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2.2 Overview of Medicare and Medicaid
Publication date: 31 Mar 2023
us Health care guide
Virtually all institutional health care providers (e.g., hospitals, nursing homes, home health agencies, hospices) and most physicians serve Medicare or Medicaid beneficiaries to some extent. Some providers’ revenues are significantly dependent on compensation from these and other government programs. Due to those programs’ size and nationwide scope, decisions made by the federal government’s Centers for Medicare & Medicaid Services (CMS) significantly impact and influence the entire US health care delivery system. Private health plans often follow their lead.
While federal government and state governments are not “customers” in health care providers’ revenue transactions for accounting purposes (i.e., the government is not receiving the goods or services), their “purchasing” power enables them to exert influence that is similar to rights found in contracting relationships when the government is the customer. For example:
- As sovereign powers, governments possess unilateral rights not normally present in commercial relationships. Because of their size and power, amounts paid to providers are neither negotiated nor established by the marketplace but instead can be unilaterally imposed by CMS and state agencies.
- The regulations governing provider relationships with CMS and the laws on which Medicare and Medicaid are based are inherently political and subject to frequent change. Changes in program interpretations, requirements, or “conditions of participation” after the fact can have implications for revenues previously recognized (refer to HC 3.3.2).
- Revenues earned in providing services to government program beneficiaries may be subject to adjustment as a result of examinations by government agencies or their contractors. The audit process and the resolution of significant related matters (including disputes based on differing interpretations of regulations) might not be finalized until several years after the services were rendered.
- Additional risks may result from the applicability of certain laws that provide for potentially significant penalties if violated. For example, a provider that is found to have submitted false claims for payment may be subject to punitive measures ranging from civil monetary penalties to suspension or debarment from participation in Medicare or Medicaid.
2.2.1 Medicare
Medicare is a federal government insurance program administered by the Centers for Medicare & Medicaid Services (CMS). The largest health insurance program in the United States, it serves Americans age 65 and older as well as younger individuals with certain disabilities and diseases.
Medicare has four components:
- Part A, primarily for inpatient hospital services;
- Part B, for outpatient services such as physician visits;
- Part C, for Medicare managed care (“Medicare Advantage”); and
- Part D, for prescription drugs.
Benefits are available to enrollees through two structures: Medicare Advantage (Medicare managed care) and traditional Medicare. In Medicare Advantage, benefits are offered through private sector commercial health plans under contract with CMS; in traditional Medicare, benefits are offered through a health insurance program operated by CMS.
Medicare Advantage Plans, sometimes called "Part C" or "MA Plans," are bundled plans that combine the benefits from Part A and Part B, and usually Medicare drug coverage (Part D) as well. In Medicare Advantage, CMS pays premiums to the health plans that, in turn, are responsible for paying for all covered services provided to enrollees. Because the plan operators are private sector health plans, the relationships with providers (for example, network contracting) are those described in HC 2.1.4.1 (instead of CMS’ rules described at HC 2.2.1.1).
In traditional Medicare (sometimes referred to as “fee-for-service” or FFS Medicare), CMS acts as an insurer, contracting with providers and paying claims for health services provided to Medicare enrollees. CMS administers traditional Medicare through a network of fiscal intermediaries (Medicare Administrative Contractors, or MACs), which are private sector organizations that serve as the primary operational contact between CMS and the health care providers. In addition to handling enrollment and claims payment functions, MACs review and audit institutional providers’ cost reports (see below) and make settlement determinations on behalf of CMS.
Patients enrolled in traditional Medicare can see any provider they choose, but the extent to which they will share financial responsibility with CMS for payment of the bill will vary based on whether the provider is part of Medicare’s network (see HC 2.2.1.1). Unlike private sector health plans, CMS unilaterally establishes rates paid to providers; it does not negotiate. Providers file claims for services provided to beneficiaries and generally are paid prospectively determined rates as discussed in HC 2.1.4.1. Reimbursement for claims based on reasonable costs (i.e., cost reimbursement) is used in only a few situations. Regardless of whether claims payments are prospectively determined or cost reimbursed (retrospectively), the total compensation to which institutional providers will be entitled for services provided during a fiscal year will be determined by filing a cost report (a regulatory report described in HC 2.2.1.3).
