medicare assignment rates

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What is Medicare assignment and how does it work?

Kimberly Lankford,

​Because Medicare decides how much to pay providers for covered services, if the provider agrees to the Medicare-approved amount, even if it is less than they usually charge, they’re accepting assignment.

A doctor who accepts assignment agrees to charge you no more than the amount Medicare has approved for that service. By comparison, a doctor who participates in Medicare but doesn’t accept assignment can potentially charge you up to 15 percent more than the Medicare-approved amount.

That’s why it’s important to ask if a provider accepts assignment before you receive care, even if they accept Medicare patients. If a doctor doesn’t accept assignment, you will pay more for that physician’s services compared with one who does.

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How much do I pay if my doctor accepts assignment?

If your doctor accepts assignment, you will usually pay 20 percent of the Medicare-approved amount for the service, called coinsurance, after you’ve paid the annual deductible. Because Medicare Part B covers doctor and outpatient services, your $240 deductible for Part B in 2024 applies before most coverage begins.

All providers who accept assignment must submit claims directly to Medicare, which pays 80 percent of the approved cost for the service and will bill you the remaining 20 percent. You can get some preventive services and screenings, such as mammograms and colonoscopies , without paying a deductible or coinsurance if the provider accepts assignment. 

What if my doctor doesn’t accept assignment?

A doctor who takes Medicare but doesn’t accept assignment can still treat Medicare patients but won’t always accept the Medicare-approved amount as payment in full.

This means they can charge you up to a maximum of 15 percent more than Medicare pays for the service you receive, called “balance billing.” In this case, you’re responsible for the additional charge, plus the regular 20 percent coinsurance, as your share of the cost.

How to cover the extra cost? If you have a Medicare supplement policy , better known as Medigap, it may cover the extra 15 percent, called Medicare Part B excess charges.

All Medigap policies cover Part B’s 20 percent coinsurance in full or in part. The F and G policies cover the 15 percent excess charges from doctors who don’t accept assignment, but Plan F is no longer available to new enrollees, only those eligible for Medicare before Jan. 1, 2020, even if they haven’t enrolled in Medicare yet. However, anyone who is enrolled in original Medicare can apply for Plan G.

Remember that Medigap policies only cover excess charges for doctors who accept Medicare but don’t accept assignment, and they won’t cover costs for doctors who opt out of Medicare entirely.

Good to know. A few states limit the amount of excess fees a doctor can charge Medicare patients. For example, Massachusetts and Ohio prohibit balance billing, requiring doctors who accept Medicare to take the Medicare-approved amount. New York limits excess charges to 5 percent over the Medicare-approved amount for most services, rather than 15 percent.

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How do I find doctors who accept assignment?

Before you start working with a new doctor, ask whether he or she accepts assignment. About 98 percent of providers billing Medicare are participating providers, which means they accept assignment on all Medicare claims, according to KFF.

You can get help finding doctors and other providers in your area who accept assignment by zip code using Medicare’s Physician Compare tool .

Those who accept assignment have this note under the name: “Charges the Medicare-approved amount (so you pay less out of pocket).” However, not all doctors who accept assignment are accepting new Medicare patients.

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What does it mean if a doctor opts out of Medicare?

Doctors who opt out of Medicare can’t bill Medicare for services you receive. They also aren’t bound by Medicare’s limitations on charges.

In this case, you enter into a private contract with the provider and agree to pay the full bill. Be aware that neither Medicare nor your Medigap plan will reimburse you for these charges.

In 2023, only 1 percent of physicians who aren’t pediatricians opted out of the Medicare program, according to KFF. The percentage is larger for some specialties — 7.7 percent of psychiatrists and 4.2 percent of plastic and reconstructive surgeons have opted out of Medicare.

Keep in mind

These rules apply to original Medicare. Other factors determine costs if you choose to get coverage through a private Medicare Advantage plan . Most Medicare Advantage plans have provider networks, and they may charge more or not cover services from out-of-network providers.

Before choosing a Medicare Advantage plan, find out whether your chosen doctor or provider is covered and identify how much you’ll pay. You can use the Medicare Plan Finder to compare the Medicare Advantage plans and their out-of-pocket costs in your area.

Return to Medicare Q&A main page

Kimberly Lankford is a contributing writer who covers Medicare and personal finance. She wrote about insurance, Medicare, retirement and taxes for more than 20 years at  Kiplinger’s Personal Finance  and has written for  The Washington Post  and  Boston Globe . She received the personal finance Best in Business award from the Society of American Business Editors and Writers and the New York State Society of CPAs’ excellence in financial journalism award for her guide to Medicare.

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What Does It Mean for a Doctor to Accept Medicare Assignment?

Written by: Malini Ghoshal, RPh, MS

Reviewed by: Malinda Cannon, Licensed Insurance Agent

Key Takeaways

Doctors who accept Medicare assignment are paid agreed-upon rates for services.

It’s important to verify that your doctor accepts assignment before receiving services to avoid high out-of-pocket costs.

A doctor or clinician may be “non-participating” but can still agree to accept Medicare assignment for some services.

If you visit a doctor or clinician who has opted out (doesn’t accept Medicare), you may have to pay for your entire visit cost unless it’s a medical emergency.

Medigap Supplemental insurance (Medigap) plans won’t pay for service costs from doctors who don’t accept assignment.

One of the things that Original Medicare beneficiaries often enjoy about their coverage is that they can use it anywhere in the country. Unlike plans with provider networks, they can visit doctors either at home or on the road; both are covered the same.

But do all doctors accept Medicare patients?

Truth is, this wide-ranging coverage area only applies to doctors who accept Medicare assignment. Fortunately, most do. If you’re eligible for Medicare, it’s important to visit doctors and clinicians who accept Medicare assignment. This will help keep your out-of-pocket costs within your control. Doctors who agree to accept Medicare assignment sign an agreement that they’re willing to accept payment from Medicare for their services.

If you’re a current beneficiary or nearing enrollment, you may have other questions. Do all doctors accept Medicare Advantage plans? What about Medicare Supplement insurance (Medigap)? Read on to learn how to find doctors that accept Medicare assignment and how this keeps your healthcare costs down.

Find the Medicare Advantage plan that meets your needs.

What Is Medicare Assignment of Benefits?

When you’re eligible for Medicare, you have the option to visit doctors and clinicians who accept assignment. This means they are Medicare-approved providers who agree to receive Medicare reimbursement rates for covered services. This helps save you money.

If you have Original Medicare (Part A and B), your doctor visits are covered by your Part B plan. Inpatient services such as hospital stays and some skilled nursing care are covered by Part A .

In order for a participating doctor (or facility) to bill Medicare and be reimbursed, you must authorize Medicare to reimburse your doctor directly for your covered services. This is called the Medicare assignment of benefits. You transfer your right to receive Medicare payment for a covered service to your doctor or other provider.

Note: If you have a Medicare Supplement insurance ( Medigap ) plan to pay for out-of-pocket costs, you may also need to sign a separate assignment of benefits form for Medigap reimbursement. More on Medigap below.

How Can I Find Doctors Near Me That Accept Medicare?

There are several ways to find doctors and other clinicians who accept Medicare assignment close to you.

First, let’s take a look at the different types of Medicare providers.

They include:

Participating providers: Medicare-participating doctors and providers sign a participation agreement stating they will accept Medicare reimbursement rates for their services.

Non-participating providers:  Doctors or providers who are non-participating providers are eligible to accept Medicare assignment but haven’t signed a Medicare agreement. They may choose to accept assignment on a case-by-case basis. If you visit a non-participating provider, make sure to ask if they accept assignment for your particular service. Also get a copy of their fees. They will need to select “yes” on Centers for Medicare & Medicaid Services CMS Form 1500 to accept assignment for the service.

Opt-out providers:  Some doctors and other providers choose not to accept Medicare. If they choose to opt out, the period is two years (based on Medicare guidelines). The opt-out automatically renews if the provider doesn’t request a change in their status. You would be responsible for paying all costs for services received from an opt-out provider. You cannot bill Medicare for reimbursement unless the service was an urgent or emergency medical need. According to a report from KFF , roughly 1% of non-pediatric physicians opted out of Medicare in 2023.

Visiting a doctor who doesn’t accept assignment may cost you more. These providers can charge you up to 15% more than the Medicare-approved rate for a given service. This 15% charge is called the limiting charge. Some states limit this extra charge to a certain percent. This may also be called the Part B excess charge.

Here are some tips for finding doctors and providers who accept Medicare assignment:

• The easiest way to find a doctor who accepts Medicare assignment is to contact their office and ask them directly.
• If you’re looking for a new doctor, you can use the Medicare search tool to find clinicians and doctors that accept Medicare assignment.
• You can also ask a state health insurance assistance program (SHIP) representative for help in locating a doctor that accepts Medicare assignment.
• Don’t assume that having a longstanding relationship with your doctor means nothing will ever change. Check in with them to make sure they still accept Medicare assignment and whether they’re planning to opt out.

Note: Your doctor can choose to become a non-participating provider or opt out of participating in Medicare. It’s important to verify they accept Medicare assignment before receiving any services.

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Do Doctors Who Accept Medicare Have to Accept Supplement Plans?

If your doctor accepts Medicare assignment and you have Original Medicare (Medicare Part A and Part B) with a Medicare Supplement (Medigap) plan, they will accept the supplemental insurance. Depending on your Medigap plan coverage , it may pay all or part of your out-of-pocket costs such as deductibles, copayments and coinsurance.

However, if you have a Medicare Advantage plan (Part C), you may have a network of covered doctors under the plan. If you visit an out-of-network doctor, you may need to pay all or part of the cost for your services.

Keep in mind that you can’t have a Medigap supplemental plan if you have a Medicare Advantage plan.

If you have questions or want to learn more about different Medicare plans like Original Medicare with Medigap versus Medicare Advantage, GoHealth has licensed insurance agents ready to help. They can shop your different options and offer impartial guidance where you need it.

Do Most Doctors Accept Medicare Advantage Plans?

Many doctors accept Medicare Advantage (Part C) plans, but these plans often use provider networks. These networks are groups of doctors and providers in an area that have agreed to treat an insurance company’s customers. If you have a Part C plan, you may be required to see in-network doctors with few exceptions. However, these types of plans are popular options for all-in-one coverage for your health needs. Plans must offer Part A and B coverage, plus a majority also include Part D , or prescription drug coverage. But whether a doctor accepts a Medicare Advantage plan may depend on where you live and the type of Medicare Advantage plan you have.

There are several types of Medicare Advantage plans including:

• Health Maintenance Organization (HMO): These plans have a network of covered providers, as well as a primary care physician to manage your care. If you visit a doctor outside your plan network, you may have to pay the full cost of your visit.
• Preferred Provider Organization (PPO): You’ll probably still have a primary care physician, but these are more flexible plans that allow you to go out of network in some cases. But you may have to pay more.
• Private Fee for Service (PFFS): You may be able to visit any doctor or provider with these plans, but your costs may be higher.
• Special Needs Plan (SNP): This type of plan is only for certain qualified individuals who either have a specific health condition ( C-SNP ) or who qualify for both Medicaid and Medicare insurance ( D-SNP ).

Still have questions? GoHealth has the answers you need.

What Are Medicare Assignment Codes?

Medicare assignment codes help Medicare pay for covered services. If your doctor or other provider accepts assignment and is a participating provider, they will file for reimbursement for services with a CMS-1500 form and the code will be “assigned.”

But non-participating providers can select “not assigned.” This means they are not accepting Medicare-assigned rates for a given service. They can charge up to 15% over the full Medicare rate for the service.

If you go to a doctor or provider who accepts assignment, you don’t need to file your own claim. Your doctor’s office will directly file with Medicare. Always check to make sure your doctor accepts assignment to avoid excess charges from your visit.

Health Insurance Claim Form . CMS.gov.

Lower costs with assignment . Medicare.gov.

How Many Physicians Have Opted-Out of the Medicare Program? KFF.org.

Joining a plan . Medicare.gov.

