final rule, published on or about August 1 of each year, includes the finalized DRG 

assignments and repeats the finalized ICD-9-CM codes. The ICD-9-CM codes that were 

finalized after the spring publication of the proposed IPPS rule appear in the final rule with 

an asterisk by the code number. 

Publishers and vendors then prepare ICD-9-CM coding books, software, and other 

publications. The revised codes are implemented on October 1 of each year to coincide with 

the updating of the IPPS. 

New technology coding topics presented during the Fall C&M Committee meeting are 

considered for an April 1 implementation if a strong and convincing case is made by the 

requester at the Committee’s public meeting. The request must identify the reason why a 

new code is needed in April for purposes of the IPPS new technology process. The 

participants at the meeting and those reviewing the Committee meeting summary report are 

provided an opportunity to comment on the expedited request. The April 1 implementation 

exception for new technology, though available since 2004, has not yet been utilized.

ICD-9 Coding Guidance

The official ICD-9-CM coding guidelines are posted on the National Center for Health 

Statistics (NCHS) website at:

 7 Ibid.

Request for a Procedure Code

A request should include:

• Background information on the 

procedure

• Patients on whom the procedure is 

performed

• Outcomes and any complications

• Manner in which the procedure is 

currently coded 

• Discussion of reasons the existing 

ICD-9-CM codes do not adequately 

capture the procedure

• Recommended options for new or 

revised code titles 

Examples of procedure code papers can 

be found in summary reports of previous 

meetings located on the CMS website at 

http://www.cms.hhs.gov/ICD9ProviderDi

agnosticCodes/03_meetings.asp#TopOf

Page
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

22

http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#guide

Operational coding advice and guidelines for ICD-9-CM are published quarterly by the 

American Hospital Association (AHA) in Coding Clinic for ICD-9-CM (Coding Clinic). The 

Editorial Advisory Board (EAB) for Coding Clinic consists of representatives of AHA, the 

American Health Information Management Association (AHIMA), NCHS, CMS, the 

American Medical Association (AMA), the American College of Surgeons, and other 

hospital coders and physicians. Four of those parties (AHA, AHIMA, NCHS, and CMS) are

identified as Cooperating Parties for Coding Clinic. The Cooperating Parties must agree on 

the coding guidance before it can be published in the Coding Clinic. Anyone may send 

issues to AHA for EAB discussion. 

AHA supplies copies of the Coding Clinic to the Quality Improvement Organizations (QIOs) 

for use as official coding advice in reviewing the accuracy of coding for Medicare claims 

submitted by hospitals. Copies are also available on the AHA website

(www.ahacentraloffice.org) for a fee.

A Look to the Future

 For information on the ICD-10 coding system:

http://www.cms.hhs.gov/ICD10/

http://www.cms.hhs.gov/MLNProducts/downloads/ICD-10factsheet2009.pdf

ICD-9-CM, which is over 30 years old, is exhibiting technical obsolescence. One aspect of 

this problem is a significant limitation on the availability of new codes to accommodate new 

technology and changes in medical practice. On January 16, 2009, the Department of Health 

and Human Services issued regulations through notice and comment rule-making that will

replace ICD-9-CM as a national standard code set with an updated version called ICD-10-

CM for identifying diagnoses and the ICD-10-Procedure Coding System (PCS) for 

identifying procedures. The effective date was March 17, 2009. The compliance date for 

these provisions is October 1, 2013. The ICD-10-PCS/CM encompasses an updated 

hierarchical structure and uses seven-character alphanumeric codes permitting a more 

detailed and flexible inpatient coding system. 

HCPCS

 For information on HCPCS:

http://www.cms.hhs.gov/MedHCPCSGenInfo/

The Healthcare Common Procedure Coding System (HCPCS)8

 8

 Prior to 2001, this code set was called the HCFA Common Procedure Coding System after the previous name 

of the Agency. In 2001, the former Health Care Financing Administration (HCFA) became the Centers for 

Medicare & Medicaid Services.

is the standard code set for 

items and services furnished in outpatient settings, such as physicians’ offices, hospital 

outpatient departments, and patients’ homes. The HCPCS code set is divided into two 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

23

principal subsystems, referred to as Level I and Level II. Level I consists of the Current 

Procedural Terminology (CPT), an alpha-numeric coding system maintained by the 

American Medical Association to identify medical services and procedures furnished by 

physicians and other health care professionals. Level II of the HCPCS is a standardized 

coding system that is used primarily to identify products, supplies, and services not included 

in the CPT codes. Because Medicare and other insurers cover a variety of services, supplies, 

and equipment that are not identified by CPT codes, the Level II HCPCS codes were 

established for use in submitting claims for these items. Level II codes are maintained and 

distributed by CMS, taking into consideration input from all insurers including Medicare, 

Medicaid, and private payer organizations.

Level I HCPCS - Current Procedural Terminology 

The AMA developed the Current Procedural Terminology in 1966, and the version currently 

in use is the fourth edition. There are three categories of CPT codes:

• Category I codes consist of five numeric digits and represent procedures and services 

performed by physicians, other health care professionals, and facilities. Category I codes 

are divided into six sections: Evaluation and Management; Anesthesiology; Surgery; 

Radiology; Pathology and Laboratory; and Medicine. Each section is further divided into 

subsections based on anatomic system, procedure or condition. 

• Category II codes are performance measurement codes that support data collection for 

services that are generally agreed to contribute to positive health outcomes. Category II 

codes have five characters – four numbers and then the letter F. 

• Category III codes are emerging technology codes that support data collection for 

services that do not yet have FDA approval or are not widely used. Category III codes 

have five characters – four numbers followed by the letter T.9

Requesting a Revision to Level I HCPCS (CPT)

 

 For information on how to apply for a CPT code:

http://www.ama-assn.org/ama/pub/category/3866.html

Proposals to add, modify, or delete CPT codes are considered by the CPT Editorial Panel, a 

17-member group comprised of representatives from the AMA, private health insurers, the 

American Hospital Association, the Health Care Professionals Advisory Committee, and 

CMS. The CPT Editorial Panel is supported in its efforts by the CPT Advisory Committee, 

which is made up of representatives of more than 90 medical specialty societies and other 

health care professional organizations.

 9 Unlike Category I codes, the AMA Relative Value Update Committee (RUC) does not make 

recommendations for relative values relation to resource use for Category II and Category III Codes. (The RUC 

provides information on resource use to be used in establishing relative weights under the Medicare Physician 

Fee Schedule, which is described in the Payment chapter.)
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

24

The CPT Editorial Panel meets regularly, at 

least three times a year. Applications for new 

codes are accepted on a rolling basis but 

proposed CPT changes must be received at 

least four months in advance for consideration 

at the next meeting. An application form and 

directions to request changes to CPT are 

available on the AMA website. 

Category I CPT codes are updated annually to 

reflect changes in medical technology and 

practice. Coding changes are effective for use 

on January 1 of each year. The AMA 

prepares each annual update so that the new 

CPT books are available in the fall of each 

year preceding their effective date to allow for 

January 1 or July 1 of a given implementation. 

Category I vaccine product codes, Category II, and Category III codes are typically released 

either CPT cycle and become effective six months subsequent to the date of release, e.g., 

codes released on January 1 are effective July 1, allowing 6 months for implementation, and 

codes released on July 1 are effective January 1.

CPT Coding Guidance

 For information on CPT coding guidance:

http://catalog.ama-assn.org/Catalog/home.jsp?checkXwho=done

The AMA produces a number of CPT manuals and publications. A catalog of their products 

is available on the AMA website. CPT is copyrighted by the AMA. The AMA requires a 

license to use CPT in a product or publication. Information on the licensing agreement is 

available on the AMA website. 

In 2005, the AHA and CMS entered into an agreement for the establishment of a 

Clearinghouse to handle inquiries on established HCPCS usage and to publish the results of 

those inquiries to assist providers in properly using established HCPCS codes. The purpose 

of the Clearinghouse is to provide interpretation and explanation on the proper use of Level I 

HCPCS (CPT-4) codes for hospital providers and certain Level II HCPCS codes for 

hospitals, physicians, and other health professionals who bill Medicare. 

CMS works closely with the AHA and the AMA to promote consistency of interpretation of 

the basic principles of HCPCS coding by institutional providers, and to prevent any wide 

divergence between HCPCS coding by institutional providers and the recommendations 

made by the AMA’s CPT-4 advisory panel for the physician community. The AHA 

Clearinghouse is supported by the HCPCS Editorial Advisory Board (EAB) and functions in 

CPT Coding Request

The AMA recommends that parties 

interested in requesting a CPT code 

answer several questions before 

submitting a request:

• Is the suggestion a fragmentation 

of an existing procedure/service?

• Can the suggested procedure / 

service be reported by using two or 

more existing codes?

• Does the suggested procedure / 

service represent a distinct 

service?

• Why aren’t the existing codes 

adequate?

Source: AMA website 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

25

a manner similar to the Coding Clinic for ICD-9-CM. Coding guidance provided by the 

HCPCS EAB is published quarterly by the AHA in the Coding Clinic for HCPCS. CMS is 

working with the AHA, AHIMA, and other members of the HCPCS EAB to develop the 

Clearinghouse into the kind of valuable resource for users of HCPCS that the Coding Clinic 

has become for ICD-9-CM users. 

Level II HCPCS 

Level II HCPCS codes are used primarily to identify products and services not included in 

the CPT codes, such as drugs and biologicals, or durable medical equipment, prosthetics, 

orthotics, and supplies (DMEPOS) used in outpatient settings such as hospital outpatient 

departments, physicians’ offices, and patients’ homes. The development and use of Level II 

of the HCPCS began in the 1980's. Level II HCPCS codes are also referred to as alphanumeric codes because they consist of a single alphabetical letter followed by four numeric 

digits. 

