Medicare Payment Mechanism, Term Paper Example

What is Medicare?

The Medicare payment mechanism is a national tool used to reimburse hospitals and physicians for Medicare services. According to the official U.S. Government website for Medicare, people 65 and over, or people with certain disabilities are eligible to receive Medicare, which is a federal health insurance program (Medicare). It is estimated that there are over 39 million people in the United States insured by one or both options provided by Medicare. If a person is eligible for the first option, he or she is automatically enrolled in the second option; however, the person has a right to cancel this. The first option is Medicare Part A, which is hospital insurance for people aged 65-years-old or older who are eligible to receive Social Security benefits. The second is Medicare Part B which is medical insurance. Medicare is funded by the payroll taxes of working people and employers, monthly premiums, general federal funds, and deductibles (Scarrow, 2002).

Physician Payments from Medicare

According to Scarrow (2002), physician service fees are outlined in a Medicare fee schedule which is based on a value that is relative to the type of care Medicare beneficiaries receive. This fee schedule was approved and is recommended by the Physician Payment Review Commission. Medicare fees for physicians are paid based on three Medicare payment components which are (1) relative service value, (2) the geographic practice cost index (GPCI), and (3) a dollar conversion factor.

Relative Service Value

This portion of Medicare payments to physicians is based on the time and skill allocated to the particular service provided, average physician practice expenses, and the average cost of malpractice insurance paid by the physician.


This portion accounts for cost variations in medical practice such as the median employee pay for a specific area, office rent, medical equipment, medical supplies, and other overhead expenses.

Dollar Conversion Factor

This portion of physician Medicare payments converts relative service value, adjusted for geographic location, to a dollar amount. This conversion factor is updated annually. In addition, physicians are paid incentive pay when they provide services in an area with a shortage of health care professionals.

Hospital Payments from Medicare

According to the Medicare News Group, Medicare patients are treated at over 3,500 hospitals in the country. These treatments fall under classified diagnosis related groups (DRGs). These DRGs are weighted, relative to costs of treatments for patients within the group (Medicare FAQs). Moreover, medical complications and other factors can add to the fees under DRGs, as they are basically a guideline. Hospitals are expected to deliver a stardard quality of care in return for the fees, and these fees are adjusted each year, based on market conditions, patient conditions, and other factors (Medicare FAQs). Another type of care organization, besides hospitals, is an Accountable Care Organization and these are significant to Medicare as well.

Accountable Care Organizations (ACO)

An ACO is comprised of groups of hospitals, doctors, nurse practitioners, and various other professional health care providers who volunteer their services to provide high-quality health care to Medicare recipients (CMS, 2013).

ACOs are compensated by Medicare through sharing in Medicare savings; however, an ACO must qualify first. Qualification criteria include achieving savings over a specified minimum rate and meeting quality benchmarks. Savings amounts are calculated by determining the difference between benchmarks adjusted for risk expenditures and fee-for-service payments received by the ACO by Medicare participants (Medicare ACO Proposed Rule, 2011). Additionally, ACOs are compensated through an advanced payment model that provides supplementary incentives. These incentives are offered to physician-based and rural health care providers as monthly, upfront payments. Some payments are fixed and some are variable. The monthly payment amount is determined by the size of the ACO and the number of assigned beneficiaries (CMS, 2013).

Key to ACO Success

In my opinion, three factors that are keys to the success of an ACO are (1) quality service, (2) cost savings, and (3) efficient documentation. According to the Medicare ACO rules, there are qualification standards that need to be met which include ensuring that Medicare patients receive quality care. This is a good check and balance to ensure that organizations do not take advantage of the system and leave the participants without quality care. This could lead to possible overhauls in the currently delivery system. In addition, the guidelines state that the quality care should be provided in the most efficient way possible, to ensure efficient uses of resources. Also, if ACOs do not keep good records of their compliance and progress, then it may be detrimental to their status with Medicare.

It is important that ACOs spend health care funds wisely to realize the requirement cost savings imposed by the Medicare ACO rules, because this helps the Medicare program to achieve effective cost savings, as well.


(2011). Medicare ACO Proposed Rule. American College of Physicians, Regulatory and Insurer Affairs.

CMS. (2013, March 22). Accountable Care Organizations (ACO) . Retrieved from

Medicare FAQs. (n.d.). How Are Hospitals Paid for Treating Medicare Patients? Retrieved from The Medicare Newsgroup:

Medicare. (n.d.). What is Medicare? Retrieved from

Scarrow, A. M. (2002). Physician Reimbursement Under Medicare. Neurosurgical Focus, 12(4).