This website is operated by GoHealth, LLC., a licensed health insurance company. The website and its contents are for informational and educational purposes; helping people understand Medicare in a simple way. The purpose of this website is the solicitation of insurance. Contact will be made by a licensed insurance agent/producer or insurance company. Medicare Supplement insurance plans are not connected with or endorsed by the U.S. government or the federal Medicare program. Our mission is to help every American get better health insurance and save money. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.

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If you have Original Medicare , your Part B costs once you have met your deductible can vary depending on the type of provider you see. For cost purposes, there are three types of provider, meaning three different relationships a provider can have with Medicare . A provider’s type determines how much you will pay for Part B -covered services.

• These providers are required to submit a bill (file a claim ) to Medicare for care you receive. Medicare will process the bill and pay your provider directly for your care. If your provider does not file a claim for your care, there are troubleshooting steps to help resolve the problem .
• If you see a participating provider , you are responsible for paying a 20% coinsurance for Medicare-covered services.
• Certain providers, such as clinical social workers and physician assistants, must always take assignment if they accept Medicare.
• Non-participating providers can charge up to 15% more than Medicare’s approved amount for the cost of services you receive (known as the limiting charge ). This means you are responsible for up to 35% (20% coinsurance + 15% limiting charge) of Medicare’s approved amount for covered services.
• Some states may restrict the limiting charge when you see non-participating providers. For example, New York State’s limiting charge is set at 5%, instead of 15%, for most services. For more information, contact your State Health Insurance Assistance Program (SHIP) .
• If you pay the full cost of your care up front, your provider should still submit a bill to Medicare. Afterward, you should receive from Medicare a Medicare Summary Notice (MSN) and reimbursement for 80% of the Medicare-approved amount .
• The limiting charge rules do not apply to durable medical equipment (DME) suppliers . Be sure to learn about the different rules that apply when receiving services from a DME supplier .
• Medicare will not pay for care you receive from an opt-out provider (except in emergencies). You are responsible for the entire cost of your care.
• The provider must give you a private contract describing their charges and confirming that you understand you are responsible for the full cost of your care and that Medicare will not reimburse you.
• Opt-out providers do not bill Medicare for services you receive.
• Many psychiatrists opt out of Medicare.

Providers who take assignment should submit a bill to a Medicare Administrative Contractor (MAC) within one calendar year of the date you received care. If your provider misses the filing deadline, they cannot bill Medicare for the care they provided to you. However, they can still charge you a 20% coinsurance and any applicable deductible amount.

Be sure to ask your provider if they are participating, non-participating, or opt-out. You can also check by using Medicare’s Physician Compare tool .

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Balance Billing in Health Insurance

• How It Works
• When It Happens
• What to Do If You Get a Bill
• If You Know in Advance

Balance billing happens after you’ve paid your deductible , coinsurance or copayment and your insurance company has also paid everything it’s obligated to pay toward your medical bill. If there is still a balance owed on that bill and the healthcare provider or hospital expects you to pay that balance, you’re being balance billed.

This article will explain how balance billing works, and the rules designed to protect consumers from some instances of balance billing.

Is Balance Billing Legal or Not?

Sometimes it’s legal, and sometimes it isn’t; it depends on the circumstances.

Balance billing is generally illegal :

• When you have Medicare and you’re using a healthcare provider that accepts Medicare assignment .
• When you have Medicaid and your healthcare provider has an agreement with Medicaid.
• When your healthcare provider or hospital has a contract with your health plan and is billing you more than that contract allows.
• In emergencies (with the exception of ground ambulance charges), or situations in which you go to an in-network hospital but unknowingly receive services from an out-of-network provider.

In the first three cases, the agreement between the healthcare provider and Medicare, Medicaid, or your insurance company includes a clause that prohibits balance billing.

For example, when a hospital signs up with Medicare to see Medicare patients, it must agree to accept the Medicare negotiated rate, including your deductible and/or coinsurance payment, as payment in full. This is called accepting Medicare assignment .

And for the fourth case, the No Surprises Act , which took effect in 2022, protects you from "surprise" balance billing.

Balance billing is usually legal :

• When you choose to use a healthcare provider that doesn’t have a relationship or contract with your insurer (including ground ambulance charges, even after implementation of the No Surprises Act).
• When you’re getting services that aren’t covered by your health insurance policy, even if you’re getting those services from a provider that has a contract with your health plan.

The first case (a provider not having an insurer relationship) is common if you choose to seek care outside of your health insurance plan's network.

Depending on how your plan is structured, it may cover some out-of-network costs on your behalf. But the out-of-network provider is not obligated to accept your insurer's payment as payment in full. They can send you a bill for the remainder of the charges, even if it's more than your plan's out-of-network copay or deductible.

(Some health plans, particularly HMOs and EPOs , simply don't cover non-emergency out-of-network services at all, which means they would not cover even a portion of the bill if you choose to go outside the plan's network.)

Getting services that are not covered is a situation that may arise, for example, if you obtain cosmetic procedures that aren’t considered medically necessary, or fill a prescription for a drug that isn't on your health plan's formulary . You’ll be responsible for the entire bill, and your insurer will not require the medical provider to write off any portion of the bill—the claim would simply be rejected.

Prior to 2022, it was common for people to be balance billed in emergencies or by out-of-network providers that worked at in-network hospitals. In some states, state laws protected people from these types of surprise balance billing if they had state-regulated health plans.

But not all states had these protections. And the majority of people with employer-sponsored health insurance are covered under self-insured plans, which are not subject to state regulations. This is why the No Surprises Act was so necessary.

How Balance Billing Works

When you get care from a doctor, hospital, or other healthcare provider that isn’t part of your insurer’s provider network  (or, if you have Medicare, from a provider that has opted out of Medicare altogether , which is rare but does apply in some cases ), that healthcare provider can charge you whatever they want to charge you (with the exception of emergencies or situations where you receive services from an out-of-network provider while you're at an in-network hospital).

Since your insurance company hasn’t negotiated any rates with that provider, they aren't bound by a contract with your health plan.

Medicare Limiting Charge

If you have Medicare and your healthcare provider is a nonparticipating provider but hasn't entirely opted out of Medicare, you can be charged up to 15% more than the allowable Medicare amount for the service you receive (some states impose a lower limit).

This 15% cap is known as the limiting charge, and it serves as a restriction on balance billing in some cases. If your healthcare provider has opted out of Medicare entirely, they cannot bill Medicare at all and you'll be responsible for the full cost of your visit.

If your health insurance company agrees to pay a percentage of your out-of-network care, the health plan doesn’t pay a percentage of what’s actually billed . Instead, it pays a percentage of what it says should have been billed, otherwise known as a reasonable and customary amount.

As you might guess, the reasonable and customary amount is usually lower than the amount you’re actually billed. The balance bill comes from the gap between what your insurer says is reasonable and customary, and what the healthcare provider or hospital actually charges.

Let's take a look at an example in which a person's health plan has 20% coinsurance for in-network hospitalization and 40% coinsurance for out-of-network hospitalization. And we're going to assume that the No Surprises Act does not apply (ie, that the person chooses to go to an out-of-network hospital, and it's not an emergency situation).

In this scenario, we'll assume that the person already met their $1,000 in-network deductible and $2,000 out-of-network deductible earlier in the year (so the example is only looking at coinsurance).

And we'll also assume that the health plan has a $6,000 maximum out-of-pocket for in-network care, but no cap on out-of-pocket costs for out-of-network care:

When Does Balance Billing Happen?

In the United States, balance billing usually happens when you get care from a healthcare provider or hospital that isn’t part of your health insurance company’s provider network or doesn’t accept Medicare or Medicaid rates as payment in full.

If you have Medicare and your healthcare provider has opted out of Medicare entirely, you're responsible for paying the entire bill yourself. But if your healthcare provider hasn't opted out but just doesn't accept assignment with Medicare (ie, doesn't accept the amount Medicare pays as payment in full), you could be balance billed up to 15% more than Medicare's allowable charge, in addition to your regular deductible and/or coinsurance payment.

Surprise Balance Billing

Receiving care from an out-of-network provider can happen unexpectedly, even when you try to stay in-network. This can happen in emergency situations—when you may simply have no say in where you're treated or no time to get to an in-network facility—or when you're treated by out-of-network providers who work at in-network facilities.

For example, you go to an in-network hospital, but the radiologist who reads your X-rays isn’t in-network. The bill from the hospital reflects the in-network rate and isn't subject to balance billing, but the radiologist doesn’t have a contract with your insurer, so they can charge you whatever they want. And prior to 2022, they were allowed to send you a balance bill unless state law prohibited it.

Similar situations could arise with:

• Anesthesiologists
• Pathologists (laboratory doctors)
• Neonatologists (doctors for newborns)
• Intensivists (doctors who specialize in ICU patients)
• Hospitalists (doctors who specialize in hospitalized patients)
• Radiologists (doctors who interpret X-rays and scans)
• Ambulance services to get you to the hospital, especially air ambulance services, where balance billing was frighteningly common
• Durable medical equipment suppliers (companies that provide the crutches, braces, wheelchairs, etc. that people need after a medical procedure)

These "surprise" balance billing situations were particularly infuriating for patients, who tended to believe that as long as they had selected an in-network medical facility, all of their care would be covered under the in-network terms of their health plan.

To address this situation, many states enacted consumer protection rules that limited surprise balance billing prior to 2022. But as noted above, these state rules don't protect people with self-insured employer-sponsored health plans, which cover the majority of people who have employer-sponsored coverage.

There had long been broad bipartisan support for the idea that patients shouldn't have to pay additional, unexpected charges just because they needed emergency care or inadvertently received care from a provider outside their network, despite the fact that they had purposely chosen an in-network medical facility. There was disagreement, however, in terms of how these situations should be handled—should the insurer have to pay more, or should the out-of-network provider have to accept lower payments? This disagreement derailed numerous attempts at federal legislation to address surprise balance billing.

But the Consolidated Appropriations Act, 2021, which was enacted in December 2020, included broad provisions (known as the No Surprises Act) to protect consumers from surprise balance billing as of 2022. The law applies to both self-insured and fully-insured plans, including grandfathered plans, employer-sponsored plans, and individual market plans.

It protects consumers from surprise balance billing charges in nearly all emergency situations and situations when out-of-network providers offer services at in-network facilities, but there's a notable exception for ground ambulance charges.

This is still a concern, as ground ambulances are among the medical providers most likely to balance bill patients and least likely to be in-network, and patients typically have no say in what ambulance provider comes to their rescue in an emergency situation. But other than ground ambulances, patients are no longer subject to surprise balance bills as of 2022.

The No Surprises Act did call for the creation of a committee to study ground ambulance charges and make recommendations for future legislation to protect consumers. The Biden Administration announced the members of that committee in late 2022, and the committee began holding meetings in May 2023.

Balance billing continues to be allowed in other situations (for example, the patient simply chooses to use an out-of-network provider). Balance billing can also still occur when you’re using an in-network provider, but you’re getting a service that isn’t covered by your health insurance. Since an insurer doesn’t negotiate rates for services it doesn’t cover, you’re not protected by that insurer-negotiated discount. The provider can charge whatever they want, and you’re responsible for the entire bill.

It is important to note that while the No Surprises Act prohibits balance bills from out-of-network working at in-network facilities, the final rule for implementation of the law defines facilities as "hospitals, hospital outpatient departments, critical access hospitals, and ambulatory surgical centers." Other medical facilities are not covered by the consumer protections in the No Surprises Act.

Balance billing doesn’t usually happen with in-network providers or providers that accept Medicare assignment . That's because if they balance bill you, they’re violating the terms of their contract with your insurer or Medicare. They could lose the contract, face fines, suffer severe penalties, and even face criminal charges in some cases.

If You Get an Unexpected Balance Bill

Receiving a balance bill is a stressful experience, especially if you weren't expecting it. You've already paid your deductible and coinsurance and then you receive a substantial additional bill—what do you do next?

First, you'll want to try to figure out whether the balance bill is legal or not. If the medical provider is in-network with your insurance company, or you have Medicare or Medicaid and your provider accepts that coverage, it's possible that the balance bill was a mistake (or, in rare cases, outright fraud).

And if your situation is covered under the No Surprises Act (ie, an emergency, or an out-of-network provider who treated you at an in-network facility), you should not be subject to a balance bill. So be sure you understand what charges you're actually responsible for before paying any medical bills.