Currently, Level II HCPCS codes represent approximately 4,000 separate categories of like 

items or services that encompass millions of products from different manufacturers. A 

descriptor is assigned to a code that provides the definition of the items and services that can 

be billed using that code. To avoid any appearance of endorsement of a particular product 

through HCPCS, brand or trade names generally are not used to describe the products 

represented by a code unless brand distinction is deemed necessary in order to facilitate 

compliance with Section 1847A of the Social Security Act, (e.g., as it pertains to singlesource drugs). Level II HCPCS are in the public domain and a free, downloadable file is 

available on the CMS HCPCS website at www.cms.hhs.gov/medhcpcsgeninfo. Tape or disk 

versions can be purchased from the National Technical Information Service (NTIS) by phone

at 703-487-4650 or by e-mail at orders@ntis.fedworld.gov. Paper copies can be purchased 

through the Government Printing Office (GPO). The American Dental Association (ADA) 

maintains and copyrights the Current Dental Terminology (CDT) code sets. Therefore, CMS 

has an agreement with the ADA to include and publish CDT codes or dental codes (D codes) 

in the HCPCS Level II code set.

Permanent National HCPCS

Level II HCPCS includes several types of codes that have different purposes. The permanent 

national HCPCS code set is distributed and maintained by CMS. The CMS HCPCS 

Workgroup considers each coding request and recommends whether a change to the national 

permanent codes is warranted. Recommendations for a revision to the HCPCS are reviewed 

at regularly scheduled meetings of the CMS HCPCS Workgroup. CMS makes final HCPCS 

coding decisions. The HCPCS Decision Tree, developed by the CTI, is a helpful tool for 

determining if a new technology warrants a unique code and is posted on the CMS website 

at: http://www.cms.hhs.gov/MedHCPCSGenInfo/Downloads/decisiontree.pdf. 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

26

Permanent national codes are 

updated once a year on January 

1. Codes are broken down into 

general categories that include a 

series of codes for drugs10

Temporary National HCPCS

, 

orthotics and prosthetics, vision 

services, etc. A list of the 

categories of permanent 

national codes appears in the 

side box.

Like permanent national 

HCPCS codes, temporary 

national HCPCS codes are 

distributed and maintained by 

CMS. Temporary codes allow 

CMS the flexibility to establish 

codes that are needed to meet 

the national program operating 

needs of a particular insurer,

(i.e., Medicare, Medicaid, 

private insurance sector), before 

the next January 1 annual 

update for permanent national 

codes or until consensus can be 

achieved on a permanent national code. Temporary codes are intended to meet the national 

program operational needs of a particular insurer (Medicare, Medicaid, or the private 

insurance sector) that are not addressed by an already existing national code. They are 

developed based on programmatic needs and cannot be requested by other parties. The CMS 

HCPCS Workgroup has set aside certain sections of the HCPCS code set for temporary codes 

for specific items or types of insurers (for example, G codes are used by Medicare to identify 

professional health care procedures and services that would otherwise be coded in CPT but 

for which there are no suitable CPT codes). [See side box.]

Temporary codes do not have established expiration dates. Although temporary codes may 

be established to meet the programmatic needs of specific payers, other payers may elect to 

use these codes.

 10 Medicare uses the 5 character alphanumeric HCPCS to identify Part B drugs rather than the 11-digit National 

Drug Codes (NDCs). NDCs are used by retail pharmacies and by state Medicaid agencies to identify drugs, and 

in Medicare Parts C and D. Some billing systems used by professional and institutional providers do not use 

NDC codes. 

Types of Permanent Level II HCPCS Codes*

A codes Ambulance, medical and surgical supplies, 

administrative, miscellaneous, and 

investigational

B codes Enteral and parenteral nutrition

D codes Current Dental Terminology (CDT) codes

E codes Durable Medical Equipment (DME)

J codes Drugs that are not self-administered and 

generally not administered orally, inhalation 

solutions, chemotherapy drugs

L codes Orthotics and prosthetics 

M codes Other Medical Services

P codes Pathology and laboratory services, and blood 

products

R codes Diagnostic radiology services

U codes Modifiers (There are currently no codes in this 

section.)

V codes Vision Services (e.g., lenses), audiology, and 

speech-language pathology

*“Miscellaneous” and “Not Otherwise Classified” codes 

exist in almost every alphabetic code section.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

27

Temporary codes can be added, 

changed, or deleted on a

quarterly basis. Once 

established, temporary codes 

for Medicare are usually 

implemented within 90 days, 

the time needed to prepare and 

issue policy and 

implementation instructions, 

enter the new code into the 

claims processing computer 

systems, and initiate user 

education. Quarterly updates to 

the Level II HCPCS codes can 

be found on the CMS HCPCS 

website.

Code Modifiers

In some instances, insurers 

instruct providers and suppliers 

that a HCPCS code must be 

accompanied by a code 

modifier to provide additional 

information regarding the 

service or item identified by the 

HCPCS code. Modifiers are 

used when the information 

provided by a HCPCS code 

descriptor needs to be 

supplemented to identify 

specific circumstances that may 

apply to an item or service and that may have implications for the level of or conditions of 

payment for a particular insurer. For example, a UE modifier is used when the DME item 

identified by a HCPCS code is "used equipment," a NU modifier is used for "new 

equipment." The level II HCPCS modifiers are either alpha-numeric or two letters.

Dental Codes

Dental codes are a separate category of national codes. The Current Dental Terminology 

(CDT) is maintained and copyrighted by the American Dental Association (ADA). It lists 

codes for billing for dental procedures and supplies. CDT codes, while a separate standard 

code set adopted under HIPAA, reside within HCPCS Level II. Decisions regarding the 

revision, deletion, or addition of CDT codes are made by the ADA and not the CMS HCPCS 

Workgroup. HHS has an agreement with the ADA to include CDT as a set of HCPCS level 

II codes for use in billing for dental services. CDT manuals are available for purchase on the 

Types of Temporary Level II HCPCS Codes

C codes Items and services for outpatient use, including 

pass-through devices, pass-through drugs and 

biologicals, brachytherapy sources, and new 

technology and certain other services.

G codes Professional health care procedures and 

services that would otherwise be coded in CPT 

but for which there are no CPT codes.

H codes Mental health services for which State Medicaid 

agencies are mandated by State law to establish 

separate codes.

K codes Used by the DME MACs when permanent 

national codes do not include codes needed to 

implement a medical review policy.

Q codes Drugs, biologicals and other medical equipment 

or services not identified by national Level II 

codes, but for which codes are needed for 

Medicare claims processing.

S codes Used primarily by private insurers to report 

drugs, services, and supplies for which there are 

no permanent national codes, but for which 

codes are needed to implement policies, 

programs, or claims processing. Also may be 

used by Medicaid program, but typically not 

payable by Medicare.

T codes Used primarily by State Medicaid agencies for 

items for which there are no permanent national 

codes and for which codes are necessary to 

meet a national Medicaid program operating 

need. Typically not used by Medicare but can be 

used by private insurers.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

28

ADA website. Users of CDT codes must enter an agreement with the ADA.

Miscellaneous Codes

The absence of a specific code for a distinct category of products does not preclude a 

provider’s or supplier's ability to submit claims to private or public insurers and does not 

affect patient access to products. Miscellaneous codes are available for assignment when 

there is no existing national code that adequately describes the item or service for billing. 

Miscellaneous codes allow providers and suppliers to begin billing immediately for a service 

or item as soon as it is allowed to be marketed by the FDA, even though there may be no 

distinct code that describes the service or item. A miscellaneous code may be assigned by an 

insurer for use while a request for a new code is being considered under the HCPCS review 

process, permitting establishment of a claims history to support the need for a national 

permanent code. The use of miscellaneous codes also helps avoid the inefficiency and 

administrative burden of assigning distinct codes for items or services that are rarely 

furnished or for which insurers expect to receive few claims.

Except for hospital outpatient claims, Medicare claims with miscellaneous codes are 

generally manually reviewed by the claims contractors. The provider must provide a clear 

description of the billed item or service, pricing information, and documentation to explain 

why the item or service is needed by the beneficiary. In most cases, under the hospital 

outpatient prospective payment system (OPPS), unlisted procedure codes are assigned to the 

lowest level APC within the clinical category that includes the unlisted code. The 

assignment of an unlisted code to the lowest level APC in the clinical category in which the 

code falls provides a reasonable means for interim payment until such time as there is a code 

that specifically describes the services being performed and paid. It encourages the creation 

of codes where appropriate and mitigates against overpayment of services that are not clearly 

identified on the bill. For new technologies that encompass complete services but may not 

have yet been granted a specific HCPCS code, the New Technology APC payment 

mechanism is available under the OPPS.

Before using a miscellaneous code on a claim form, a provider or supplier should check with 

the entity that will receive the claim to determine whether there is a specific code that should 

be used rather than a miscellaneous code. Interested parties that believe a unique code is 

warranted should submit a request to modify the HCPCS in accordance with the established 

process. 

Requesting a Modification to the Level II HCPCS Code Set

 For information on the HCPCS application process:

http://www.cms.hhs.gov/MedHCPCSGenInfo/01a_Application_Form_and_Instructions.a

sp#TopOfPage

Any interested party may submit a request to modify the HCPCS Level II national code set.

Detailed information regarding the process and the format for submitting a request is

available on the CMS HCPCS website. In addition to the information requested in this 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

29

format, a requestor should submit any descriptive material, including the manufacturer's 

product literature and information that is helpful in understanding the medical features of the 

item. 

The HCPCS coding review process is an ongoing, continuous process. Requests may be 

submitted at any time throughout the year. Requests that are received and complete by 

January 3 of the current year (or by the following Monday if January 3 falls on a weekend) 

are considered for inclusion in the next annual update, with implementation, January 1 of the 

following year. Requests received or completed after January 3, and requests received earlier 

that require additional evaluation, are included in a later HCPCS review cycle. 