2.2.1.1 Participating, non-participating, and opt-out providers in traditional Medicare
As discussed in HC 2.1.4.2, most health plans will establish a network of providers that have committed (through contractual arrangements with the health plan) to provide care at discounted rates to the plan’s subscribers, members, or enrollees. In traditional Medicare, networking relationships with CMS take one of three forms: “opt out,” “participating,” or “non-participating.” The relationship selected will have implications for the amounts providers can bill for their services and how much of that amount will be paid by Medicare or the patient (i.e., cost sharing). Amounts due from CMS are regarded as fully collectible while amounts due from patients are less likely to be fully collectible. As discussed in HC 3, collectibility considerations impact the amount of revenue recognized in a provider’s financial statements under ASC 606.
Opt-out providers
A provider that opts out of Medicare signs an agreement to be excluded from the program. Services provided to Medicare patients will not be covered. The provider can charge whatever it wishes, but the patient is fully responsible.
Participating providers
Participating providers have a relationship with CMS closely resembling that of in-network providers in private-sector health plans (see HC 2.1.4.2). The contractual agreement with CMS (referred to as a provider agreement) generally has a one-year term and automatically renews unless the provider withdraws or is debarred from the program. The provider agreement incorporates by reference the complex laws and regulations for Medicare payment, and providers agree to accept Medicare’s approved amounts as the contractual prices for all services provided to Medicare patients. Because Medicare’s approved amount will establish the agreed-upon contractual prices for services, a provider that treats a Medicare patient will “write off” (i.e., never recognize as revenue) the difference between its established charges and the Medicare rate to the contra-revenue account “contractual allowances,” as discussed in HC 2.1.3. Once the patient’s deductible has been met, CMS typically will pay 80% of the approved amount directly to the participating provider, and the patient is responsible for the 20% coinsurance.
Non-participating providers
Under federal law, almost all institutional health care entities must be participating providers; physicians, allied health professionals (i.e., practitioners other than physicians or nurses, such as physical therapists), and certain other providers and suppliers are permitted a choice. A non-participating provider can elect on a claim-by-claim basis to accept Medicare’s approved amount or not. If they choose to accept the approved rate (referred to as “accepting assignment”), they are paid like a participating provider. Otherwise, Medicare sets a slightly lower rate for the services, and pays its share (usually 80%) directly to the patient, not the provider. The provider is permitted to “balance bill” the patient for a portion of the difference between its established charges and the Medicare rate; that amount (referred to as the “limiting charge”) is capped at 15% over the Medicare non-participating provider rate. Thus, the non-participating provider must collect from the patient the balance-billing amount, the patient’s coinsurance amount, and CMS’s payment. Example HC 2-2 illustrates the accounting entries for a non-participating provider.
EXAMPLE HC 2-2
Accounting by a Medicare non-participating provider
Accounting by a Medicare non-participating provider
Physician Associates (PA) is a non-participating provider under Medicare. PA performs an in-office procedure for a Medicare patient. PA’s gross charges for the services are $800.
PA decides not to accept assignment for the patient’s claim. Medicare’s non-participating provider rate for the services is $450. Medicare will pay 80% of that amount, and the patient is responsible for the other 20%. As a non-participating provider, the limiting charge for the services is capped at $518 (15% above the non-participating provider rate). Patient has met their deductible for the year.
What entries should PA record related to patient’s office visit?