If you think that the balance bill was an error, contact the medical provider's billing office and ask questions. Keep a record of what they tell you so that you can appeal to your state's insurance department if necessary.

If the medical provider's office clarifies that the balance bill was not an error and that you do indeed owe the money, consider the situation—did you make a mistake and select an out-of-network healthcare provider? Or was the service not covered by your health plan?

If you went to an in-network facility for a non-emergency, did you waive your rights under the No Surprises Act (NSA) and then receive a balance bill from an out-of-network provider? This is still possible in limited circumstances, but you would have had to sign a document indicating that you had waived your NSA protections.

Negotiate With the Medical Office

If you've received a legitimate balance bill, you can ask the medical office to cut you some slack. They may be willing to agree to a payment plan and not send your bill to collections as long as you continue to make payments.

Or they may be willing to reduce your total bill if you agree to pay a certain amount upfront. Be respectful and polite, but explain that the bill caught you off guard. And if it's causing you significant financial hardship, explain that too.

The healthcare provider's office would rather receive at least a portion of the billed amount rather than having to wait while the bill is sent to collections. So the sooner you reach out to them, the better.

Negotiate With Your Insurance Company

You can also negotiate with your insurer. If your insurer has already paid the out-of-network rate on the reasonable and customary charge, you’ll have difficulty filing a formal appeal since the insurer  didn’t actually deny your claim . It paid your claim, but at the out-of-network rate.

Instead, request a reconsideration. You want your insurance company to  reconsider the decision to cover this as out-of-network care , and instead cover it as in-network care. You’ll have more luck with this approach if you had a compelling medical or logistical reason for choosing an out-of-network provider .

If you feel like you’ve been treated unfairly by your insurance company, follow your health plan’s internal complaint resolution process.

You can get information about your insurer’s complaint resolution process in your benefits handbook or from your human resources department. If this doesn’t resolve the problem, you can complain to your state’s insurance department.

• Learn more about your internal and external appeal rights.
• Find contact information for your Department of Insurance using this resource .

If your health plan is self-funded , meaning your employer is the entity actually paying the medical bills even though an insurance company may administer the plan, then your health plan won't fall under the jurisdiction of your state’s department of insurance.

Self-funded plans are instead regulated by the Department of Labor’s Employee Benefit Services Administration. Get more information from the  EBSA’s consumer assistance web page  or by calling an EBSA benefits advisor at 1-866-444-3272.

If You Know You’ll Be Legally Balance Billed

If you know in advance that you’ll be using an out-of-network provider or a provider that doesn’t accept Medicare assignment, you have some options. However, none of them are easy and all require some negotiating.

Ask for an estimate of the provider’s charges. Next, ask your insurer what they consider the reasonable and customary charge for this service to be. Getting an answer to this might be tough, but be persistent.

Once you have estimates of what your provider will charge and what your insurance company will pay, you’ll know how far apart the numbers are and what your financial risk is. With this information, you can narrow the gap. There are only two ways to do this: Get your provider to charge less or get your insurer to pay more.

Ask the provider if he or she will accept your insurance company’s reasonable and customary rate as payment in full. If so, get the agreement in writing, including a no-balance-billing clause.

If your provider won’t accept the reasonable and customary rate as payment in full, start working on your insurer. Ask your insurer to increase the amount they’re calling reasonable and customary for this particular case.

Present a convincing argument by pointing out why your case is more complicated, difficult, or time-consuming to treat than the average case the insurer bases its reasonable and customary charge on.

Single-Case Contract

Another option is to ask your insurer to negotiate a  single-case contract   with your out-of-network provider for this specific service.

A single-case contract is more likely to be approved if the provider is offering specialized services that aren't available from locally-available in-network providers, or if the provider can make a case to the insurer that the services they're providing will end up being less expensive in the long-run for the insurance company.

Sometimes they can agree upon a single-case contract for the amount your insurer usually pays its in-network providers. Sometimes they’ll agree on a single-case contract at the discount rate your healthcare provider accepts from the insurance companies she’s already in-network with.

Or, sometimes they can agree on a single-case contract for a percentage of the provider’s billed charges. Whatever the agreement, make sure it includes a no-balance-billing clause.

Ask for the In-Network Coinsurance Rate

If all of these options fail, you can ask your insurer to cover this out-of-network care using your in-network coinsurance rate. While this won’t prevent balance billing, at least your insurer will be paying a higher percentage of the bill since your coinsurance for in-network care is lower than for out-of-network care.

If you pursue this option, have a convincing argument as to why the insurer should treat this as in-network. For example, there are no local in-network surgeons experienced in your particular surgical procedure, or the complication rates of the in-network surgeons are significantly higher than those of your out-of-network surgeon.

Balance billing refers to the additional bill that an out-of-network medical provider can send to a patient, in addition to the person's normal cost-sharing and the payments (if any) made by their health plan. The No Surprises Act provides broad consumer protections against "surprise" balance billing as of 2022.

A Word From Verywell

Try to prevent balance billing by staying in-network, making sure your insurance company covers  the services you’re getting, and complying with any pre-authorization requirements. But rest assured that the No Surprises Act provides broad protections against surprise balance billing.

This means you won't be subject to balance bills in emergencies (except for ground ambulance charges, which can still generate surprise balance bills) or in situations where you go to an in-network hospital but unknowingly receive care from an out-of-network provider.

Congress.gov. H.R.133—Consolidated Appropriations Act, 2021 . Enacted December 27, 2021.

Kona M. The Commonwealth Fund. State balance billing protections . April 20, 2020.

Data.CMS.gov. Opt Out Affidavits .

Chhabra, Karan; Schulman, Kevin A.; Richman, Barak D. Health Affairs. Are Air Ambulances Truly Flying Out Of Reach? Surprise-Billing Policy And The Airline Deregulation Act . October 17, 2019.

Kaiser Family Foundation. 2022 Employer Health Benefits Survey .

Centers for Medicare and Medicaid Services. Members of New Federal Advisory Committee Named to Help Improve Ground Ambulance Disclosure and Billing Practices for Consumers . December 13, 2022.

Centers for Medicare and Medicaid Services. Advisory Committee on Ground Ambulance and Patient Billing (GAPB) .

Internal Revenue Service; Employee Benefits Security Administration; Health and Human Services Department. Requirements Related to Surprise Billing . August 26, 2022.

National Conference of State Legislatures. States Tackling "Balance Billing" Issue . July 2017.

By Elizabeth Davis, RN Elizabeth Davis, RN, is a health insurance expert and patient liaison. She's held board certifications in emergency nursing and infusion nursing.

The independent source for health policy research, polling, and news.

Medicare 101

Published: May 28, 2024

KFF Authors:

Juliette Cubanski

Meredith Freed

Nancy Ochieng

Alex Cottrill

Jeannie Fuglesten Biniek

Tricia Neuman

Juliette Cubanski , Meredith Freed , Nancy Ochieng , Alex Cottrill , Jeannie Fuglesten Biniek and Tricia Neuman

Table of Contents

What is medicare.

Medicare is the federal health insurance program established in 1965 under Title XVIII of the Social Security Act for people age 65 or older, regardless of income or medical history, and later expanded to cover people under age 65 with long-term disabilities. Today, Medicare provides health insurance coverage to 66 million people , including 58 million people age 65 or older and 8 million people under age 65. Medicare covers a comprehensive set of health care services, including hospitalizations, physician visits, and prescription drugs, along with post-acute care, skilled nursing facility care, home health care, hospice, and preventive services. People can choose to get coverage of Medicare benefits under traditional Medicare or Medicare Advantage private plans.

Medicare spending comprised  12% of the federal budget in 2022 and  21% of national health care spending in 2021 . Funding for Medicare comes primarily from general revenues, payroll tax revenues, and premiums paid by beneficiaries. Over the longer term, the Medicare program faces financial pressures associated with higher health care costs, growing enrollment, and an aging population.

Who Is Covered by Medicare?

Most people become eligible for Medicare when they reach age 65, regardless of income, health status, or medical conditions. Residents of the U.S., including citizens and permanent residents, are eligible for premium-free Medicare Part A if they have worked at least 40 quarters (10 years) in jobs where they or their spouses paid Medicare payroll taxes and are at least 65 years old. People under age 65 who receive Social Security Disability Insurance (SSDI) payments generally become eligible for Medicare after a two-year waiting period. People diagnosed with end-stage renal disease (ESRD) and amyotrophic lateral sclerosis (ALS) become eligible for Medicare with no waiting period.

Medicare covers a diverse population in terms of demographics and health status, and this population is expected to grow larger and more diverse in the future as the U.S. population ages. Currently, most people with Medicare are White, female, and between the ages of 65 and 84 (Figure 1). The share of U.S. adults who are age 65 or older is projected to grow from 17% in 2020 to nearly a quarter of the nation’s total population in 2060, while people ages 80 and older will account for more than one-third of people 65 and older in 2060, up from one-quarter in 2020. As the U.S. population ages, the number of Medicare beneficiaries is projected to grow from around 63 million people in 2020 to just over 93 million people in 2060. The Medicare population will also grow more racially and ethnically diverse. By 2060, people of color will comprise close to half (47%) of the U.S. population ages 65 and older, nearly double the share in 2020 (25%).

While many Medicare beneficiaries enjoy good health, others live with health problems that affect their quality of life, including multiple chronic conditions, limitations in their activities of daily living, and cognitive impairments. In 2021, one-third (33%) of Medicare beneficiaries had four or more chronic conditions, more than a quarter (27%) had a functional impairment, and 17% had a cognitive impairment (Figure 2).

Most Medicare beneficiaries have limited financial resources, including income and assets. In 2023, half of all Medicare beneficiaries had incomes below $36,000 and savings below $103,800 per person. Median incomes for Medicare beneficiaries are lower among women than men, among people of color than White beneficiaries, and among beneficiaries under age 65 with disabilities than older beneficiaries (Figure 3).

What Does Medicare Cover and How Much Do People Pay for Medicare Benefits?

Benefits . Medicare covers a comprehensive set of medical care services, including hospital stays, physician visits, and prescription drugs. Medicare benefits are divided into four parts: 

• Part A, also known as the Hospital Insurance (HI) program, covers inpatient care provided in hospitals and short-term stays in skilled nursing facilities, hospice care, post-acute home health care, and pints of blood received at a hospital or skilled nursing facility. An estimated 63.5 million people were enrolled in Part A in 2021. In 2021, 14% of beneficiaries in traditional Medicare had an inpatient hospital stay, while 8% used home health care services, and 4% had a skilled nursing facility stay (Figure 4). (Comparable utilization data for beneficiaries in Medicare Advantage is not available.)
• Part B, the Supplementary Medical Insurance (SMI) program, covers outpatient services such as physician visits, outpatient hospital care, and preventive services (e.g. mammography and colorectal cancer screening), among other medical benefits. An estimated 58 million people were enrolled in Part B in 2021. A larger share of beneficiaries use Part B services compared to Part A services. For example, in 2021, nearly 9 in 10 (88%) traditional Medicare beneficiaries used physician and other medical services covered under Part B and 66% used outpatient hospital services.
• Part C, more commonly referred to as the Medicare Advantage program, allows beneficiaries to enroll in a private plan, such as a health maintenance organization (HMO) or preferred provider organization (PPO), as an alternative to traditional Medicare. Medicare Advantage plans cover all benefits under Medicare Part A, Part B, and, in most cases, Part D (Medicare’s outpatient prescription drug benefit), and typically offer extra benefits, such as dental services, eyeglasses, and hearing exams. In 2023, 31 million beneficiaries were enrolled in Medicare Advantage , which is 51% of Medicare beneficiaries who are eligible to enroll in Medicare Advantage plans. (See “ What Is Medicare Advantage and How Is It Different From Traditional Medicare? ” for additional information.) 
• Part D is a voluntary outpatient prescription drug benefit delivered through private plans that contract with Medicare, either stand-alone prescription drug plans (PDPs) or Medicare Advantage prescription drug (MA-PD) plans. In 2023, an estimated 50 million beneficiaries are enrolled in Part D . In 2021, nearly all Medicare beneficiaries enrolled in Part D (98%) used prescription drugs. (See “ What Is the Medicare Part D Prescription Drug Benefit? " for additional information.)