Three types of coding revisions may be requested:

• Addition of a permanent code

• Revision ofthe language used to describe an existing code

• Discontinuation of an existing code 

The CMS website includes a list of all public requests for modifications to the code set 

submitted in the current coding cycle along with CMS’ preliminary coding decision and 

rationale. Interested parties may submit comments regarding these code requests and 

preliminary decisions to the CMS HCPCS Workgroup by sending an e-mail via the HCPCS 

website. CMS hosts a series of annual HCPCS public meetings that provide an open forum 

for interested parties to make oral presentations or submit written comments in response to 

the preliminary HCPCS coding decisions. Comments regarding code requests, received by 

the date of the public meeting at which the code request is discussed, are included as part of 

the Workgroup's review when it reconvenes to reconsider all requests on the public meeting 

agendas. Notice of HCPCS Public Meetings is published in the Federal Register each year.

HCPCS Coding Guidance

 The following resources are available on the CMS HCPCS website at: 

http://www.cms.hhs.gov/MedHCPCSGenInfo/

• HCPCS decision tree and definitions,

• current HCPCS, Quarterly and Annual Updates,

• alphabetical index of HCPCS codes by type of service or product, 

• alphabetical table of drugs for which there are Level II codes,

• newly established temporary codes, and their effective dates,

• HCPCS Level II coding process information and criteria, 

• HCPCS Level II code modification application and instructions, 

• Summaries of code applications, and

• Public meeting agendas and summaries.
 

 

 

 

 

 

 

Version 2.0 

CODE SET COMPARISON CHART 

Timing Volume Transparency 

CODE 

SET 

Application 

Deadline 

Effective 

Date 

Length 

of Cycle 

Average 

Number of 

Applications 

in Cycle 

Provide 

Detailed 

Application 

Summaries 

Publish 

Preliminary 

Decisions 

Public Input 

HCPCS 

II January 3 January 1 of 

the following 

year 

12 

months + 

Quarterly 

Updates 

200 

Yes – 

published at 

least 4 weeks 

prior to Public 

Meetings 

Yes 

Public Meetings 

Spring of 

each year 

CPT 

November 1 

see 

www.amaassn.org 

Cat. I: 

codes 

released Fall, 

eff Jan 1 

Cat III: 

codes 

released 

Jan 1, 

eff July 1 

or 

released 

July 1, 

eff Jan 1 

15 

months + 

Quarterly 

Updates 

200 

(Review is 

divided into 

committees 

and subcommittees, 

who report 

back to 1 

group) 

No No 

Public may 

attend voting 

meeting. 

Votes are silent. 

CDT 

October 1 

thru October 

1 of the 

following 

year 

15 to 27 

months 

following 

receipt of 

application 

15 to 27 

months 120 No No 

Public may 

attend voting 

meeting. Votes 

are known. 

ICD-9 

October 1 October 1 of 

the following 

year 

12 

months + 

Quarterly 

Updates 

CMS 

processes 10 – 

25 procedure 

applications Yes – provided 

at public 

meeting 

No Public Meeting 

May NCVHS 

processes 25 

diagnosis 

applications 

Between 

July and the 

following 

January 

October of 

the following 

year 

(procedures) 

or extra year 

(diagnoses) 

9 - 27 

months 

CMS 

processes 10 – 

25 procedure 

applications Yes – provided 

at public 

meeting 

No 

Public Meetings 

March & 

September NCVHS 

processes 25­

35 diagnosis 

applications 

This guide is only intended as a general summary and is not intended to grant rights, impose 30 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010. 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

31

PAYMENT

 For information on Medicare FFS payment systems:

http://www.cms.hhs.gov/home/medicare.asp

http://www.cms.hhs.gov/center/provider.asp

http://www.medpac.gov/payment_basics.cfm

Medicare is the single largest payer for health care services in the United States. The 

majority of beneficiaries, approximately 80 percent in FY 2008, are enrolled in Medicare 

Parts A and B, which provide fee-for-service (FFS) insurance. Medicare contracts with 

claims administrators (known as Medicare contractors) to process more than one billion FFS 

claims from over one million providers, totaling over $324 billion in FY 2009.

Medicare pays for most items and services on a prospective rather than cost basis. A 

prospective, fixed payment system allows for better resource planning by providers, offers 

bundled services or items for care management, and provides incentives for efficiencies.

While the methodologies for determining the payment rates vary by setting, in most cases the 

payments are based on a statutory formula that calculates the relative relationship between 

the average cost for performing a service and the average cost of performing all services in 

the same setting. The relative cost for a service is represented by a number called the relative 

weight. To determine the payment, the relative weight is generally multiplied by a fixed 

dollar amount or rate. 

Under most FFS payment systems, changes to the relative weights are budget-neutral such 

that increasing the relative weight (and payment) for one item or service will decrease 

payments for all other items and services under that system. Updates to the fixed dollar 

amount or rate for inflation or other factors that result in a change in total expenditures are 

not generally budget-neutral.

Each FFS payment system is usually updated annually. CMS proposes payment rates and 

policy changes for the following year and those rates and changes are open for public 

comment. In some instances, CMS also holds public meetings to gather additional input. 

This chapter focuses on the payment systems for acute and ambulatory care settings that are 

most likely to see the introduction of new technology – inpatient acute care hospitals, 

hospital outpatient departments, and physician offices. This chapter also describes the 

payment mechanisms for specific items such as the limited drugs covered under Part B, 

clinical laboratory tests, and durable medical equipment, prosthetics, orthotics, and supplies 

(DMEPOS), including information on the new competitive bidding program for certain 

DMEPOS. 

Payment systems for other settings such as skilled nursing facilities, home health agencies, 

inpatient rehabilitation facilities, inpatient psychiatric facilities, long-term care hospitals, 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

32

end-stage renal disease facilities, ambulatory surgical centers, and ambulance suppliers are 

similar in their prospective nature and general design to the payment systems profiled in this 

chapter. A chart of the rulemaking cycles for the profiled FFS payment systems is located at 

the end of this chapter. 

Inpatient Prospective Payment System 

 For information on the IPPS:

http://www.cms.hhs.gov/AcuteInpatientPPS/

http://www.medpac.gov/documents/MedPAC_Payment_Basics_09_hospital.pdf

IPPS Payments

 For information on determining IPPS payment: 

http://www.cms.hhs.gov/AcuteInpatientPPS/02_stepspps.asp#TopOfPage

The hospital inpatient prospective payment system (IPPS) makes payments to acute care 

hospitals for each Medicare patient, or case, treated. Hospitals are paid based on the average 

national resource use for treating patients in similar circumstances, not the specific cost of 

treating each individual patient. With few exceptions, Medicare does not pay separately for 

individual items or services.11 Physicians and hospital staff determine the appropriate course 

of treatment, and hospitals receive a bundled payment for the covered inpatient facility 

services provided to the Medicare patient. Hospitals receive one IPPS payment per Medicare 

case at discharge that equates to the total Medicare payment for the facility costs of caring for 

that Medicare patient. Physicians are paid separately under the Physician Fee Schedule for 

their professional services provided during the inpatient stay. 

Medicare Severity Diagnosis-Related Groups

 For information on MS-DRGs:

http://www.cms.hhs.gov/reports/downloads/WR434Z1.pdf

Under the IPPS, each case is categorized into a Diagnosis-Related Group (DRG) depending 

on the patient’s diagnosis, the procedures performed, complicating conditions, age, and 

discharge status. Each DRG has a payment weight assigned to it, based on the average 

resources used to treat Medicare patients in that DRG compared to the cost of cases in other 

DRGs. The weights are recalibrated annually. For FY 2008, CMS revised the DRG payment 

system by adopting 745 Medicare Severity (MS)-DRGs to replace the previously existing 

538 DRGs to better recognize severity of illness. The changes did not result in cost savings to 

Medicare but increased payment amounts to hospitals treating more severely ill and costlier 

patients, and decreased payment amounts to hospitals treating less severely ill patients. For 

FY 2009 one new MS-DRG was created bringing the total to 746 MS-DRGs.

 11 Certain costs are paid outside of the IPPS. For example, heart, liver, lung and kidney acquisition costs 

incurred by an approved transplant facility are paid on a reasonable cost basis.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

33

Standardized Amounts

 For information on wage index:

http://www.cms.hhs.gov/AcuteInpatientPPS/03_wageindex.asp

The base payment unit for IPPS is called the standardized amount. The standardized amount 

is based on hospital charges per Medicare discharge that are adjusted to account for 

differences in certain hospital costs, such as the patient case-mix and wage rates. These 

payment amounts are increased annually by an update factor. Update factors are set by 

Congress and are intended to account for annual inflation while maintaining incentives for 

hospitals to be efficient. 

The standardized amount is divided into labor-related and non-labor-related shares. After the 

labor-related share is adjusted by a wage index applicable to the area where the hospital is 

located, it is added back to the non-labor-related share.12 This wage-adjusted standardized 

amount is then multiplied by the DRG relative weight to determine the payment for the case. 

The standardized amount is subject to other adjustments that may be applied to each case that 

a qualifying hospital treats or applied only to specific cases as described below.

Add-on Payments – DSH 

 For information on DSH: 

http://www.cms.hhs.gov/AcuteInpatientPPS/05_dsh.asp#TopOfPage

If a hospital treats a high percentage of low-income patients, it receives a percentage add-on 

payment applied to the wage-adjusted base payment rate of the DRG for each case it treats. 

This add-on, known as the disproportionate share hospital (DSH) adjustment, varies 

depending on several factors, including the percentage of low-income patients served. 

Add-on Payments – IME

 For information on IME:

http://www.cms.hhs.gov/AcuteInpatientPPS/07_ime.asp#TopOfPage

If the hospital trains residents in an approved medical residency program, it receives a 

percentage add-on payment for each case, known as the indirect medical education (IME) 

adjustment. This payment varies with the number of residents the hospital is training and the 

hospital’s number of inpatient beds. Teaching hospitals also receive a separate payment 

outside the IPPS, based on the number of residents, for Medicare’s share of the hospital’s 

direct cost of medical education.