Analysis
Medicare will pay $360 on the claim, which is 80% of the non-participating provider rate ($450 x 80%) and patient’s coinsurance amount will be $90 ($450 x 20%). PA can also balance-bill the patient for the $68 difference between the limiting charge ($518) and the non-participating provider rate ($450). The $282 difference between PA’s established gross charges and the capped limiting charge amount ($800 – $518) represents a contractual allowance.
Because Medicare pays its portion to the patient when the provider is non-participating, PA must collect the entire $518 from the patient ($360 Medicare-reimbursed portion + $90 coinsurance + $68 balance billing amount). Thus, PA would record the following entries:
Dr. Accounts receivable—Due from patient |
$ 518 |
Dr. Revenue—Contractual adjustments |
$ 282 |
Dr. Accounts receivable—Due from Medicare |
$ 0 |
Dr. Revenue—Implicit price concessions |
[see below] |
Cr. Revenue—Gross charges |
$ 800 |
Because the amount due from an individual patient is likely subject to much higher collection risk, PA will need to estimate the amount it expects to collect from patient and the amount it is likely to forgo in the form of an implicit price concession. It would not be appropriate for PA to recognize the full $800 in revenue if its collection history from patients in this financial class have not historically paid 100% of amounts due.
2.2.1.2 Alternative fee-for-service Medicare payment models
Fee-for-service is the most common payment mechanism used in traditional Medicare. As such, each health care entity involved in care during an individual’s illness or course of treatment will bill and be paid separately for each service they provide, with little or no coordination among providers across the spectrum of services. Concerns about this inefficiency within traditional Medicare has led CMS to evaluate alternative approaches to fee-for-service payment that would incent more cost-efficient care without sacrificing quality.
The Medicare Shared Savings Program (MSSP) is an alternative payment model that offers physicians, hospitals, and other providers an opportunity to better coordinate care by creating accountable care organizations (ACOs). An ACO agrees to be held accountable for the quality, cost, and experience of care of an assigned Medicare fee-for-service beneficiary population. ACOs are discussed in HC 4.
Bundled payment care initiatives also incent providers to work together to coordinate care provided. Some models might provide a single comprehensive payment that covers all services provided within a specific time frame for a patient with a certain medical condition across a continuum of care that includes hospitals, physician groups, post-acute care facilities and services, and others. Other models involve establishing cost and quality targets across the continuum of care that provide bonuses or penalties to an “anchor” provider that spearheads the process (for example, a hospital that performs joint-replacement surgery on a patient who will also require home health care and outpatient physical therapy, in addition to ongoing monitoring by the surgeon). For commentary and examples related to estimating performance-based bonuses or penalties under such a program, see the discussion of “risk sharing arrangements” in the AICPA Revenue Recognition Audit and Accounting Guide (AAG-REV 7.6.73 through AAG-REV 7.6.108).
2.2.1.3 Potential retrospective adjustments of Medicare compensation
Providers must consider the possibility of adjustments CMS may make in future years to retroactively adjust the amount of compensation to which they are entitled for the current year’s services. For example, institutional providers, such as hospitals, nursing homes, home health companies, and hospices, are exposed to recoupment risk arising from future adjustments that may be made in connection with audits or desk reviews of cost reports (see HC 2.2.1.3). All providers have recoupment risk associated with post-payment review and denials of claims (see HC 2.2.1.3) and from potential government allegations of billing fraud (see HC 6.2.1).
The potential for such adjustments represents an uncertainty that must be considered when estimating revenue for the period in which the services were provided. Such uncertainties cause compensation from government programs to be considered variable for purposes of applying ASC 606, as discussed in HC 3.3.2.
Compensation obtained through cost reports
The cost report is an annual report to CMS that details the revenues, costs, and expenses associated with the services provided by the provider/facility to Medicare patients. The data included within these reports is utilized by CMS to compute final reimbursement for Medicare claims.
For providers whose rates are prospectively determined, the cost report is used to provide additional details about specific costs or programs that may have been incurred, such as for treating high volumes of high-acuity patients or low-income patients, or for providing a clinical setting for the education of interns and residents and other allied health professionals. In essence, these amounts (referred to as pass-through costs) are lump-sum adjustments to the standard prospective rates.