Although Medicare covers a comprehensive set of medical benefits, Medicare does not cover long-term care services. Additionally, coverage of vision services, dental care, and hearing aids is not part of the standard benefit, though most Medicare Advantage plans offer some coverage of these services .

Premiums and cost sharing . Medicare has varying premiums, deductibles, and coinsurance amounts that typically change yearly to reflect program cost changes.

• Part A: Most beneficiaries do not pay a monthly premium for Part A services, but are required to pay a deductible for inpatient hospitalizations ($1,632 in 2024). (People who are working contribute payroll taxes to Medicare and qualify for premium-free Part A at age 65 based on having paid 1.45% of their earnings over at least 40 quarters). Beneficiaries are generally subject to cost sharing for Part A benefits, including extended inpatient stays in a hospital ($408 per day for days 61-90 and $816 per day for days 91-150 in 2024) or skilled nursing facility ($204 per day for days 21-100 in 2024). There is no cost sharing for home health visits.
• Part B: Beneficiaries enrolled in Part B, including those in traditional Medicare and Medicare Advantage plans, are generally required to pay a monthly premium ($174.70 in 2024). Beneficiaries with annual incomes greater than $103,000 for a single person or $206,000 for a married couple in 2024 pay a higher, income-related monthly Part B premium, ranging from $244.60 to $594. Approximately 8% of all Medicare beneficiaries are expected to pay income-related Part B premiums in 2024. Part B benefits are subject to an annual deductible ($240 in 2024), and most Part B services are subject to coinsurance of 20 percent.
• Part C: In addition to paying the Part B premium, Medicare Advantage enrollees may be charged a separate monthly premium for their Medicare Advantage plan, although 7 in 10 enrollees were in plans that charged no additional premium in 2023 . Medicare Advantage plans are generally prohibited from charging more than traditional Medicare, but vary in the deductibles and cost-sharing amounts they charge. Medicare Advantage plans may establish provider networks and require higher cost sharing for services received from non-network providers.
• Part D: Part D plans vary in terms of premiums, deductibles, and cost sharing. People in traditional Medicare who are enrolled in a separate stand-alone Part D plan generally pay a monthly Part D premium unless they qualify for full benefits through the Part D Low-Income Subsidy (LIS) program and are enrolled in a premium-free (benchmark) plan. In 2023, the average enrollment-weighted premium for stand-alone Part D plans was  $40 per month , substantially higher than the enrollment-weighted average monthly portion of the premium for drug coverage in MA-PDs ($10 in 2023).

Sources of coverage . Most people with Medicare have some type of coverage that may protect them from unlimited out-of-pocket costs and may offer additional benefits, whether it’s coverage in addition to traditional Medicare or coverage from Medicare Advantage plans, which are required to have an out-of-pocket cap and typically offer  supplemental  benefits (Figure 5). However, based on KFF analysis of data from the 2021 Medicare Current Beneficiary Survey, 3 million people with Medicare have no additional coverage, which places them at risk of facing high out-of-pocket spending or going without needed medical care due to costs.  

• Medicare Advantage plans now cover more than half of all Medicare beneficiaries enrolled in both Part A and Part B, or 31 million people (in 2021, Medicare Advantage enrollment was just under half of beneficiaries, or around 27 million people). (See “What Is Medicare Advantage and How Is It Different From Traditional Medicare? ” for additional information.)
• Employer and union-sponsored plans provided some form of coverage to 15.2 million Medicare beneficiaries – one-quarter (26%) of Medicare beneficiaries overall in 2021. Of the total number of beneficiaries with employer coverage, 9.7 million beneficiaries had this coverage in addition to traditional Medicare (32% of beneficiaries in traditional Medicare), while 5.6 million beneficiaries were enrolled in Medicare Advantage employer group plans. (These estimates exclude 5.2 million  Medicare beneficiaries with Part A only in 2021, primarily because they or their spouse were active workers and had primary coverage from an employer plan.) 
• Medicare supplement insurance, also known as Medigap, covered 2 in 10 (21%) Medicare beneficiaries overall, or 41% of those in traditional Medicare (12.5 million beneficiaries) in 2021.  Medigap policies , sold by private insurance companies, fully or partially cover Medicare Part A and Part B cost-sharing requirements, including deductibles, copayments, and coinsurance. 
• Medicaid, the federal-state program that provides health and long-term services and supports coverage to low-income people, was a source of coverage for 11 million Medicare beneficiaries with low incomes and modest assets in 2021 (19% of all Medicare beneficiaries), including 6.1 million enrolled in Medicare Advantage and 5.0 million in traditional Medicare. (This estimate is somewhat lower than KFF estimates published elsewhere due to different data sources and methods used.) For these beneficiaries, referred to as dual-eligible individuals, Medicaid typically pays the Medicare Part B premium and may also pay a portion of Medicare deductibles and other cost-sharing requirements.  Most  dual-eligible individuals are eligible for full Medicaid benefits, including long-term services and supports.

What Is Medicare Advantage and How Is It Different From Traditional Medicare?

Medicare Advantage, also known as Medicare Part C, allows beneficiaries to receive their Medicare benefits from a private health plan, such as an HMO or PPO. Medicare pays private insurers to provide Medicare-covered benefits (Part A and B, and often Part D) to enrollees. Virtually all Medicare Advantage plans include an out-of-pocket limit for benefits covered under Parts A and B, and most offer additional benefits not covered by traditional Medicare, such as vision, hearing, and dental. The average Medicare beneficiary can choose from  43 Medicare Advantage plans  offered by eight insurance companies in 2024. These plans vary across many dimensions, including premiums, cost-sharing requirements, out-of-pocket limits, extra benefits, provider networks, prior authorization and referral requirements, denial rates, and prescription drug coverage.

More than half of all eligible Medicare beneficiaries (51% ), are currently enrolled in a Medicare Advantage plan, up from 25% in 2010 (Figure 6). The share of eligible Medicare beneficiaries in Medicare Advantage plans varies across states, ranging from 2% in Alaska to 60% in Alabama, Hawaii, and Michigan. Growth in Medicare Advantage enrollment is due to a number of factors. Medicare beneficiaries are attracted to Medicare Advantage due to the multitude of extra benefits, the simplicity of one-stop shopping (in contrast to traditional Medicare where beneficiaries might purchase a Part D plan and a Medigap plan), and the availability of plans with no premiums beyond the Part B premium, driven in part by the current payment system that generates high gross margins in this market (see “ How Does Medicare Pay Private Plans in Medicare Advantage and Medicare Part D? ” for additional information) . Insurers market these plans aggressively, airing thousands of TV ads for Medicare Advantage during the Medicare open enrollment period. In some cases, Medicare beneficiaries have no choice but to be enrolled in a Medicare Advantage plan for their retiree health benefits as some employers are shifting their retirees into these plans ; if they are dissatisfied with this option, they may have to give up retiree benefits altogether, although they would retain Medicare and have the option to choose traditional Medicare (potentially with a Medigap supplement).

There are several differences between Medicare Advantage and traditional Medicare. Medicare Advantage plans can establish provider networks, the size of which can vary considerably for both  physicians  and  hospitals , depending on the plan and the county where it is offered. These provider networks may also change over the course of the year. Medicare Advantage enrollees who seek care from an out-of-network provider may pay higher cost sharing or pay completely out of-pocket for their care. In contrast, traditional Medicare beneficiaries may see any provider that accepts Medicare and is accepting new patients. In 2019, 89% of non-pediatric office-based physicians accepted new Medicare patients , with little change over time. Only 1% of all non-pediatric physicians formally opted out of the Medicare program in 2023.

Medicare Advantage plans also often use tools to manage utilization and costs, such as requiring enrollees to receive  prior authorization  before a service will be covered and requiring enrollees to obtain a referral for specialists or mental health providers. In 2023, virtually all Medicare Advantage enrollees were in plans that  required prior authorization  for some services, most often higher-cost services. Over 35 million prior authorization requests were submitted to Medicare Advantage plans in 2021 (Figure 7). Prior authorization and referrals to specialists are applied less frequently in traditional Medicare, with prior authorization generally applying to a  limited set of services .

Medicare Advantage plans are required to use payments from the federal government that exceed their costs of covering Part A and B services ( known as rebates ) to provide supplemental benefits to enrollees, such as lower cost sharing, extra benefits not covered by traditional Medicare, or rebates toward Part B and/or Part D premiums. Examples of extra benefits include eyeglasses , hearing exams , preventive dental care , and gym memberships (Figure 8). ( See “ How Does Medicare Pay Private Plans in Medicare Advantage and Medicare Part D? ” for a discussion of how Medicare pays Medicare Advantage plans ). [Additionally], Medicare Advantage plans must include a cap on out-of-pocket spending, providing protection from catastrophic medical expenses. Traditional Medicare does not have an out-of-pocket limit, though some have protection from catastrophic costs if they purchase a Medigap policy. (See “What Does Medicare Cover and How Much Do People Pay for Medicare Benefits?” for a brief discussion of Medigap .)

What Is the Medicare Part D Prescription Drug Benefit?

Medicare Part D , Medicare’s voluntary outpatient prescription drug benefit, was established by the Medicare Modernization Act of 2003 (MMA) and launched in 2006. Before the addition of the Part D benefit, Medicare did not cover the cost of outpatient prescription drugs. Under Part D, Medicare helps cover prescription drug costs through private plans that contract with Medicare to offer the Part D benefit to enrollees, which is unlike coverage of Part A and Part B benefits under traditional Medicare, and beneficiaries must enroll in a Part D plan if they want this benefit.

A total of 50.5 million people with Medicare are currently enrolled in plans that provide the Medicare Part D drug benefit, including plans open to everyone with Medicare (stand-alone prescription drug plans, or PDPs, and Medicare Advantage drug plans, or MA-PDs) and plans for specific populations (including retirees of a former employer or union and Medicare Advantage Special Needs Plans, or SNPs). More than 13 million low-income beneficiaries receive extra help with their Part D plan premiums and cost sharing through the Part D Low-Income Subsidy Program (LIS).

For 2024, the average Medicare beneficiary has a choice of 21 stand-alone Part D plans and 36 Medicare Advantage drug plans . These plans vary in terms of premiums, deductibles and cost sharing, the drugs that are covered, any utilization management restrictions that apply, and pharmacy networks. People in traditional Medicare who are enrolled in a separate stand-alone Part D plan generally pay a monthly Part D premium unless they qualify for full benefits through the Part D LIS program and are enrolled in a premium-free (benchmark) plan. In 2023, the average enrollment-weighted premium for stand-alone Part D plans was  $40 per month . In 2023, most stand-alone Part D plans included a deductible, averaging  $411 . Plans generally impose a tiered structure to define cost-sharing requirements and cost-sharing amounts charged for covered drugs, typically charging lower cost-sharing amounts for generic drugs and preferred brands and higher amounts for non-preferred and specialty drugs, and a mix of flat dollar copayments and coinsurance (based on a percentage of a drug’s list price) for covered drugs.

The standard design of the Medicare Part D benefit currently has four distinct phases, where the share of drug costs paid by Part D enrollees, Part D plans, drug manufacturers, and Medicare varies. Based on changes in the Inflation Reduction Act, these shares will change in 2024 and 2025 (Figure 9). Most notably, the benefit includes catastrophic coverage for enrollees with high drug costs, a phase where Part D enrollees not receiving low-income subsidies have been responsible for paying 5% of their total drug costs. In 2024, costs in the catastrophic phase will change: the 5% coinsurance requirement for Part D enrollees will be eliminated and Part D plans will pay 20% of total drug costs in this phase instead of 15%. In 2025, out-of-pocket drug costs for Part D enrollees will be capped at $2,000. These changes are expected to help well over 1 million Part D enrollees with high drug costs each year.