 12 If the hospital is located in Alaska or Hawaii, the non-labor share is also adjusted by a cost of living 

adjustment factor.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

34

Outlier Payments

 For information on outlier payments: 

http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage

Case-specific adjustments are made for high cost cases called outliers. The outlier payment 

is designed to protect the hospital from large financial losses due to unusually expensive 

cases, which can reflect the use of advanced technology. The costs of a new technology are 

included in the determination of whether a case qualifies for an outlier payment. The outlier 

payment is determined by comparing the total cost of caring for a particular case to the DRG 

payment for that case, including DSH or IME payments and payments for new medical 

services and technologies, plus a fixed dollar amount that is set in regulation.13 The outlier 

payment is added to the wage-adjusted base payment rate for the DRG, plus any DSH or 

IME adjustments and any applicable add-on payment for new technologies, as described 

below.

Add-on Payments – New Technology 

 For information on IPPS new technology add-on payments:

http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp#TopOfPage

The IPPS is designed to adapt to changing technology through year-to-year adjustments in 

DRG weights based on historical cost data. In theory, if new technologies lead to better care 

but are more expensive, or if they lead to more efficient care and are less expensive, hospitals 

will eventually receive appropriate payment as the DRG weights are adjusted over time to 

reflect the impact of fluctuating costs. In practice, however, there are concerns that the 

system may be slow to react to rapidly evolving technological advancements. Hospitals may 

experience a financial disadvantage as they provide more expensive products and services to 

Medicare beneficiaries while waiting for DRG payments to reflect the higher costs. As an 

incentive for hospitals to adopt new technologies during the period before their costs are 

recognized in the DRG weights, certain new medical services or technologies may be eligible 

for new technology add-on payments. The new technology add-on payment policy provides 

additional payments for eligible high cost cases without significantly eroding the incentives 

provided by a payment system based on averages.

 13 The costs are determined by applying the hospital’s cost-to-charge ratio (CCR) – the percentage of charges 

that costs have represented for the hospital in the past -- to the hospital’s charges for the case. Those costs are 

compared to a DRG-specific fixed loss threshold, which is the sum of the DRG payment for the case, including 

any add-on payments (new technology, indirect medical education, disproportionate share adjustment), plus a 

fixed loss amount. CMS sets the fixed loss amount each year at a level projected to generate outlier payments 

equal to 5.1 percent of total payments under the IPPS. Medicare then pays 80 percent of hospitals’ costs above 

the fixed loss threshold. 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

35

Items Qualifying for New Technology 

Add-on Payments

Item

Condition 

Treated

Add-on

Years

Xigris® Severe sepsis FY2003

FY2004

InFuseTM Bone 

Graft

Spinal fusion FY2004

FY2005

Kinetra® 

Implantable 

Neurostimulator

Essential tremor 

and Parkinson’s 

disease

FY2005

FY2006

Cardiac 

Resynchronization 

Therapy with 

Defibrillation

Chronic, 

moderate to 

severe heart 

failure

FY2005

Endovascular Graft 

Repair of the 

Thoracic Aorta

(GORE TAG)

Thoracic aorta

aneurysms

FY2006

FY2007

Restore® 

Rechargeable 

Implantable 

Neurostimulator

X STOP 

Interspinous 

Process 

Decompression 

System

Chronic, 

intractable pain

Back and leg 

pain (lumbar 

spinal stenosis)

FY2006

FY2007

FY 2007

CardiowestTM

Temporary Artificial

Heart System 

(TAH-t)

Spiration IBV Valve

Bridge

heart transplant 

Prolonged

respiratory

air leak 

FY 2009

FY 2010

FY 2010

To qualify for add-on payments, a 

service or technology must be new, 

represent a substantial clinical 

improvement over predecessor 

technology, and be high cost relative to 

the DRG payment that would normally 

be paid. Since it can take two to three 

years for reflection of cost data in the 

calculation of the DRG weights, 

technologies generally are considered 

new for two to three years after they 

become available. Applicants must 

demonstrate that their product offers 

substantial clinical improvement, 

relative to technologies previously 

available, in the diagnosis or treatment 

of Medicare beneficiaries. Applicants 

must submit a formal request including a 

full description of the clinical 

applications of the technology, the 

results of any clinical evaluations 

demonstrating that the new technology 

represents a substantial clinical 

improvement, and data to demonstrate 

that the technology meets the high cost 

threshold, which is published in the 

IPPS final rule. 

The side box represents items approved 

for new technology add-on payment 

since 2003 and the years for which the 

add-on payments were effective. Half of 

all submitted applications were 

disapproved either because the 

applications were not substantially 

different from older technologies or 

because they failed to meet the criteria

for substantial clinical improvement or 

high cost. 

The high cost threshold for eligible items is the lesser of:

• 75 percent of the standardized payment amount, increased based on the national 

case-weighted ratio of costs to charges,

- or -

• 75 percent of one standard deviation of the geometric mean standardized charge for 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

36

cases in the DRG involved with the technology, or the case-weighted average of all 

relevant DRGs, if the new technology could be assigned to many different DRGs. 

Although any interested party may submit an application for a new technology add-on 

payment, applications often come from the manufacturer of a new drug or device. A

preliminary discussion on whether or not new technologies qualify for add-on payments is

published in the IPPS proposed rule and is open to public comment. CMS posts the 

deadlines for submittal of the applications on its web site well in advance of the expected 

IPPS proposed rule publication to allow time for receipt and careful consideration of the 

applications. CMS will generally accept partial or Phase I applications if some of the 

necessary information (e.g., FDA approval) is expected but has not been obtained by the 

initial deadline. The deadline for completed or Phase II applications is generally at the end 

of the calendar year for add-on payments effective October 1 of the following year. Go to 

http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp to find the current year’s 

deadline.

The actual add-on payments are based on the cost to hospitals for the new technology. A 

new technology add-on payment is made if the total covered costs of the patient discharge 

exceed the DRG payment of the case (including adjustments for IME and DSH, but 

excluding outlier payments). The total covered costs are calculated by applying the cost-tocharge ratio (that is used for inpatient outlier purposes) to the total covered charges of the 

discharge.

If the costs of the discharge exceed the full DRG payment, the additional payment amount 

equals the lesser of the following:

• 50 percent of the costs of the new medical service or technology; or

• 50 percent of the amount by which the total covered costs of the case (as 

determined above) exceed the standard DRG payment, plus any applicable outlier 

payments if the costs of the case exceed the DRG, plus adjustments for IME and 

DSH.

Hospital Outpatient Prospective Payment System

 For information on the OPPS:

http://www.cnms.hhs.gov/HospitalOutpatientPPS/

http://www.medpac.gov/documents/MedPAC_Payment_Basics_09_OPD.pdf

Bundled Payments

Under the hospital outpatient prospective payment system (OPPS), hospitals are generally 

paid for each covered service they provide to Medicare beneficiaries at prospectively 

established rates based on the national median cost of performing similar services. As under 

the IPPS, the payment received for each service is generally a bundled payment for a group 

that reflects the total facility cost of providing the service. The payment bundle includes most 

implantable devices and low cost drugs, as well as supplies and equipment integral to 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

37

performing a service. Therefore, OPPS group payments typically include the costs of the 

supportive and ancillary services required to perform the specific hospital outpatient service, 

which are incorporated into the OPPS cost-based payment group weight. However, while the 

IPPS makes one bundled payment for all care provided during the inpatient stay, a hospital 

may receive multiple OPPS payments for a single outpatient encounter if multiple separately 

payable services are provided during that encounter. Physicians are paid separately under the 

Medicare Physician Fee Schedule for their professional services provided during outpatient 

encounters.

Ambulatory Payment Classifications

All items and services paid separately under the OPPS are assigned to payment groups called 

Ambulatory Payment Classifications (APCs), which are intended to group together items and 

services that are similar in clinical characteristics and cost. APC relative payment weights 

are based on estimated cost. There are several types of APCs that represent types of items or 

services paid under the OPPS:

• Procedure or visit APCs (clinical APCs), 

• Pass-through drug, biological, or device APCs, 

• Nonpass-through drug APCs, 

• Brachytherapy source and blood product APCs, and

• New Technology APCs

Items, services, procedures, and supplies under the OPPS are reported on claims with CPT 

codes and Level II HCPCS codes (see Coding chapter). For a reference, please see 74 FR 

60431. Payment for these codes may be either paid separately or packaged. As noted above, 

OPPS cost-based relative payment weights reflect the packaged costs of items and/or services 

that are usually supportive and ancillary to a separately payable service. Services in each 

clinical APC are similar clinically and in terms of the resources they require. By law, subject 

to certain exceptions, items and services within an APC group cannot be considered 

comparable with respect to use of resources if the highest median cost (or mean cost, if 

elected by the Secretary) for an item or service in the APC group is more than 2 times greater 

than the lowest median cost (or mean cost, if so elected) for an item or service within the 

same APC group (often referred to as the 2 times rule). Each year CMS reviews and adjusts, 

as necessary, the APC groupings and updates the relative payment weights to ensure that 

they are consistent with clinical practice and comport with the requirements of the 2 times 

rule. Exceptions to the 2 times rule may be made for low volume services or other special 

cases. 

Advisory Panel on Ambulatory Payment Classification Groups

 For information on the APC Panel: 

http://cms.hhs.gov/FACA/05_AdvisoryPanelonAmbulatoryPaymentClassificationGroups

.asp

Generally, twice a year CMS holds a meeting of the Advisory Panel on Ambulatory Payment 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

38

Classification Groups (APC Panel), a federal advisory committee comprised of hospital 

representatives with expertise as clinicians or in hospital administration, coding, and billing. 

The APC Panel meetings are open to the public, with notification of upcoming meetings 

published in the Federal Register. The meetings generally occur in late winter and late 

summer to provide input into the development of the proposed and final OPPS rules for the 

following calendar year. The APC Panel hears presentations from the public about the need 

for changes in the structure of the APCs, and reviews data on the utilization and cost of the 

services in question. The Panel makes recommendations to CMS about potential changes in 

APCs. CMS addresses these recommendations during the annual rulemaking cycle. 