For the relatively few providers whose compensation is determined with hindsight (that is, they are paid on a reasonable-cost basis), the cost report is the vehicle used to determine the actual reimbursable costs incurred in providing services to Medicare patients. Such providers receive interim payments as claims are filed throughout the contract year. After year end, the fiscal intermediary (Medicare Administrative Contractor) settles with the provider for the difference between interim payments and actual reasonable costs calculated in the cost report.
Cost reports often are not filed with fiscal intermediaries until after a provider’s financial statements have been issued. In those situations, the Medicare revenue estimates included in the financial statements will include an estimate of the provider’s calculation of additional compensation due from or payable to CMS that is expected to arise from the cost report.
Subsequent to filing, the cost reports are subject to routine reviews or audits by the fiscal intermediaries, which may result in adjustments to the provider’s calculation of amounts due from or payable to CMS. Often, final settlement does not occur until several years after the cost report has been filed. The potential for retroactive adjustments resulting from final settlement of cost reports represents an uncertainty that must be considered in estimating revenue for the period in which the services are provided. Example HC 3-5 in HC 3 illustrates the estimation of revenue when these uncertainties exist.
Retrospective adjustments for denial of claims
All providers that file claims under either the traditional Medicare or Medicare Advantage programs are exposed to risk for retrospective adjustment of compensation based on post-payment review and denials of claims that were processed and paid by the MAC or fiscal intermediary. CMS engages recovery audit contractors (“RAC auditors”) for this purpose.
RAC auditors perform reviews or audits to ensure that claims payments made at the time services were provided were appropriate. Claims for items or services that are subsequently deemed to be “not medically necessary,” not covered by the program, or improperly documented or coded can be flagged for recoupment by RAC auditors up to three years after the payments were received. Although issued prior to ASC 606 (and thus refers to ASC 605 and ASC 954-605 revenue recognition language), the nonauthoritative Healthcare Financial Management Association Principles & Practices Board Issue analysis, Accounting For RAC Audit Adjustments and Exposures
provides helpful context and commentary on accounting issues associated with RAC audits.
The potential for retroactive adjustments resulting from RAC audits represent an uncertainty that must be considered in estimating revenue for the period in which the services were provided. HC 3.3.2 discusses application of the ASC 606 model when estimating revenue provided to enrollees in government programs, and AAG-REV 7.6.71 illustrates how to estimate the impact on revenue of amounts repayable due to RAC audits.
2.2.2 Medicaid
Medicaid is a government insurance program that helps low-income individuals and families obtain and pay for health care services. It also provides benefits not normally covered by Medicare, including residential nursing home care services. While Medicaid is jointly funded by federal and state governments, its programs are established and administered on a state-by-state basis. Individual state programs operate under general guidelines established by the federal government and overseen by CMS.
In order to be entitled to the federal funding, each state has a formal agreement with CMS (the Medicaid “state plan”) detailing how that state’s program is administered. In effect, the state plan represents a contract between that state and the federal government indicating the services that will be covered, how providers will be paid for services, and committing to the joint funding. To make changes in benefits or how they pay providers, state agencies must submit and receive CMS approval of a “state plan amendment” (SPA). For example, enactment by a state of a Medicaid provider tax program (discussed in HC 5.3) typically requires a SPA.
Under the joint funding arrangement, the federal government matches a percentage of the total expenditures that will be made by a state to pay health care providers, shown in Figure HC 2-1. This matching is referred to as federal financial participation (FFP), which means the federal government’s share of a state’s expenditures under the Medicaid program. Under this arrangement, the federal government determines their share of a state’s expenditures using the state’s financial medical assistance percentage (FMAP). For example, if a state’s FMAP percentage is 70%, then each state dollar expended for Medicaid services will be matched by 70 cents from the federal government.