The  Inflation Reduction Act of 2022 , signed into law by President Biden on August 16, 2022, includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government, including several changes related to the Part D benefit. These provisions include (but are not limited to) (Figure 10):

• Requiring the Secretary of the Department of Health and Human Services to negotiate the price of some drugs covered under Medicare, with negotiated prices first available for 10 Part D drugs in 2026 (and first available for Part B drugs in 2028). The law that established the Part D benefit included a provision known as the “ noninterference ” clause, which, to date, has prevented the HHS Secretary from being involved in price negotiations between drug manufacturers and pharmacies and Part D plan sponsors. In addition, the Secretary of HHS does not currently negotiate prices for drugs covered under Medicare Part B (administered by physicians).
• Adding a hard cap on out-of-pocket drug spending under Part D, which will phase in beginning in 2024, with a $2,000 cap on out-of-pocket spending in 2025. As noted above, under the original design of the Part D benefit, enrollees have had catastrophic coverage for high out-of-pocket drug costs, but there has been no limit on the total amount that beneficiaries pay out of pocket each year. 
• Limiting the price of insulin products to no more than $35 per month in all Part D plans and in Part B and making adult vaccines covered under Part D available for free as of 2023. Until these provisions took effect, beneficiary costs for insulin and adult vaccines were subject to varying cost-sharing amounts.
• Expanding eligibility for full benefits under the Part D Low-Income Subsidy program in 2024, eliminating the partial LIS benefit for individuals with incomes between 135% and 150% of poverty. Beneficiaries who receive full LIS benefits pay no Part D premium or deductible and only modest copayments for prescription drugs until they reach the catastrophic threshold, at which point they face no additional cost sharing.
• Requiring drug manufacturers to pay a rebate to the federal government if prices for drugs covered under Part D and Part B increase faster than the inflation rate, with the initial period for measuring Part D drug price increases running from October 2022-September 2023. Previously, Medicare had no authority to limit annual price increases for drugs covered under Part B or Part D. Year-to-year drug price increases exceeding inflation are not uncommon and affect people with both Medicare and private insurance.

How Does Medicare Pay Hospitals, Physicians, and Other Providers in Traditional Medicare?

In 2023, Medicare is estimated to spend $436 billion on benefits covered under Part A and Part B for beneficiaries in traditional Medicare. Medicare pays providers in traditional Medicare using various payment systems depending on the setting of care (Figure 11).

Medicare relies on a number of different approaches when determining payments to providers for Part A and Part B services delivered to beneficiaries in traditional Medicare. These providers include hospitals (for both inpatient and outpatient services), physicians, skilled nursing facilities, home health agencies, and several other types of providers. Of the $436 billion in estimated spending on Medicare benefits covered under Part A and Part B in traditional Medicare in 2023, $144 billion (33%) is for hospital inpatient services and $62 billion (14%) is for hospital outpatient services, $72 billion (17%) is for services covered under the physician fee schedule, and $158 billion (36%) is for all other Part A or Part B services for beneficiaries in traditional Medicare.

Medicare uses prospective payment systems for most providers in traditional Medicare. These systems generally require that Medicare pre-determine a base payment rate for a given unit of service (e.g. a hospital stay, an episode of care, a particular service). Then, based on certain variables, such as the provider’s geographic location and the complexity of the patient receiving the service, Medicare adjusts its payment for each unit of service provided . Medicare updates payment rates annually for most payment systems to account for inflation adjustments. 

The main features of hospital, physician, outpatient, and skilled nursing facility payment systems (altogether accounting for 70% of spending on Part A and Part B benefits in traditional Medicare) are described below:

• Inpatient hospitals (acute care) : Medicare pays hospitals per beneficiary discharge using the Inpatient Prospective Payment System . The rate for each discharge corresponds to one of over 750 different categories of diagnoses – called Medicare Severity Diagnosis Related Groups (MS-DRGs), which reflect the principal diagnosis, secondary diagnoses, procedures performed, and other patient characteristics. DRGs that are likely to incur more intense levels of care and/or longer lengths of stay are assigned higher payments. Medicare’s payments to hospitals also account for a portion of hospitals’ capital and operating expenses.
• Medicare also makes additional payments to hospitals in particular situations. These include additional payments for rural or isolated hospitals that meet certain criteria. Further, Medicare makes additional payments to help offset costs incurred by hospitals that are not otherwise accounted for in the inpatient prospective payment system. These include add-on payments for treating a disproportionate share (DSH) of low-income patients, as well as for covering costs associated with care provided by medical residents, known as indirect medical education (IME). While not part of the Inpatient Prospective Payment System, Medicare also pays hospitals directly for the costs of operating residency programs, known as Graduate Medical Education (GME) payments.
• While not part of the Physician Fee Schedule, Medicare also pays for a limited number of drugs that physicians and other health care providers administer. For drugs administered by physicians, which are covered under Part B, Medicare reimburses providers based on a formula set at 106% of the Average Sales Price (ASP), which is the average price to all non-federal purchasers in the U.S, inclusive of rebates (other than rebates paid under the Medicaid program).
• Hospital outpatient departments : Medicare pays hospitals for ambulatory services provided in outpatient departments, using the Hospital Outpatient Prospective Payment System , based on the classification of individual services into Ambulatory Payment Classifications (APC) with similar characteristics and expected costs. Final determination of Medicare payments for outpatient department services is complex. It incorporates both individual service payments and payments “packaged” with other services, partial hospitalization payments, as well as numerous exceptions, such as payments for new technologies. Medicare payment rates for services provided in hospital outpatient departments are typically higher than for similar services provided in physicians’ offices, and evidence indicates that providers have shifted the billing of services to higher-cost settings . There is bipartisan interest in proposals to expand so-called “site-neutral” payments, meaning that Medicare would align payment rates for the same service across settings.
• Skilled Nursing Facilities (SNFs) : SNFs are freestanding or hospital-based facilities that provide post-acute inpatient nursing or rehabilitation services. Medicare pays SNFs based on the Skilled Nursing Facility Prospective Payment System , and payments to SNFs are determined using a base payment rate, adjusted for geographic differences in labor costs, case mix, and, in some cases, length of stay. Daily rates consider six care components – nursing, physical therapy, occupational therapy, speech–language pathology services, nontherapy ancillary services and supplies, and non–case mix (room and board services).

How Does Medicare Pay Private Plans in Medicare Advantage and Medicare Part D?

Medicare Advantage . Medicare pays insurers offering Medicare Advantage plans a set monthly amount per enrollee. The payment is determined through an annual process in which plans submit “bids” for how much they estimate it will cost to provide benefits covered under Medicare Parts A and B for an average beneficiary. The bid is compared to a county “benchmark”, which is the maximum amount the federal government will pay for a Medicare Advantage enrollee and is a percentage of estimated spending in traditional Medicare in the same county, ranging from 95 percent in high-cost counties to 115 percent in low-cost counties. When the bid is below the benchmark in a given county, plans receive a portion of the difference (“the rebate”), which they must use to lower cost sharing, pay for extra benefits, or reduce enrollees’ Part B or Part D premiums. Payments to plans are risk adjusted, based on the health status and other characteristics of enrollees, including age, sex, and Medicaid enrollment. In addition, Medicare adopted a quality bonus program that increases the benchmark for plans that receive at least four out of five stars under the quality rating system, which increases plan payments.

Generally, Medicare pays more to private Medicare Advantage plans for enrollees than their costs would be in traditional Medicare. The  Medicare Payment Advisory Commission (MedPAC) reports  that while it costs Medicare Advantage insurers 82% of what it costs traditional Medicare to pay for Medicare-covered services, plans receive payments from CMS that are  122%  of spending for similar beneficiaries in traditional Medicare, on average. The higher spending stems from features of the formula used to determine payments to Medicare Advantage plans, including setting benchmarks above traditional Medicare spending in half of counties and higher benchmarks due to the quality bonus program, resulting in bonus payments of nearly $13 billion in 2023 . This amount is more than four times greater than spending on bonus payments in 2015 (Figure 12).

The higher spending in Medicare Advantage is also related to the impact of coding intensity, where Medicare Advantage enrollees look sicker than they would if they were in traditional Medicare, resulting in plans receiving higher risk adjustments to their monthly per person payments, translating to  an estimated $83 billion in excess payments to plans in 2024 .

Higher payments to Medicare Advantage allow plans to offer extra benefits attractive to enrollees. However, these benefits come at a cost to all beneficiaries through higher premiums and contribute to the strain on the Medicare Part A Hospital Insurance Trust Fund . (See “How Much Does Medicare Spend and How Is the Program Financed? ” for additional information . )

Medicare Part D . Medicare pays Part D plans, both stand-alone prescription drug plans and Medicare Advantage plans that offer drug coverage, based on an annual competitive bidding process. Plans submit bids yearly to Medicare for their expected costs of providing the drug benefit plus administrative expenses. Plans receive a direct subsidy per enrollee, which is risk-adjusted based on the health status of their enrollees, plus reinsurance payments from Medicare for the highest-cost enrollees and adjustments for the low-income subsidy (LIS) status of their enrollees. (Unlike Medicare Advantage, there is no quality bonus program that provides higher payments to Part D plans with higher Part D quality ratings.) Risk-sharing arrangements with the federal government (“risk corridors”) limit plans' potential total losses or gains.

Under reinsurance, Medicare currently subsidizes 80% of total drug spending incurred by Part D enrollees with relatively high drug spending above the catastrophic coverage threshold and plans pay 20% in 2024 (up from 15% in prior years). In the aggregate, Medicare’s reinsurance payments to Part D plans accounted for close to half of total Part D spending (48%) in 2022, up from 14% in 2006 (increasing from $6 billion in 2006 to  $57 billion in 2022 ) (Figure 13).

Beginning in 2025, under a provision of the Inflation Reduction Act, Medicare’s share of costs for brand-name drugs above the catastrophic threshold will decrease from 80% to 20% , shifting more of the responsibility for these costs to Part D plans and drug manufacturers. (See “What Is the Medicare Part D Prescription Drug Benefit?” for more detail on plan liability under various phases of the Part D benefit and more information on changes to Part D included in the Inflation Reduction Act .)

For 2024, Medicare’s actuaries estimate that Part D plans will receive direct subsidy payments averaging $383 per enrollee overall, $2,588 for enrollees receiving the LIS, and $1,153 in reinsurance payments for very high-cost enrollees.

What Is Medicare Doing to Promote Alternative Payment Models?

While Medicare has traditionally paid providers on a fee-for-service basis, the program is implementing various alternative payment models designed to tie payments under traditional Medicare to provider performance on quality and spending. Although the overarching goals of these various models are similar— improving the quality and affordability of patient care , advancing health equity, and reducing health care costs—the specific aims vary by model.

A notable example of an alternative payment model within Medicare is the Medicare Shared Savings Program (MSSP) , a permanent accountable care organization (ACO) program in traditional Medicare established by the Affordable Care Act (ACA) that offers financial incentives to providers for meeting or exceeding savings targets and quality goals. ACOs are groups of doctors, hospitals, and other health care providers who voluntarily form partnerships to collaborate and share accountability for the quality and cost of care delivered to their patients. The MSSP currently offers different participation options to ACOs, allowing these organizations to share in savings only or both savings and losses, depending on their level of experience and other factors.

ACOs have a defined patient population for the purpose of calculating annual savings or losses. Beneficiaries in traditional Medicare may choose to align themselves to an ACO ( voluntary alignment ) or may be assigned to a particular ACO based on where they received a plurality of their primary care services. In either case, beneficiaries are free to seek treatment from any provider who accepts Medicare and are not limited to ACO-affiliated providers. This contrasts with enrollment in Medicare Advantage, where beneficiaries are generally limited to seeing providers in their plan’s network or face higher out-of-pocket costs for seeing out-of-network providers.

In 2022, the Medicare Shared Savings Program saved Medicare an estimated $1.8 billion relative to annual spending targets. As of 2023, there are 456 MSSP ACOs nationwide , with over 573,000 participating clinicians and 10.9 million beneficiaries aligned to MSSP ACOs (Figure 14).