APC Payment Rates

Hospital-specific overall and hospital-specific departmental cost-to-charge ratios (CCRs) are 

applied to a hospital’s charges for services in the most recent full year hospital claims data to 

determine estimated costs per service for purposes of rate setting. The costs are standardized 

on each claim to reflect the labor costs in the geographic area in which the hospital is located 

using the IPPS pre-reclassification hospital wage index. The median cost, including 

packaged costs, of all services assigned to each clinical APC is then calculated. CMS 

calculates an unscaled APC weight that reflects the relative median cost of the services 

within the APC compared to the median cost of the mid-level clinic visit, which is then 

scaled to maintain the total payment weight under the prospective payment system. The 

scaled relative weight for the APC is multiplied by a base payment unit called the conversion 

factor to determine the APC payment rate. The conversion factor is updated annually for 

changes in hospital operating input costs. The conversion factor also is adjusted annually to 

account for anticipated outlier payments and pass-through payments and incorporates budget 

neutrality adjustments for the wage index and rural adjustment. 

All items within an APC have the same payment rate, although there are policies, such as the 

multiple surgical procedure reduction, that may result in two procedures in the same APC 

being paid different amounts. In CY 2010, separately payable drugs and biologicals are paid 

based upon average acquisition cost, including pharmacy handling costs, as calculated from 

hospital claims and cost report data. 

Outlier Payments

In addition to the APC payment, hospitals may receive outlier payments for high cost 

services. To receive an outlier payment, the hospital’s charges, adjusted to cost by 

application of its overall CCR, must exceed the OPPS payment for the service by both a 

fixed threshold ($2,175 for CY 2010) and by 1.75 times (for CY 2010) the APC payment. 

The fixed loss threshold exists to ensure that outlier payments are made for unusually high 

costs that are incurred in providing care to the most costly patients receiving expensive and 

complex services. When a service meets the criteria for outlier payment, the hospital 

receives an outlier payment that equals 50 percent of the difference between its costs and

1.75 times the APC payment amount. For CY 2010, the OPPS sets the criteria to limit the 

outlier payments to 1 percent of the estimated total payments made under the OPPS.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

39

Transitional Corridor Payments

Certain cancer hospitals and children’s hospitals receive additional transitional corridor 

payments that make up any difference between what the hospital receives under the OPPS 

and what it would have received under the cost reimbursement methodology that existed 

prior to implementation of the OPPS. These hospitals are permanently held harmless from a 

decline in payments below their pre-Balanced Budget Act of 1997 (BBA) amount as a result 

of the implementation of the OPPS. 

Rural Sole Community Hospital Adjustment

The MMA instructed the Secretary to conduct a study comparing urban and rural hospital 

costs and provided the authority to adjust OPPS payments to rural hospital payments by 

January 1, 2006, if rural hospital costs were determined to be greater than urban hospital 

costs. Based on an analysis of rural and urban hospital costs that showed that rural sole 

community hospitals were the only class of rural hospitals that were significantly more costly 

than urban hospitals, CMS implemented a budget neutral 7.1 percent payment increase for 

rural sole community hospitals in CY 2006, which has been continued during CY 2007, CY 

2008, CY 2009, and CY 2010 and includes the small number of hospitals classified as 

essential access community hospitals. 

New Technology APCs

 For information on the New Technology APC application process: 

http://www.cms.hhs.gov/HospitalOutpatientPPS/Downloads/newtechapc.pdf

New technology services, including surgical procedures, diagnostic tests, and other 

procedures, may be assigned to a New Technology APC. Assignment to a New Technology 

APC allows CMS to gather actual cost data about the service before it is placed in an APC 

with other clinically similar services. The predetermined New Technology APC payment is

based on CMS’s best estimated cost of the new service. 

New Technology APCs provide payment for complete services or procedures that cannot be 

appropriately reported under an existing HCPCS code or combination of codes. Components 

or items that are part of a more comprehensive service are not eligible for placement in a 

New Technology APC. Although any interested party may apply to have a new service 

assigned to a New Technology APC, most applications are received from manufacturers or 

hospitals. To qualify for assignment to a New Technology APC, among other criteria, the 

service must not be adequately represented in the claims data being used for the most current 

annual OPPS payment update, and may not qualify for transitional pass-through payment. 

Applications for a New Technology APC assignment can be submitted at any point in the 

year and are considered for inclusion in a quarterly update that is at least four months away 

from the date of submission to allow time for analysis, decision-making, and systems 

changes. For example, to be considered for the July 1 update, applications must be received 

by the first business day in March. The time period for a determination may be extended if 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

40

Pro-Rata Reduction

By law, the total projected amount of 

pass-through payments in a year is 

limited to a percentage of projected total 

payments under the OPPS. For 2000 

through 2003, the pass-through limit was 

2.5 percent of total projected payments. 

In 2004 and future years, the limit is 2.0 

percent of total projected payments. If 

CMS estimates that pass-through 

payments will exceed that limit, a uniform 

(pro-rata) reduction to all pass-through 

payments is required. Pro-rata 

reductions apply only to transitional 

pass-through payments for a particular 

year. To date, 2002 is the only year in 

which a pro-rata reduction has been 

necessary. 

an application is incomplete, if further information is required, or if a more extensive 

evaluation is required to determine eligibility. 

The table below indicates the earliest date that New Technology APC status could be

implemented once a completed application and all additional information are received.

CMS Must Have Complete

Application and All Necessary

Information by the First

Business Date in . . . 

Earliest Date To Be Considered

For a New Technology APC

Assignment Effective. . .

March July 1

June October 1

September January 1

December April 1

Assignment to a New Technology APC is temporary. Services and procedures are moved 

from a New Technology APC to a clinical APC once sufficient claims data are available for

the technology to appropriately place it with services that are clinically similar and have 

similar resource use. The transition from a New Technology APC to a clinical APC is done 

through the rulemaking process, where the proposed clinical APC assignment is open to 

public comment. 

Transitional Pass-Through Payments

To develop an appropriate APC payment for a 

procedure, CMS must be able to determine the 

costs to the hospital of performing the procedure, 

including the cost of drugs, biologicals, and 

devices that may be used in the respective 

procedure. Prior to the implementation of the 

OPPS in 2000, there was concern that CMS did 

not have sufficient hospital cost data to determine 

the appropriate cost for some items. Transitional 

pass-through payments may provide additional 

payment for new devices, drugs, and biologicals 

for two to three years while CMS gathers 

additional data on the cost of those items. These 

new items are used in existing procedures, and 

those procedures are assigned to existing APCs. 

As noted above, complete new procedures do not 

qualify for transitional pass-through payments but 

may be considered for placement in a New 

Technology APC.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

41

Examples of Expired Device Categories

Category Active Pass-through Years

Pacemaker, dual chamber, non rate-responsive 2001, 2002

Lead, neurostimulator (implantable) 2001, 2002

Lead, coronary venous 2003, 2004

Integrated keratoprosthesis 2004, 2005

Rechargeable neurostimulator 2006, 2007

Transitional Pass-Through Payments: Devices

 For information on the transitional pass-through device application process:

http://www.cms.hhs.gov/HospitalOutpatientPPS/04_passthrough_payment.asp#TopOfPa

ge 

Subject to any budget neutrality reduction, the pass-through payment for a device is the 

hospital’s charge for the device, adjusted to the actual cost for the device, minus the amount 

included in the APC payment for the device. The pass-through device cost is determined by 

adjusting a hospital’s charges for the item to cost using its overall CCR. The cost of similar 

devices, if any, which are identified in the procedural APC with which the pass-through 

device is associated, is then subtracted from the device’s cost to determine the pass-through 

payment amount for the device.

As with applications for assignment to New Technology APCs, applications for pass-through 

status can be submitted at any point in the year and are considered for inclusion in a quarterly 

update that is at least four months away from the date of submission. The time period for a 

determination may be extended if an application is incomplete, if further information is 

required, or if a more extensive evaluation is required to determine eligibility. To qualify, an 

item must have costs that are not insignificant compared with APC payments that would 

otherwise be made, including the costs of similar items. Applications for new devices must 

also demonstrate a substantial clinical improvement in the diagnosis or treatment of an illness 

or injury or to improve the functioning of a malformed body part compared to the benefits of 

a device or devices in a previously established category or other available treatment. 

Transitional pass-through 

payments for devices are 

based on categories of 

devices. CMS can create a 

new category of pass-through 

devices to include an item 

only if that item cannot be 

described by any current or 

previous pass-through device 

category. Comments received during past rulemaking cycles indicated that some of the 

previous and existing category descriptors were thought by some observers to be overly 

broad and may preclude some new technologies from qualifying for establishment of a new 

device category for pass-through payment. In response to this concern CMS modified the 

regulations to permit, beginning in CY 2006, creation of an additional category for devices 

that meet all of the criteria required to establish a new category for pass-through payment in 

instances where an existing or previously existing category descriptor does not appropriately 

describe the new type of device. The above web site link describes two tests that must be 

met to determine whether an existing or previously existing category appropriately describes 

the new device. Creation of an additional category may require clarification or refinement of 

the descriptors of previous categories. A determination regarding the revision of category 

descriptors is made on a case-by-case basis and implemented prospectively. 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

42

Transitional Pass-Through Payments: Drugs and Biologicals

 For information on transitional pass-through drug payments: 

http://www.cms.hhs.gov/HospitalOutpatientPPS/04_passthrough_payment.asp#TopOfPa

ge

 For information on Average Sales Price:

http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/

 For a listing of services that identifies the drugs and biologicals that are separately paid 

under the OPPS, along with their payment rates: 

http://www.cms.hhs.gov/HospitalOutpatientPPS/AU/list.asp#TopOfPage

The purpose of transitional pass-through payments for new drugs and biologicals is to enable 

beneficiaries’ access to technologies that are too new to be captured in the data used to 

determine APC payment rates. Section 1833(t)(6)(D)(i) of the Act specifies that the passthrough payment amount is the amount by which the amount determined under section 

1842(o) (referring to payment under the average sales price (ASP) methodology) exceeds the 

otherwise applicable payment for the drug or biological (or if the drug or biological is 

covered under the Competitive Acquisition Program (CAP), payment is made under the 

applicable methodology outlined in the statute). For CY 2010, payment for drugs and 

biologicals with pass-through status is made at ASP+6 percent or the CAP rate if the product 

is offered under the Part B drug CAP, while payment for separately paid drugs and 

biologicals without pass-through status is made at ASP+4 percent. Approval of a drug or 

biological for a transitional pass-through payment under the OPPS is not contingent on prior 

assignment of a national HCPCS code. New drugs and biologicals that receive transitional 

pass-through status are typically assigned a product-specific HCPCS code.