Figure HC 2-1
Federal government matching of state Medicaid expenditures
Federal government matching of state Medicaid expenditures
Benefits are made available to enrollees through two structures: Medicaid managed care and traditional Medicaid.
Under Medicaid managed care, state agencies outsource program benefits to a private sector health plan (referred to as a Medicaid managed care organization, or MMCO) through which enrollees will receive most or all of their services. MMCOs accept a set premium payment per enrollee (usually per-member-per-month, or “PMPM”) and in turn, pay providers for the covered services that are specified in the MMCO’s contract with the state. In such arrangements, the third-party payer is the MMCO, not the Medicaid program itself. Because the plan operators are private sector health plans, the relationships with providers (for example, network contracting) are those described in HC 2.1.4.2. Most often, the plans pay providers on a fee-for-service basis (that is, based on filing claims for services provided to enrollees).
In traditional Medicaid (sometimes referred to as “fee-for-service” or FFS Medicaid), the state acts as an insurer operating a health insurance plan. Due to the low-income status of the beneficiaries, cost-sharing between the program and the patients is less significant than in either private health insurance or traditional Medicare.
States will enroll providers who agree to treat Medicaid patients and accept the program’s rates as the contractual prices for those services. Claims submitted by enrolled providers are processed by the state agency’s Medicaid Management Information System (MMIS) for review, verification, and payment. Subsequent to payment, various audit and review processes may be conducted by state and federal administrators, such as the MMIS or in some cases, a RAC auditor (see HC 2.2.1.3) to verify that the payments made were appropriate.
Payment rates are determined by the state for each service in accordance with its approved Medicaid state plan, and the “units” for payment vary by provider type. For example, the approved rates for acute-care hospitals might be structured as per-case amounts that depend upon individuals’ diagnoses (i.e., DRGs), as a per-diem amount paid for each day of inpatient care, or as a percentage of the provider’s established charges. Skilled or intermediate-care nursing facilities are commonly paid a per diem for each day of residential care.
State Medicaid programs often have other characteristics similar to traditional Medicare, including use of cost reports, fiscal intermediaries, post-payment reviews of claims, and potential for government investigations (see HC 2.2.1.3). As a result, providers serving Medicaid patients are at risk for retrospective adjustment of their compensation. The potential impact of such adjustments must be estimated and provided for in the period the services were rendered to the covered patients.
2.2.2.1 Medicaid supplemental payments
In addition to the base payments received for specific services provided to individual Medicaid patients (under either traditional Medicaid or through MMCOs), providers will receive supplemental payments. Most supplemental payments function as adjustments to base rates. For example, upper payment limit (UPL) payments are intended to increase base rates to the levels that Medicare would have paid for the same services. Disproportionate share hospital (DSH) and uncompensated care pool payments are made to providers that have higher costs associated with serving large numbers of low-income patients. In addition, graduate medical education (GME) payments adjust the rates paid to teaching hospitals for higher patient care costs associated with clinical education of medical students. The supplemental payments described in this paragraph enter into the determination of patient service revenue under ASC 606.
Delivery system reform incentive payments (DSRIP) are supplemental payment streams from Medicaid. DSRIP are calculated independent from the uncompensated care pool and, in substance, help providers pay for fundamental changes in how care is delivered in order to improve health care quality and access. DSRIP are considered grants and are recognized using an appropriate model for nonexchange revenue transactions—likely an analogy to ASC 958-605 or IAS 20 for business entities, ASC 958-605 for not-for-profit entities, and GASB 33 for governmental entities.
In traditional Medicaid, providers typically receive supplemental payments in quarterly or annual lump sum amounts. For providers paid under Medicaid managed care, pass-through supplemental payments are included in the capitation rates paid to the MMCOs, and the MMCOs in turn make the supplemental payments to hospitals, physicians, or nursing facilities, as directed by the state.
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