The ACA also established the Center for Medicare and Medicaid Innovation (CMMI, also known as the Innovation Center) , an operating center within the Centers for Medicare & Medicaid Services tasked with designing and testing alternative payment models to address concerns about rising health care costs, quality of care, and inefficient spending within the Medicare, Medicaid, and CHIP programs. Since its start in 2010, CMMI has launched more than 70 models across six different categories, including accountable care models, disease-specific models, health plan models, and others (Figure 15). CMMI models are designed to be tested over a limited number of years, but Congress gave CMMI the authority to expand models nationwide permanently if they meet certain quality and savings criteria . As of 2023, six models have shown statistically significant savings, and four have met the requirements for permanent expansion into the wider Medicare program, including the Medicare Diabetes Prevention Program and the Home Health Value-Based Purchasing Model .

According to the Congressional Budget Office (CBO), the activities of CMMI increased federal spending by $5.4 billion from 2011 to 2020, which CBO attributes in part to the mixed success of many models at generating sufficient savings to offset their high upfront costs. (CBO had initially projected that CMMI would reduce federal spending by $2.8 billion in its first decade of operation.) However, a review of select CMMI models provides evidence of improvements in care coordination, team-based care, and other care delivery changes, even in the absence of savings. CBO projects that CMMI’s activities will come closer to the breakeven point regarding federal spending over the next decade (2024-2033).

How Much Does Medicare Spend and How Is the Program Financed?

Spending . Medicare plays a significant role in the health care system, accounting for 21% of total national health spending in 2021, 26% of spending on both hospital care and physician and clinical services, and 32% of spending on retail prescription drug sales (Figure 16).

In 2022, Medicare spending, net of income from premiums and other offsetting receipts, totaled $747 billion and accounted for 12% of the federal budget —a similar share as spending on Medicaid, the ACA, and the Children’s Health Insurance Program combined, and defense spending (Figure 17).

In 2023, Medicare benefit payments are estimated to total $1 trillion , up from $583 billion in 2013 (including spending for Part A, Part B, and Part D benefits in both traditional Medicare and Medicare Advantage). Medicare spending per person has also grown, increasing from $5,800 to $15,700 between 2000 and 2022 – or 4.6% average annual growth over the 22-year period. In recent years, however, growth in Medicare spending per person has been lower in Medicare than in private health insurance .

Spending on Medicare Part A benefits (mainly hospital inpatient services) has decreased as a share of total Medicare spending over time as care has shifted from inpatient to outpatient settings, leading to an increase in spending on Part B benefits (including physician services, outpatient services, and physician-administered drugs). Spending on Part B services now accounts for the largest share of Medicare benefit spending (49% in 2023) (Figure 18). Moving forward, Medicare spending on physician services and other services covered under Part B is expected to grow to more than half of total Medicare spending by 2033, while spending on hospital care and other services covered under Part A is projected to decrease further as a share of the total.

Payments to Medicare Advantage plans for Part A and Part B benefits tripled as a share of total Medicare spending between 2013 and 2023, from $145 billion to $454 billion , partly due to steady enrollment growth in Medicare Advantage plans. Growth in spending on Medicare Advantage also reflects that Medicare pays more to private Medicare Advantage plans for enrollees than their costs in traditional Medicare, on average. (See “ How Does Medicare Pay Private Plans in Medicare Advantage and Medicare Part D? ” for additional information.) These higher payments have contributed to growth in spending on Medicare Advantage and overall Medicare spending. In 2023, just over half of all Medicare program spending for Part A and Part B benefits was for Medicare Advantage plans, up from just under 30% in 2013 . Between 2023 and 2033, Medicare Advantage payments are projected to total nearly $8 trillion, $2 trillion more than spending under traditional Medicare (Figure 19).

Financing . Medicare funding, which totaled $989 billion in 2022, comes primarily from general revenues (43%), payroll tax revenues (36%), and premiums paid by beneficiaries (16%). Other sources include taxes on Social Security benefits, payments from states, and interest.

The different parts of Medicare are funded in varying ways, and revenue sources dedicated to one part of the program cannot be used to pay for another part (Figure 20).

• Part A, which covers inpatient hospital stays, skilled nursing facility (SNF) stays, some home health visits, and hospice care, is financed primarily through a 2.9% tax on earnings paid by employers and employees (1.45% each). Higher-income taxpayers (more than $200,000 per individual and $250,000 per couple) pay a higher payroll tax on earnings (2.35%). Payroll taxes accounted for 89% of Part A revenue in 2022.
• Part B, which covers physician visits, outpatient services, preventive services, and some home health visits, is financed primarily through a combination of general revenues (71% in 2022) and beneficiary premiums (28%) (and 1% from interest and other sources). The standard Part B premium that most Medicare beneficiaries pay is calculated as 25% of annual Part B spending, while beneficiaries with annual incomes over $103,000 per individual or $206,000 per couple pay a higher, income-related Part B premium reflecting a larger share of total Part B spending, ranging from 35% to 85%.
• Part D, which covers outpatient prescription drugs, is financed primarily by general revenues (74%) and beneficiary premiums (14%), with an additional 11% of revenues coming from state payments for beneficiaries enrolled in both Medicare and Medicaid. Higher-income enrollees pay a larger share of the cost of Part D coverage, as they do for Part B.
• The Medicare Advantage program (sometimes referred to as Part C) does not have its own separate revenue sources. Funds for Part A benefits provided by Medicare Advantage plans are drawn from the Medicare HI trust fund. Funds for Part B and Part D benefits are drawn from the Supplementary Medical Insurance (SMI) trust fund. Beneficiaries enrolled in Medicare Advantage plans pay the Part B premium and may pay an additional premium if required by their plan. In 2023, 73% of Medicare Advantage enrollees pay no additional premium.

Measuring the level of reserves in the Medicare Hospital Insurance trust fund, out of which Part A benefits are paid, is a common way of measuring Medicare's financial status. Each year, Medicare’s actuaries provide an estimate of the year when the reserves are projected to be fully depleted. In 2024, the Medicare Trustees projected sufficient funds would be available to pay for Part A benefits in full until 2036, 12 years from now. At that point, in the absence of Congressional action, Medicare will be able to pay 89% of costs covered under Part A using payroll tax revenues. Since 2010, the projected year of trust fund reserve depletion has ranged from 5 years out (in 2021) to 19 years out (in 2010) (Figure 21).

The level of reserves in the Part A Trust Fund is affected by growth in the economy, which affects revenue from payroll tax contributions, health care spending and utilization trends, and demographic trends: an increasing number of beneficiaries as the population ages, especially between 2010 and 2030 when the baby boom generation reaches Medicare eligibility age, and a declining ratio of workers per beneficiary making payroll tax contributions. 

Part B and Part D do not have financing challenges similar to Part A, because both are funded by beneficiary premiums and general revenues that are set annually to match expected outlays. However, future increases in spending under Part B and Part D will require increases in general revenue funding and higher premiums paid by beneficiaries.

Future Outlook

Looking to the future, Medicare faces a number of challenges from the perspective of beneficiaries, health care providers and private plans, and the federal budget. These include:

• How best to address the fiscal challenges arising from an aging population and increasing health care costs through spending reductions and/or revenue increases.
• Whether and how to improve coverage for Medicare beneficiaries, including an out-of-pocket limit in traditional Medicare, enhanced financial support for lower-income beneficiaries, and additional benefits, such as dental and vision.
• How to control spending while ensuring fair and adequate payments to hospitals, physicians and other providers, and Medicare Advantage plans, including whether and how to reduce overpayments to Medicare Advantage plans.
• How to address the implications for traditional Medicare of rapid growth in Medicare Advantage enrollment.

Consideration of possible changes to Medicare will involve careful deliberation about the potential implications for federal spending and taxpayers, the solvency of the Medicare Hospital Insurance trust fund, total health care spending, the affordability of health care for Medicare’s growing number of beneficiaries, many of whom have limited incomes, and access to high-quality medical care.

• What to Know about Medicare Spending and Financing
• An Overview of the Medicare Part D Prescription Drug Benefit
• Medicare Advantage in 2023: Enrollment Update and Key Trends
• Key Facts About Medicare Part D Enrollment and Costs in 2023
• What to Know about the Medicare Open Enrollment Period and Medicare Coverage Options
• Explaining the Prescription Drug Provisions in the Inflation Reduction Act
• A Snapshot of Sources of Coverage Among Medicare Beneficiaries
• Spending on Medicare Advantage Quality Bonus Payments Will Reach at Least $12.8 Billion in 2023
• FAQs about the Inflation Reduction Act’s Medicare Drug Price Negotiation Program
• How Many Physicians Have Opted Out of the Medicare Program?
• The Facts About Medicare Spending
• Medicare Part D in 2024: A First Look at Prescription Drug Plan Availability, Premiums, and Cost Sharing
• Medicare Advantage 2024 Spotlight: First Look
• Income and Assets of Medicare Beneficiaries in 2023

Cubanski, Juliette, Freed, Meredith, Ochieng, Nancy, Cottrill, Alex, Fuglesten Biniek, Jeannie, & Neuman, Tricia, Medicare 101. In Altman, Drew (Editor), Health Policy 101, (KFF, May 28, 2024) https://www.kff.org/health-policy-101-medicare/ (date accessed).

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• v.1(3); Winter 1980

Medicare Assignment Rates of Physicians: Their Responses to Changes in Reimbursement Policy

A physician's Medicare assignment rate is one measure of his or her willingness to participate in the Medicare program. The assignment rate reflects the proportion of services provided to Medicare beneficiaries for which the physician accepts the Medicare reasonable fee as payment in full. Generally, Medicare reasonable fees are lower than the payment which a physician receives from providing the same service to a private patient or to a Medicare patient who is not treated on assignment. Because Medicare eligibles not treated on an assigned basis are financially liable for the difference between the physician's charge and the Medicare reasonable fee, the assignment rate is an indication of the out-of-pocket costs borne by Medicare eligibles.

One factor which may affect the willingness of physicians to accept patients on assignment is the difference between the reimbursement which he or she may receive in the private market and the fee received from treating Medicare eligibles on assignment. Throughout this paper we assume that the physician's private price or billed charge is equivalent to the level of reimbursement received from treating privately insured patients and Medicare non-assigned patients. Since the level of reimbursement is generally no greater than the billed charge and may be less, this assumption may overstate the actual reimbursement received by the physician. In all instances, reimbursement refers to the aggregate amount received by the physician from all sources for a given service. The lower a physician's Medicare reasonable fee relative to the private market fee the less willing he/she may be to participate in Medicare assignment. This paper examines the effect of changes in Medicare reimbursement on the assignment rates of physicians. It also predicts Medicare assignment rates under a policy option which would increase Medicare reasonable fees to the level of prevailing fees.

Medicare Reimbursement

Medicare legislation originally provided for reimbursement of physicians on the basis of their reasonable, customary, and prevailing charges. Physicians were paid by Medicare on the basis of their reasonable charge, which is the lowest of: (1) the actual charge for the service provided, (2) the physician's median (customary) charge for services rendered during the calendar year immediately preceding the fee screen year, or (3) the prevailing charge, set at the 75th percentile of all customary charges made for similar services in the same geographic area. 1

Although the CPR methodology for determining the reasonable fee put some constraints on the amount which the Medicare program will pay physicians for their services to the elderly, it does not necessarily constrain the out-of-pocket costs of the elderly for medical care. Physicians participating in the Medicare program are permitted two billing options, assignment and non-assignment, which they may exercise on a claim-by-claim basis. When a claim is assigned, physicians submit their bills directly to the Medicare carrier for their area. Medicare pays the physician 80 percent of the reasonable charge for the service, less any unpaid deductible. The physician bills the patient for the 20 percent coinsurance and any unpaid deductible.

The second option is to bill on a non-assigned basis. Physicians choosing non-assignment must bill the patient directly for the full amount charged. The patient in turn pays the physician directly for the services rendered and secures reimbursement from Medicare for 80 percent of the reasonable charge, less any unpaid deductible. Patients who are treated on a non-assigned basis are liable for the entire difference between the billed and reasonable charges, as well as the coinsurance and the deductible. From the physician's perspective, treating non-assigned Medicare patients is equivalent to seeing private patients.

Physicians treating elderly patients who are also eligible for Medicaid do not have the same billing options. Joint Medicare/Medicaid claims are in practicality only taken on an assigned basis. The reimbursement levels are equivalent to the reasonable charge as determined by the Medicare carrier, and Medicaid picks up the coinsurance and the deductible on behalf of the patient. The only option the physician has in this case is to not treat the patient at all.