For new drugs and biologicals for which a HCPCS code has not been assigned, the MMA 

requires CMS to pay hospital outpatient departments at 95 percent of its average wholesale 

price (AWP). To implement the MMA provision, CMS instructed hospitals to bill for a new 

drug or biological using a new HCPCS code, C9399 (unclassified drug or biological), and the 

National Drug Code (NDC) for the product. The OPPS payment system flags the code for 

manual pricing by the Medicare contractor. The contractor sets the payment rate at 95 

percent of AWP using the Red Book. Contractors notify CMS of drugs and biologicals being 

reported under HCPCS code C9399. 

Physician Fee Schedule (PFS)

 For information on the PFS:

http://www.cms.hhs.gov/PhysicianFeeSched/

http://www.cms.hhs.gov/center/physician.asp

http://www.medpac.gov/documents/MedPAC_Payment_Basics_09_Physician.pdf

Payments per Service
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

43

Medicare pays for services furnished by physicians (e.g., surgery, office visits, and other 

professional services) and services furnished by many other non-physician practitioners 

under a payment system known as the Medicare Physician Fee Schedule (PFS). The PFS 

includes payments for the professional services as well as the direct expenses (i.e., staff, 

equipment, and supplies) and office overhead expenses needed to perform a specific service 

(e.g., supplies, equipment, clinical and administrative staff, and office overhead expenses).

PFS payments are the product of the national relative value units for a service, the geographic 

practice cost indexes (GPCIs) for the area where the service is furnished, and the single 

“dollar” conversion factor. The conversion factor for physicians’ services is updated 

annually by a formula specified in law.

Relative Value Units

 For information on RVUs:

http://www.cms.hhs.gov/PFSlookup/03_PFS_Document.asp#TopOfPage

http://www.cms.hhs.gov/PFSlookup/

Each of the over 7,000 services paid under the PFS is divided into three components for 

purposes of establishing its relative value:

• physician work – reflecting the physician’s time, effort, and technical skill required to 

render a service, 

• practice expense – equipment, supplies, and office overhead items such as rent, 

employee wages, utilities, and 

• malpractice insurance premiums. 

Generally, each component of each physician service is assigned a uniform national relative 

value unit (RVU), a numerical value used to quantify the relative amount of resources 

required to perform each service under the Physician Fee Schedule. The law prohibits any 

differential in payment for a service based upon the specialty of the physician performing the 

service. The law requires a review of relative values at least once every five years. 

The initial physician work RVUs used at the inception of the PFS were based primarily on a 

study of physician work conducted for CMS by the Harvard School of Public Health. The 

study valued each service on the basis of the relative physician work--time, effort, and skill--

required to perform the service. Practice expense RVUs for a service are based on the typical 

or average resources required to perform each service including the direct practice expense 

inputs for the type and amount of clinical staff time, disposable supplies, and equipment. 

Malpractice RVUS are based on malpractice premium data for the top 20 Medicare physician 

specialties. For each service, the malpractice RVU amount is the weighted average of the 

premiums for specialties that perform the service using the proportion of the total services 

provided by the specialty as the weight.

RUC 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

44

In establishing RVUs for new and revised codes, and for the 5-year review, CMS takes into 

consideration the recommendations of a committee sponsored by the American Medical 

Association (AMA). The Relative Value Update Committee (RUC) provides 

recommendations for work RVUs, and through the work of its Practice Expense Subcommittee, provides recommendations for practice expense resource inputs. Voting members 

of the RUC include representatives from medical specialties and others. The RUC

recommendations are subject to review by CMS staff and the public through notice and 

comment rulemaking.

The current process provides an opportunity for all specialties to participate through the RUC 

in developing recommendations to CMS about relative values for new services. This multispecialty feature of the system is important since the PFS, like the IPPS and OPPS, is a 

relative value payment system and not a cost-based reimbursement system. Increased 

payments for a service result in decreased payments for all other services. 

Geographic Practice Cost Indexes

 For information on GPCIs:

http://www.medpac.gov/publications/other_reports/Aug03_GPCI_2pgrKH.pdf

Payments under the PFS are adjusted for geographic variation in costs across 89 payment 

areas. A geographic practice cost index (GPCI) specific to the payment locality where the 

service is furnished is applied to each of the three relative value components of the PFS. The 

GPCIs are required by law to measure area cost differences compared to the national average 

for each of the three fee schedule relative value components. 

Sustainable Growth Rate

 For information on the SGR:

http://www.cms.hhs.gov/SustainableGRatesConFact/

The annual update to the PFS conversion factor is calculated based on a statutory formula 

which includes inflation in physicians' costs to provide care, and then is adjusted up or down 

by how actual national Medicare spending totals for physicians' services compare to a 

spending target that is set based upon a target rate of growth called the sustainable growth 

rate (SGR). If actual spending is less than the SGR, the physician payment update is 

increased, and if spending exceeds the SGR-based target spending, the update is reduced. 

The SGR update methodology was designed to constrain the rate of growth in Medicare 

physician spending and link it to growth in the overall economy, as well as to take into 

account physician control over volume and intensity of services. In recent years, application 

of the SGR formula would have dictated reductions in the PFS conversion factor, but in all 

years since 2002, Congress has enacted legislation to hold payments constant or to provide a 

small increase.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

45

Contractor-Priced Services

In some instances, an item or service coverable in a physician’s office does not have a 

national payment rate under the PFS. In those cases, the Medicare contractor is required to 

determine the appropriate payment rate for the locality it serves. Most of the contractorpriced codes represent low volume items or services, or new items or services that are not 

accurately described by established procedure codes and therefore billed using not otherwise 

classified (NOC) codes. In setting the payment rate for a service represented by a contractorpriced code, the contractor medical director (CMD) typically gathers evidence on the relative 

amount of physician work and other physician resources required to perform the service. 

Part B Drugs in the Physician’s Office

 For information on Part B drugs:

http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/

http://www.cms.hhs.gov/CompetitiveAcquisforBios/

 For information on Part B Drug ASP:

http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/

Medicare Part B covers a limited number of drugs provided as part of (or incident to) a 

physician service, certain oral drugs specified by law, and drugs furnished as part of covered 

durable medical equipment. Medicare pays the physician or pharmacy for the drug provided 

to the beneficiary and does not pay pharmaceutical manufacturers directly.

Part B covered drugs include certain infused or injected drugs provided primarily by 

oncologists, rheumatologists, and urologists, and certain oral drugs such as 

immunosuppressives, anti-cancer drugs, and anti-nausea drugs.

Beginning with 2005, the MMA specified that certain Part B covered drugs are paid 106 

percent of the average sales price (ASP) as computed based on manufacturers’ average sales 

prices submitted to CMS quarterly by manufacturers. Drug payment amounts are updated 

quarterly based on the most recent manufacturer data. During any given quarter, CMS will 

calculate the next quarter’s payment amounts based on the last quarter’s manufacturer data. 

Therefore, many describe this process as having a two quarter lag.

The MMA also required Medicare to pay a supplying fee as determined appropriate by the 

Secretary to pharmacies for certain Medicare Part B covered drugs. Currently, the supplying 

fee is set at $50 for the first immunosuppressive prescription after a beneficiary has received 

a transplant, then $24 for the first prescription each month, and $16 for all subsequent 

prescriptions within each 30-day period. Additional information on supplying fees is found 

on the CMS website at:

http://www.cms.hhs.gov/ContractorLearningResources/downloads/JA3990.pdf

Medicare pays a furnishing fee for items and services related to Medicare Part B covered 

blood clotting factor products. The furnishing fee payment amount for years after CY 2005 

is increased annually by the percentage increase in the consumer price index for medical care
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

46

for the 12 month period ending with June of the previous year. Additional information on 

the Medicare blood clotting factor furnishing fee, including the fee paid per unit of clotting 

factor is found on the CMS website at:

http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/20_ClotFactorFurnishFee.asp. 

Medicare also pays a dispensing fee for nebulized inhalation drugs that are furnished as a 

part of covered DME. Effective January 1, 2006, Medicare will pay a first time fee of $57 

for a 30-day supply, then a monthly fee of $33 thereafter. Medicare pays a fee of $66 if a 

beneficiary receives a 90-day supply of these drugs. Additional information on inhalation 

drug dispensing fees is found on the CMS website at: 

http://www.cms.hhs.gov/ContractorLearningResources/downloads/JA3990.pdf

Competitive Acquisition Program

 For information on the CAP program:

http://www.cms.hhs.gov/CompetitiveAcquisforBios/01_overview.asp

The MMA required that CMS develop a competitive acquisition program (CAP) for Part B 

drugs. CAP serves as an optional alternative method for physicians to acquire certain Part B 

injectable drugs that are administered in the office setting. Under the CAP, vendors bid for 

the opportunity to provide these specified products to physician offices. The vendor bills 

Medicare directly for the drugs and collects the coinsurance from the beneficiary. The 

physician orders the necessary drugs from the vendor and has no billing responsibilities for 

medications obtained from the vendor. The physician is still responsible for submitting 

claims for drug administration.

Clinical Laboratory Services

 For information on clinical laboratory services: 

http://www.cms.hhs.gov/ClinicalLabFeeSched/

http://www.cms.hhs.gov/center/clinical.asp

http://www.medpac.gov/documents/MedPAC_briefs_Payment_Basics_09_clinical_lab.p

df

Generally, Medicare pays for clinical diagnostic laboratory tests at the lesser of three

amounts: the actual charge for the test submitted by the laboratory; the local fee schedule 

amount; or the national limitation amount (NLA). The local fee schedules were originally 

based on 60 percent of the prevailing charges for tests in each contractor locality for services 

rendered on or after July 1, 1984. The NLA is a percentage of the median value of all local 

fees for each test. The NLA is set at 74 percent of the median of the local fees for tests for 

which NLAs were established before January 1, 2001 and at 100 percent of the median for 

tests Medicare first paid for on or after January 1, 2001. Unlike the IPPS, the OPPS, and the 

PFS, the clinical laboratory fee schedule has no provision to permit routine changes in 

relative payment rates to reflect technological advances and other changes over time.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

47

Public Meetings Regarding 

New Products

CMS holds public meetings on proposed 

payment determinations for certain new 

codes representing both clinical laboratory 

and DME items. The meetings provide an 

opportunity for CMS to obtain industry and 

public reaction to preliminary 

recommendations regarding payment 

methodology for these codes. 

Each public meeting is announced in the 

Federal Register 30 days prior to the 

meeting date. A detailed agenda and 

summary of the meeting is posted on the 

CMS website. [See Coding Chapter] 

Fee schedule amounts are generally updated 

each year by the change in the consumer price 

index. Congress has from time to time reduced 

this update. Most recently, MMA eliminated 

the update for calendar years 2004 through 

2008. Beneficiaries do not pay cost-sharing 

for clinical laboratory services as they do for 

most other Medicare services.

The statute does not specify how to calculate 

fees for new tests. The MMA required CMS to 

establish procedures for determining payment 

for new lab test codes to be included in the 

annual update of the clinical laboratory fee 

schedule. For a clinical laboratory test that is 

assigned a new or substantially revised code in 

a particular year, CMS notifies the public that a 

new code has been created and invites the public to present comments on the appropriate 

basis for establishing a payment amount for the new code. CMS considers the comments 

presented at the public meeting and makes a list of its proposed determinations. The 

proposed determinations, the reasons for the determinations, and the data on which the 

determinations were based are made available to the public. The public is given an 

opportunity to submit comments. CMS then issues a list of final determinations for each new 

test. 

Depending on the nature of a new test, CMS uses one of two bases to determine payment. 

The first basis, called crosswalking, is used for a new test that is comparable to an existing 

test code, multiple existing test codes, or a portion of an existing test code. The new test 

code is assigned the existing local fee schedule amount and the existing NLA for the related 

test. Payment for the new test code is made at the lesser of the local fee schedule amount or 

the NLA. The second method, called gapfilling, is used when no comparable, existing test is 

available. Gapfilling requires each local contractor to develop a payment amount based on 

charges, costs, and other relevant factors for its locality. Local payment amounts are 

established from the gapfill amounts and become the basis for establishing the NLA for a 

new test code, multiple existing test codes, or a portion of an existing test code. 

The public may request CMS to reevaluate its decision of whether a code should be priced by 

crosswalking or gapfilling. This reconsideration process, effective for new or substantially 

revised HCPCS codes assigned on or after January 1, 2008, provides the public with an 

additional opportunity to comment on CMS payment determinations.

Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 

 For information on DMEPOS

http://www.cms.hhs.gov/DMEPOSFeeSched/

http://www.cms.hhs.gov/center/dme.asp
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

48

Medicare payment for most durable medical equipment, prosthetics, orthotics, and supplies 

(DMEPOS), including surgical dressings, therapeutic shoes, and parenteral and enteral 

nutrition, is based on the lower of the actual charge for the item or a fee schedule amount. 

The law specifies that the fee schedule amounts for each category of DMEPOS (inexpensive 

or other routinely purchased items, items requiring frequent and substantial servicing, 

customized items, oxygen and oxygen equipment, and other items of DME) are to be based 

on average payments made under the previous reasonable charge methodology in a base 

year

14. The fee schedule amounts are updated by annual covered item updates. The law also 

sets various ceiling and floor limits on the fee schedule for different DMEPOS categories. 

The fee schedule amounts for DME and surgical dressings are statewide fee schedule 

amounts. The fee schedule amounts for prosthetic devices, prosthetics, orthotics, and 

therapeutic shoes are regional fee schedule amounts that are the weighted average of the state 

fee schedule amounts in each of 10 CMS regions. The fee schedule amounts for parenteral 

and enteral nutrition are national fee schedule amounts. 

As with clinical laboratory services, the law does not specify how to calculate fee schedule 

amounts for new DME technology. Generally, gapfilling is used to calculate new DME fee 

schedule amounts by using either:

• Fee schedule amounts for comparable items; or

• Supplier or retail prices. 

In cases where retail pricing information is used, the DME gapfilling methodology 

approximates historic reasonable charges by using current prices decreased by a deflation 

factor to approximate the base year price. The deflation factors are based on the percentage 

change in the consumer price index for urban consumers (CPI-U). Once this amount is 

determined, the amount is inflated to the current price using a percentage increase and the 

cumulative covered item update. The covered item updates are set in law and are often, but 

not always, the CPI-U. 

DMEPOS Competitive Bidding Program

 For information on DMEPOS Competitive Bidding

http://www.cms.gov/DMEPOSCompetitiveBid/

Section 302 of the Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) established requirements for a new competitive bidding program for certain 

DMEPOS items and services. The statute requires that “single payment amounts” replace the 

current Medicare DMEPOS fee schedule payment amounts for selected DMEPOS items in 

certain areas of the country. The single payment amounts are determined by using bids 

submitted by DMEPOS suppliers. The program is intended to set more appropriate 

DMEPOS payment amounts, which will reduce beneficiary out-of-pocket expenses and save 

 14 The actual months from 1986 and 1987 included in the base year vary across different types of DME 

according to time periods specified in the law. Payment for surgical dressing fees is an exception and is 

calculated using a 1992 base period.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

49

the Medicare program money while ensuring beneficiary access to quality items and 

services. 

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), enacted on 

July 15, 2008, made limited changes to the Medicare DMEPOS Competitive Bidding 

Program, including a requirement that competition to re-bid Round 1 occur in 2009. 

On January 16, 2009, CMS issued an interim final rule with comment period that 

incorporates into regulations only those provisions of MIPPA related to the DMEPOS 

competitive bidding program that are self-implementing and necessary to conduct the Round 

1 rebid competition in 2009. That rule became effective on April 18, 2009. 

CMS is currently evaluating bids suppliers submitted in 2009 and expects to announce the 

single payment amounts determined from those bids in June 2010. CMS plans to announce 

the contract suppliers in September 2010, and the program is scheduled to go into effect in 

the nine Round One Rebid areas on January 1, 2011. 

Inherent Reasonableness

Inherent reasonableness (IR) is the authority provided to CMS to correct grossly excessive or 

deficient Medicare payment amounts for specific items and services under Part B that are not 

paid under the Physician Fee Schedule or a prospective payment system. Therefore,

payments for DME, clinical laboratory services, and other Part B services other than those 

noted above may be adjusted using IR. By law, IR determinations revise inherently 

unreasonable payment amounts when factors, including the following, result in grossly 

deficient or excessive payment amounts: Medicare and Medicaid are the sole or primary 

source of payment for a category of items or services; the payment amounts do not reflect 

changing technology, increased facility with that technology, or changes in acquisition or 

production costs; or the payment amounts are grossly higher or lower than payment amounts 

made by other purchasers in comparable localities. Factors that may be considered in 

establishing a revised payment are the price markup, the differences in charges to Medicare 

and to other payers, and the cost necessary to produce the item or service. 

Both CMS and the Medicare contractors may make IR determinations. The IR 

determinations made by CMS apply nationally. CMS will publish proposed and final notices 

in the Federal Register before adopting a new payment amount. The notice will provide the 

criteria and circumstances, if any, under which a contractor may grant an exception to the IRadjusted amount. 

IR adjustments made by contractors are limited to a 15 percent increase or decrease in any 

given year. If a contractor is establishing a special payment limit using the inherent 

reasonableness authority, the contractor must inform the affected suppliers and Medicaid 

agencies of the proposed payment amounts and the factors considered in determining that 

amount. Contractors must also solicit comment on the proposed amount and evaluate those 

comments. Contractors must submit in writing any proposed IR adjustment to CMS. The 

adjustment may not be imposed until CMS informs the contractor that notification of the 

proposed adjustment has been received and the carrier has informed the affected suppliers 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

50

and State Medicaid agencies of any limits it establishes. This policy is designed to make sure 

that full consideration is given to pertinent factors before limitations are set locally. 

A Look to the Future

 For more information:

http://www.cms.hhs.gov/center/asc.asp

http://www.cms.hhs.gov/center/dme.asp

http://www.cms.hhs.gov/center/clinical.asp

http://www.cms.hhs.gov/center/esrd.asp

http://www.hhs.gov/valuedriven

The MMA requires significant changes in the future payment methodology for several items 

and services. In January 2008, CMS implemented a revised payment system for services 

provided in ambulatory surgical centers (ASCs). Like the OPPS, the ASC payment system 

has several hundred procedure classification groups with payment rates set using relative

weights, a conversion factor, and adjustments for geographic differences. In addition, certain 

items and services assigned to New Technology APCs or with pass-through status under the 

OPPS may be paid under the ASC payment system. 

As described earlier, CMS will continue to expand the competitive bidding program for 

DMEPOS.

As described above, CMS refines Medicare payment policy through annual rulemaking and 

responds to changes in clinical practice and industry operations. CMS is interested in public

input on areas that need improvement at all stages of the rulemaking process but it is most 

helpful to receive recommendations as we develop the proposed rules to allow for full 

consideration of potential changes.