Because patients whose physicians do not accept assignment generally face larger out-of-pocket expenditures than those treated on assignment, the assignment rates of physicians provide one indication of the share of the cost borne by the beneficiaries. Increases in the assignment rates of physicians are desirable because (ceterus paribus) they may reduce costs of medical care for the elderly. By examining how the assignment rate changes when billed charges and reasonable fees change, this paper will provide evidence on the extent to which changes in Medicare reimbursement can be used to alter the assignment rate.

Analytic Framework

The conceptual framework to be used in analyzing the Medicare assignment decision has been developed by Sloan, Mitchell, and Cromwell (1978) and Sloan and Steinwald (1978) and extended by Hadley and Lee (1978) . The analysis assumes that the physician firm is a monopolistic competitor. The demand curve facing a physician is therefore downward sloping, and a physician must set price and output accordingly. According to the model the physician treats five types of patients; private, Medicare non-assigned, Medicare assigned, joint Medicare/Medicaid (mandatory assigned patients), and Medicaid non-aged. In treating the five patient groups the physician will receive three different fees. For the private patients and Medicare non-assigned patients treated, the physician is reimbursed an amount equal to the billed charge. For treating Medicare assigned patients and joint Medicare/Medicaid eligibles, the physician is reimbursed an amount equal to the Medicare reasonable fee. For services rendered to the non-aged Medicaid eligibles, the physician is reimbursed at the Medicaid fee level. In general, a physician's billed charge is higher than his/her Medicare reasonable fee, which in turn is higher than the Medicaid fee.

Given these three different prices facing a physician, the model predicts that physicians will satisfy the demand for care for each higher fee market before treating patients in the lower fee market. The number of markets in which a physician participates will depend on the intersection of his marginal cost curve and the fee schedules. Individuals with higher marginal cost schedules might participate in only the private market. Those with low marginal cost schedules may participate in the private, Medicare, and Medicaid markets. 2

A graphic depiction of the problem is presented in Figure 1 , in which the demand curves have been shifted to account for the coinsurance and deductibles. Due to the three separate markets, the physician's marginal revenue curve is kinked and discontinuous. The marginal revenue curve pertaining to the private market is labelled MR. When the marginal revenue curve intersects the Medicare reasonable fee at B, it becomes horizontal. This is because a physician will be able to satisfy all demand for Medicare assigned output at the exogenously determined reasonable fee R. Once a physician exhausts assigned demand at C, he/she will then drop down to the Medicaid market and supply output at the lower exogenous fee F. The marginal revenue curve follows ABCDF with a gap existing between C (the point at which Medicare assigned output is exhausted) and D.

Given marginal cost curve MC 1 , to maximize profits the physician firm will produce total output of OQ 1C . Of this amount, OQ 1A will be provided to Medicare non-assigned patients and Q 1A Q 1B to private patients. For these two groups of patients the physician charges (and is reimbursed) price P 1 . 3 At the Medicare reasonable fee R, an additional Y ̅ 1 non-Medicaid eligible elderly are willing to purchase services. This is the available voluntary assignment pool. In addition, Z ̅ 1 elderly Medicaid eligibles will also desire physician services at the zero price. It is useful to distinguish between the Medicaid eligible and non-eligible elderly population, since demand for care by joint Medicare/Medicaid beneficiaries is not responsive to changes in the reasonable fee (they face no out-of-pocket price), while demand by the voluntary assignment pool is a negative function of R. This has important implications for the responsiveness of total assigned demand to a change in the reasonable fee. All else constant, the larger the proportion of joint Medicare/Medicaid beneficiaries demanding assigned services, the less elastic the response of assigned demand to a change in reasonable fees. The physician will produce Q 1B Q 1C units of output for the Medicare assignment market. He or she will not, however, exhaust demand for Medicare assigned services, and therefore would not participate in Medicaid. 5

Physicians with marginal cost schedule MC 2 will exhaust Medicare assigned demand and participate in the Medicaid market. Assuming, as in Figure 1 , that all physicians face the same demand curve (differing only in their marginal cost schedules), those who participate in Medicaid should charge lower private prices and provide a greater amount of non-assigned output than the non-participants. A physician with marginal cost curve MC 2 will provide OQ 2A services to the Medicare non-assignment market. Q 2A Q 2B services will be provided to the private market. For these two groups of patients, the physician will charge price P 2 . This physician will provide Q 2B Q 2C services to the Medicare assignment market, exhausting demand for services among this group of patients. The physician will then drop down to the Medicaid market, providing Q 2C Q 2D output to this patient group and receiving the Medicaid fee F for these services.

A physician's net income can be written as follows:

y = (P)(PVT) + (P)(X) + (R)(Y) + (R)(Z) + (F)(MAID) − C(Q) where

• P = private price
• R = Medicare reasonable fee
• F = Medicaid reasonable fee
• PVT = quantity of services provided to the private market
• X = quantity of services provided to Medicare non-assignment
• Y = quantity of services provided to Medicare on voluntary assignment
• Z = quantity of services provided to joint Medicare/Medicaid patients (mandatory assignment)
• MAID = quantity of services provided to Medicaid non-elderly
• Q = PVT + X + Y + Z+MAID
• C(Q) = cost function

In this study we used two definitions of the assignment rate. The total assignment rate of physicians is defined as

and represents the percent of total Medicare RVS units which are taken on assignment. The voluntary assignment rate is defined as

and excludes mandatory assigned output from both the numerator and the denominator. Because it excludes services which must either be taken on assignment or not taken at all, the voluntary assignment rate provides an indication of a physician's willingness to assign claims over which he has the discretion to do so. Because both X and Y enter into the determination of the assignment rate, the response will depend on what happens to the quantity of both assigned and non-assigned output as the price variables change.

Let us first examine the impact of an increase in R. 6 Because of coinsurance, an increase in reasonable fees will reduce the quantity of services demanded by patients currently on assignment. However, an increase in the reasonable charge will also decrease the out-of-pocket price of non-assigned patients by 80 percent of the change in the reasonable fee. This is equivalent to an outward shift in the demand curve facing the physician at prices above the reasonable fee. At the new, higher, reasonable fee and the old price, the quantity of non-assigned services demanded will increase (assuming all else is equal). The resulting impact on the assignment rate is not known and depends on the shape of the demand and supply curve of the physician. Because physicians who don't participate in Medicaid are able to increase supply to the assignment market, an increase in reasonable fees may increase the assignment rates of these physicians (as long as the supply elasticity is greater than demand elasticity). The assignment rates of physicians who do participate in Medicare are expected to decrease, since those physicians will redistribute output from the assigned to the non-assigned market.

The long run 7 impact of a change in reasonable fees on the assignment rate may differ from the short run impact. Among physicians who don't participate in Medicaid, an increase in reasonable fees will have two effects. First, it will directly increase the price at which the Medicare reasonable fee intersects the marginal revenue curve (raising it from B to E). Secondly, by reducing the out-of-pocket price faced by non-assigned patients, it will also shift the demand and marginal revenue curves facing the physician. 8 Both of these effects will lead to an increase in private price. Medicaid participating physicians will only respond to the second effect since an increase in the Medicare reasonable will not directly affect the point at which the private marginal revenue curve intersects the Medicaid reasonable. Thus, we would expect a larger private price response to a change in the Medicare reasonable to occur among physicians not participating in Medicaid. Because physicians will eventually increase private price in response to an increase in Medicare reasonable fees, the long run effects of altering reasonable fees will be to move physicians to a higher price and a lower level of non-assigned output on the new demand curve. In the long run, non-assigned output may either increase or decrease in relation to the level before the change in the reasonable. The long run effect on the assignment rate will depend on the relative elasticities of demand and supply. The relationship between the Medicare reasonable fee and the assignment rate remains an empirical question.

Let us now investigate the impact of a change in P. First of all, let us assume that an increase in price is motivated by an outward shift in demand by the non-elderly. If the demand curve of the elderly remains stationary, an increase in price will decrease non-assigned output and will lead to a substitution of private output for output in the fixed fee markets. Physicians not participating in Medicaid would reduce their Medicare assigned output. Since both assigned and non-assigned output will decrease, the impact on the assignment rate is not known and depends on the elasticity of demand. Among physicians who participate in Medicaid, an increase in private price will shift the distribution of Medicare output toward more assigned output.

Description of Data Base and Empirical Specifications

The data file used in this analysis consists of all claims paid by Medicare and Medicaid to a cohort of northern California physicians during the second quarter of each of the years 1972 through 1975. All of the physicians in the sample are solo practicioners who were eligible for reimbursement by California Blue Shield (the Medicare carrier) and who did not move during the study period. Information available from Blue Shield consists of the number and type of services provided to Medicare non-assigned, Medicare assigned, joint Medicare/Medicaid, and Medicaid patients. Information on the physician's date of graduation from medical school and country of medical education was also available. Additional information on the characteristics of the county in which the physician practices was available from public sources.

Since the major concern of this paper is to estimate the impact of private price and Medicare reasonable fees on the overall assignment rate, it was necessary to devise some method of aggregating physician prices and output. To deal with this problem we have defined Medicare output as the number of California Relative Value Scale (CRVS) units provided by the physician. 9 Previous research has shown that for surgical procedures, the number of CRVS units is highly correlated with the amount of surgeon time required to perform the procedure ( Hughes, 1972 ). In addition, the relative value scale has been in effect since 1969 and is well known among California physicians. Given the decision to use this definition of output, we then defined our price and reasonable variables as billed charge and reasonable fees per RVS unit.

The principal question of interest is the extent to which the assignment rate is sensitive to changes in the Medicare reasonable fee and in the price which the physician receives in the private market. Underlying this relationship between prices and output levels is a set of structural equations expressing the determinants of the supply of and demand for medical care. Demand for physician visits can be written as

• D = f(NP, NPALT, Y, H, T)
• NP = net price of the service (including time price)
• NPALT = net price of alternatives
• Y = family income
• H = health status
• T = vector of taste variables.

The supply of services by a physician is:

• S = f(P, C L , C c , W)
• P = price per unit of service
• C L = cost of labor inputs
• C c = cost of capital inputs
• W = physician's implicit wage

In this type of structural model, both output and price are endogenous (determined within the model) variables.

The reasonable charge may be viewed as dependent upon previous values of the endogenous variables and therefore may be treated as exogenous (determined outside the model). Because of the simultaneous determination of price and output, the instrumental variable approach is an appropriate regression technique to use. The predicted price variable is then substituted for the observed billed charge in the second stage equation which estimates the determinants of the assignment rate.

Variable Definitions

Dependent variable.

The dependent variable in the analysis is the physician's Medicare assignment rate. As discussed previously, we will use two different definitions of the assigment rate, the voluntary assignment rate (which excludes joint Medicare/Medicaid claims) and the total assignment rate. One problem with using the voluntary assignment rate however, is that the available data do not permit one to distinguish voluntary assigned claims in 1974. 10 Therefore, in estimating the voluntary assignment rate regressions we will only use data for 1972, 1973 and 1975. The total assignment rate regressions will use data from all four years.

Because we are using a regression framework for our empirical analysis, the estimated coefficient represents the change in the dependent variable with respect to a change in the independent variable, holding the value of all other independent variables constant. The coefficient on the reasonable fee therefore represents the short run effect on the assignment rate from an increase in R (i.e., P is held constant). As outlined in the previous section, an increase in the reasonable fee will have an ambiguous effect on the assignment rates of non-Medicaid participating physicians. The increase in reasonable fees is expected to reduce the assignment rates of physicians who participate in Medicaid. An increase in private price will also have an ambiguous effect on the assignment rates of non-Medicaid participating physicians, while increasing the assignment rates of physicians participating in Medicaid.

Cost Variables

The location of the physician's marginal cost curve will determine the markets in which he or she chooses to participate and the amount of output supplied to each market. Wages and salaries paid to office employees comprise one input to the firm's cost curve. Wage data are available by county and represent the cost of labor to the physician firm. The wage variable is defined by county and is a measure of the average salary of physicians' office employees. Firms with higher costs are less likely to participate in Medicare assignment and should have lower assignment rates.