Value-based Purchasing

Medicare is rapidly transforming its payment systems by linking payment to the quality and 

efficiency of care provided. This transformation will shift the focus of Medicare from paying

providers and suppliers based solely on the volume of services furnished to paying providers 

and suppliers based on the delivery of high quality, efficient health care. Value-based 

purchasing (VBP) initiatives use performance-based financial incentives and public reporting 

of quality and resource use information to encourage improvement in all aspects of health 

care quality, including patient safety and efficiency.

CMS has implemented several VBP initiatives:

• Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) 

The hospital setting has played a leading role in our VBP implementation. The current 

Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program ties 

a portion of the annual update for most hospitals reimbursed under the Inpatient 

Prospective Payment System (IPPS) to reporting on a set of quality measures that is 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

51

expanded and refined each year. Measures included in the RHQDAPU measure set for 

the 2010 payment update include process of care measures for Acute Myocardial 

Infarction (AMI), Heart Failure (HF), Pneumonia (PN) and Surgical Care, 30-day 

mortality and 30-day readmission measures for AMI, HF, and PN, several in-hospital 

mortality and patient safety indicators, structural measures of registry participation, and 

measures of patients’ experience of care. CMS has developed a Medicare Hospital ValueBased Purchasing Plan that builds on RHQDAPU and ties a portion of a hospital’s 

payment to its performance on a set of quality measures. CMS continues to develop a 

hospital measure set that comprehensively addresses clinical quality, patient safety, 

patient experience, and efficiency.

• Hospital-acquired Conditions (HACs)

Another Medicare Part A VBP initiative addresses hospital-acquired conditions

(HACs). Section 1886(d)(4)(D) of the Act requires the Secretary to identify conditions 

that are: (a) high cost or high volume or both, (b) result in the assignment of a case to a 

DRG that has a higher payment when present as a secondary diagnosis, and (c) could 

reasonably have been prevented through the application of evidence-based guidelines. 

The selected conditions include serious preventable events (e.g., object left in after 

surgery, blood incompatibility, or air embolism), urinary and venous catheter-associated 

infections, and other conditions like pressure ulcers and falls. For discharges occurring 

on or after October 1, 2008, hospitals do not receive additional payment for cases in 

which one of the selected conditions was not present on admission. That is, the case 

would be paid as though the secondary diagnosis were not present. To implement the 

HAC program, CMS also required hospitals to report present on admission information 

for both primary and secondary diagnoses when submitting claims for discharges on or 

after October 1, 2007. Additional information on the HAC payment provision, including 

the current list of HAC categories, is available on the CMS web site at: 

http://www.cms.hhs.gov/HospitalAcqCond/06_HospitalAcquired_Conditions.asp#TopOfPage

• Hospital Outpatient Quality Data Reporting Program (HOP QDRP) 

Similarly, the law now requires that the annual outpatient hospital PPS (OPPS) annual 

payment update be reduced by 2.0 percentage points for hospitals that do not meet certain 

quality reporting requirements. The Hospital Outpatient Quality Data Reporting Program 

(HOP QDRP) currently contains 11 quality measures. To receive the full OPPS annual 

payment update for services furnished in CY 2010, hospitals must report data on seven 

chart-abstracted quality measures that address emergency department or perioperative 

surgical care. In addition, CMS calculates four Medicare claims-based measures of 

Imaging Efficiency.

• Physician Quality Reporting Initiative (PQRI)

As a VBP strategy for Medicare Part B services, CMS launched on July 1, 2007, the 

Physician Quality Reporting Initiative (PQRI). The PQRI provides a bonus for 

physicians and other health professionals who satisfactorily report on quality measures.

CMS intends the PQRI to be a first step toward performance-based payment reform and 

public reporting of performance information for Part B providers. Since the launch of the 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

52

PQRI program in 2007, additional quality measures have been added which allows most 

eligible professionals (as defined by the statute) to participate in the program. These 

measures and additional information about the PQRI program, including the various 

reporting options and reporting methods, and the criteria for satisfactory reporting to 

qualify for an incentive can be found on the CMS website at www.cms.hhs.gov/pqri

• Electronic Prescribing (e-Rxing) Incentive Program 

In 2009, CMS launched the electronic prescribing (e-Rxing) incentive program and 

began accepting data regarding eligible professional’s use of e-Rxing. Similar to PQRI, 

eligible professionals may earn an incentive payment for having a qualified electronic 

prescribing system and reporting whether or not it was used for at least 50 percent of their 

eligible reporting instances. For 2010, eligible professionals can earn an incentive 

payment for having a qualified eRxing system and reporting its use for 25 unique eligible 

reporting instances. Information about the e-Rxing incentive program can be found at on 

the CMS website at www.cms.hhs.gov/ERxIncentive

• Physician Resource Use Measurement & Reporting Program

In addition to capturing quality of care information in PQRI, CMS has been developing 

resource use measures in the Physician Resource Use Measurement & Reporting 

Program. To date, CMS has disseminated over 300 confidential resource use reports to 

physicians based on their Medicare fee-for-service utilization. CMS has also recently 

launched an effort to develop a Physician Value-Based Purchasing Plan Report to 

Congress.

• Home health agencies that submit the required quality data using OASIS receive 

payments based on the full home health market basket update. If a home health agency 

does not submit quality data, the home health market basket is reduced by 2 percentage 

points. The quality measures for each home health provider are reported on Home Health 

Compare. 

• For End Stage Renal Disease (ESRD) services, as required by MIPPA, CMS is

developing a new ESRD bundled payment system for 2011 and a quality incentive 

program effective for 2012.

In addition, CMS has implemented a number of demonstration programs that support the 

further development and refinement of VBP initiatives. For example, 

• Premier Hospital Quality Incentive Demonstration 

Through the Premier Hospital Quality Incentive Demonstration, CMS aims to see a 

significant improvement in the quality of inpatient care by awarding incentive payments 

to hospitals for high quality in several clinical areas (i.e., inpatients hospitalized due to 

heart attack, heart failure, pneumonia, or surgery), and by reporting extensive quality data 

on the CMS web site. The demonstration involves a CMS partnership with Premier Inc., 

a nationwide organization of not-for-profit hospitals. Under an extension of the 

demonstration, hospitals with high quality performance get incentive awards by showing 

quality that exceeds established standards, and by demonstrating that they are in the top 
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

53

20 percent of achievement or the top 20 percent of improvement in each clinical area 

measured. 

•

The Physician Group Practice (PGP) Demonstration seeks to align incentives for 

physician groups to manage the overall care for patients, especially for beneficiaries with 

chronic illness, multiple co-morbidities and those near the end of life. The demonstration 

encourages physician groups to proactively coordinate beneficiaries’ total heath care 

needs; provides incentives to physicians to provide services efficiently and effectively; 

rewards improvements and delivery of high quality care; and creates a framework to 

collaborate with providers to the advantage of Medicare beneficiaries. Because they will 

share in any financial savings that result from improving the quality and cost efficiency 

of care, the groups have incentives to use new care management strategies and electronic 

tools that, based on clinical evidence and patient data, improve patient outcomes and 

lower total medical costs. Performance payments are based upon both cost efficiency for 

generating savings and performance on 32 quality measures.

The Physician Group Practice (PGP) Demonstration 

• Medicare Care Management Performance Demonstration

The Medicare Care Management Performance Demonstration is a pay-for-performance 

initiative that promotes the adoption and use of health information technology to improve 

the quality of patient care for chronically ill Medicare patients. Doctors who meet or 

exceed performance standards in clinical delivery systems and patient outcomes will 

receive incentive payments for managing the care of eligible Medicare beneficiaries with 

diabetes, congestive heart failure, and/or coronary artery disease and delivering 

preventive care. Physician practices are eligible to receive additional incentive payments 

for implementing a CCHIT-certified EHR and using it to redesign clinical practice and 

report clinical performance data electronically. The demonstration is focused on solo and 

small to medium-sized physician practices in both rural and urban areas.
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

54

Rulemaking Cycles of Medicare Payment Systems

Inpatient Prospective Payment System (Fiscal Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Fall/winter

Proposed rule publication Late spring (April/May)

Comment period Late spring - early summer 

Final rule publication On or about August 1

Final rule effective date October 1

Outpatient Prospective Payment System and Ambulatory Surgical Center Payment 

System (Calendar Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Winter/spring

Proposed rule publication Summer (June/July)

Comment period Late summer - early fall

Final rule publication On or about November 1

Final rule effective date January 1

Physician Fee Schedule including Part B Drugs (Calendar Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Winter/spring

Proposed rule publication Summer (June/July)

Comment period Late summer - early fall

Final rule publication On or about November 1

Final rule effective date January 1

Skilled Nursing Facility Prospective Payment System (Fiscal Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Fall/winter

Proposed rule publication Late spring (April/May)

Comment period Late spring - early summer 

Final rule publication On or about July 31

Final rule effective date October 1
Version 2.0

This guide is only intended as a general summary and is not intended to grant rights, impose 

obligations, or take the place of either the written law or regulations. It does not address 

provisions of the Patient Protection and Affordable Care Act of 2010.

55

Inpatient Rehabilitation Facility Prospective Payment System (Fiscal Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Fall/winter

Proposed rule publication Late spring (April/May)

Comment period Late spring - early summer 

Final rule publication On or about August 1

Final rule effective date October 1

Inpatient Psychiatric Facility Prospective Payment System (Rate Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Winter

Proposed rule publication January

Comment period Late winter

Final rule publication On or about May 1

Final rule effective date July 1

Home Health Agency Prospective Payment System (Calendar Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Winter/spring

Proposed rule publication Summer (June/July)

Comment period Late summer - early fall 

Final rule publication On or about November 1

Final rule effective date January 1

Hospice Wage Index (Fiscal Year Cycle)

Rulemaking Phase Approximate Timeframe

Proposed rule development Fall/winter

Proposed rule publication Late spring (April/May)

Comment period Late spring - early summer 

Final rule publication On or about August 1

Final rule effective date October 1