Perhaps the most important factor which affects the marginal cost curve is the physician's implicit wage rate. Two variables are available as proxies for this wage: a dummy variable (FMG), which equals one if the physician graduated from a medical school outside of the United States, and the number of years since graduation from medical school (EXP). FMG status is expected to be negatively associated with the physician's implicit wage rate and therefore should increase his willingness to accept Medicare patients on assignment, consequently increasing the assignment rate. The experience variable is expected to be positively associated with the implicit wage and therefore would reduce both willingness to accept assignment and the assignment rate.

The relationship between the physician's specialty and the assignment rate is somewhat ambiguous. From 1972 through 1975, California Blue Shield did not reimburse physicians on a specialty specific basis. To the extent that internists and general surgeons have higher implicit wages one would expect that they would be less willing to take patients on assignment. However, general surgeons tend to provide more complex and expensive services than either general practitioners or internists. Previous research has shown that assignment rates are positively correlated with the price of the service being rendered ( Health Insurance Benefits Council, 1973 ). If the probability of reimbursement under non-assignment varies with the size of the bill, it may be reasonable to take the higher priced procedures on assignment to avoid the risk of non-payment. This should increase general surgeons' incentives to accept assignment.

Other Variables

The number of physicians per aged population (DOCSA) is an indication of the availability of medical care in an area. As such, it may reflect the length of the mandatory assigned portion of the demand curve. The greater the number of physicians per population, the smaller the mandatory assigned demand facing each physician, and the lower will be the total assignment rate.

Two additional variables have been included in the regression equations to capture any additional variations not captured by the revenue or cost variables. The population (POP) in the county where the physician practices may be positively associated with the cost of providing services, due to rural-urban differences in costs which are not captured by other cost variables. In addition, year dummies 11 are included in the analysis to capture any year to year effects not captured by the price variables. These might include the speed with which claims are processed between Medicare and Medicaid, shifts in eligibility requirements, or the effects of price controls.

Equation Specification and Estimation Method

To estimate the impact of private prices and Medicare reasonable fees on physicians' Medicare assignment rates, we posited a regression framework of the following form:

where Y represents the Medicare assignment rate, A is a constant term, P and R refer to the billed price and Medicare reasonable, the χ i are the other independent variables, u is the error term, and α, γ , and the β i are the estimated regression coefficients. 12 The coefficients on the price and reasonable fee variables are interpreted as elasticities.

Since private price and output are simultaneously determined, ordinary least squares is not an appropriate statistical tool. An instrumental variable approach was therefore used to obtain estimates of a predicted billed price. 13 This predicted price was then input into the second stage regression which estimated the determinants of the assignment rate.

Empirical Results

Table 1 presents the means and standard deviations for the two samples of data. The predicted price per RVS unit is about 15 to 20 percent higher than the Medicare reasonable fee. Among physicians not participating in Medicaid, the average price (billed charge) per RVS unit was $.72, compared to a reasonable fee of $.61 per RVS unit. The average prices and reasonable fees for physicians participating in Medicaid were $.68 and $.59 respectively.

Voluntary Assignment Rates Segmented by Medicaid Participation/Non-Participation

The dependent variable for the first set of regressions is the voluntary assignment rate. The results are presented in Table 2 . The first column presents the coefficients and t-statistics for those physicians who were not Medicaid participants. The second column reports the results for Medicaid participants.

As predicted by the model, the voluntary assignment rate of physicians not participating in Medicaid is sensitive to changes in private prices and Medicare reasonable fees. An increase in reasonable fees of one percent results in a five percent increase in the voluntary assignment rate for Medicaid non-participants. This implies that the increased quantity of assigned output provided more than offsets the increase in non-assigned output, resulting in an increase in the assignment rate. (An increase in R reduces the out-of-pocket price for Medicare patients not on assignment, thereby increasing the quantity demanded. It also increases physician willingness to supply output to the assignment market. The net effect of these two phenomena is an increase in the assignment rate.)

The positive coefficient on the Medicare reasonable fee for Medicaid participants is contrary to the model. Without knowing something about the response of total assigned and non-assigned output, it is not possible to determine whether the increase in the assignment rates is due to an ability to increase assigned output or to a shift in output from non-assignment to assignment. If there are significant problems in collecting payment from non-assigned patients, an increase in the reasonable fee would raise the expected payment for assigned claims relative to non-assigned claims and may cause physicians to shift to more assigned output. Alternatively, if physicians are able to induce demand, or if they have not exhausted assigned demand, 14 an increase in reasonable fees could result in an increase in their assignment rate.

The physician's private price is negatively related to his/her assignment rate. A one percent increase in private price is associated with a six percent decrease in the assignment rate of physicians not participating in Medicaid and a 2.8 percent decrease in the rate of Medicaid participants. The reduction in assigned output more than offsets any decrease in non-assigned output, resulting in a decrease in the assignment rate.

In all of the analysis presented it must be remembered that the coefficient on the reasonable fee represents the effect of the reasonable fee on the assignment rate, assuming that price remains constant. As our theoretical model indicated, increases in reasonable fees will motivate increases in the private price of services. Since the coefficient on private price is negative, the long run effect of raising reasonable fees will be partially offset by the price increase. The extent of the offset will depend on the relative size of the private price and reasonable charge coefficients and the elasticity of price with respect to changes in reasonable fees. In the simulations, we will predict assignment rate responses to policy changes, using differing assumptions of the elasticity of price to reasonable fees.

Our results also show that surgeons have somewhat higher assignment rates than general practitioners. In part, this could result from differences in the type of procedures performed by surgeons. Because surgeons are most likely to provide services with high RVS values and high prices, they risk greater loss of revenue if the patient defaults than do physicians in other specialties. To minimize expected losses they may choose higher assignment rates.

Because we did not have accurate estimates of actual practice costs, we used a number of variables as proxies for the input price vector. The wage (WAGE) of personnel in physicians' offices proved not to be a significant determinant of the assignment rate. Similarly, graduation from a foreign medical school (FMG) did not affect the voluntary assignment rate. The physician's level of experience however, was significantly related to the assignment rate among those participating in Medicaid. We hypothesized that the estimated coefficient would have a negative sign, reflecting the higher implicit wage of experienced physicians. Our results confirm this hypothesis. The population of the county in which the physician practices (POP) was found to have a negative sign in the regression for Medicaid participants and was not significant among the non-participants. Inability to accurately capture the practice costs by these variables may be partly responsible for the lack of significance on some of the coefficients. In addition, the theoretical implication that physicians who participate in either of the fixed fee markets will set marginal cost equal to the fixed fee suggests that Medicaid participation status may account for a large part of the difference in marginal cost among physicians. The coefficients on the other proxy variables may therefore not be significant. 18

The number of physicians per aged population has a negative impact on the voluntary assignment rate. There are two possible reasons for this. A charity motive could cause physicians living in underserved areas to treat more patients than profit maximization would dictate. Since these patients are less likely to be able to afford the price of services than the more affluent patients, a higher assignment rate would result. Also, areas with relatively high physician to population ratios are more affluent, and the lower assignment rate may represent a demand phenomenon.

Total Assignment Rates Segmenting by Medicaid Participation/Non-Participation

The second series of regressions which we estimated used the total Medicare assignment rate as the dependent variable. Table 3 presents the results of this analysis segmenting the sample by Medicaid participation.

The assignment rate of non-Medicaid participants is significantly affected by billed prices and Medicare reasonable fees. A 1 percent increase in billed charge results in a 2 percent decrease in the assignment rate. The elasticity of the assignment rate with respect to the reasonable fee is 1.4. In general, the elasticity for the total assignment rate is considerably smaller than it was for the voluntary assignment rate. In part, this results from the fact that total assignment rates are greater than the voluntary assignment rates, so an absolute change is being applied to a much larger base. Among Medicaid participants, increases in reasonable fees are not related to increases in the assignment rate. Increases in billed charges have a significant negative impact on assignment rates, but the size of the coefficient is much smaller than it is for non-participants.

One notable difference between the results of the voluntary and total assignment rate regressions is in the coefficients on the specialty dummies. Surgeons and internists have significantly lower total assignment rates than general practitioners. This would result if specialists were less willing to treat joint Medicare/Medicaid patients than general practitioners. Available evidence for 1975 indicates that mandatory assignment rates are also substantially lower among internists and surgeons than among general practitioners. The proportion of assigned cases that are voluntarily assigned is higher among specialists than it is among general practitioners. Part of this may be the result of locational differences between the specialties, with general practitioners locating in lower income areas.

Generally, the remaining coefficients were similar in terms of significance to those found in the voluntary assignment regressions. Experience is negatively associated with the assignment rate. The salaries of employees in physicians' offices are not significantly related to the assignment rate, and FMG status is significant only among Medicaid participants. The number of physicians per aged population is negatively associated with the assignment rate, as it was in the voluntary assignment rate regressions.

Assignment Rate Simulations

The empirical results of the previous section provided estimates of the responsiveness of Medicare assignment rates to changes in reasonable fees and billed charges. The results indicate that the assignment rate is sensitive to changes in the revenue variables. This section of the paper will simulate the effect on the Medicare assignment rate of increasing reasonable charges for all physicians to the level of Medicare prevailing charges. This policy alternative will be evaluated in terms of its impact on both the voluntary and total assignment rate for Medicare services. We will base our simulations on the estimated coefficients of the assignment rate equations.

Because this policy strategy entails increasing the Medicare reasonable fee, it will be necessary to make some assumptions regarding the relationship between private prices and Medicare reasonable charges. The results of our predicted price equations and our model support the hypothesis of a positive relation between price and reasonable fees. However, our predicted price equations cannot indicate the magnitude of this relationship. It is reasonable to expect that the longer the time period, the greater the price response. In addition, our theoretical model predicted that the price response to a change in reasonable fees will be greater among physicians who do not participate in Medicaid than among those who do because of the effect which a change in reasonable fees has on the intersection of the physician's marginal revenue curve with the fee received in the fixed fee market. We have therefore simulated the assignment response under four alternative assumptions:

• An increase in reasonable fees will have no effect on private prices.
• A 1 percent increase in the reasonable fee will result in a .25 percent increase in billed charges.
• A 1 percent increase in the reasonable fee will result in a .50 percent increase in private price.
• A 1 percent increase in the reasonable fee will result in a .75 percent increase in private price.

Calculating the resulting assignment rate under each of the four assumptions will provide an indication of the sensitivity of results to the relationship between private prices and Medicare reasonable fees.

We will perform separate simulations for each of the three specialties in our sample. Specialty-specific simulations are of interest, since Medicare assignment rates and output levels differ dramatically by specialty. Table 4 indicates the percentage increase in reasonable fees which would occur if reasonable charges were increased to the level of prevailing ones.

In calculating the changes in assignment rate which would occur in such a situation, we estimated the equivalent percent increase in reasonable fees for each physician. Using our estimated regression coefficients, we simulated the new assignment rate for each physician. The aggregate assignment rate is a weighted average of the assignment rates of each physician, where the weight is the physician's total Medicare output for 1975.

Table 5 presents the simulated assignment rates of general practitioners, general surgeons, and internists for each assumption regarding the relationship of prices and reasonable fees. The simulations indicate that the assignment rates will increase the most if we assume that prices will not respond to an increase in the reasonable charge. Assuming the elasticity of price with respect to reasonable fee of .5 among all physicians, we find that increasing reasonable fees to the level of prevailing ones will increase the voluntary assignment rates of general practitioners not participating in Medicaid from 18.1 to 24.9 percent. It will increase their total assignment rate from 33.4 to 35.4 percent. The voluntary assignment rates of general practitioners participating in Medicaid will increase from 42.4 to 44.6 percent. Due to the larger coefficient on price, and assuming a .5 elasticity, an increase in reasonable fees will actually decrease the total assignment rates of general practitioners who do participate in Medicaid.

Again assuming a .5 elascticity of price with respect to reasonable fees, we find that increasing them to the level of prevailing fees will increase the voluntary assignment rates of general surgeons not participating in Medicaid from 24.7 to 34.2 percent. Their total assignment rates would increase 6 percent (from 35.2 to 37.3 percent). General surgeons participating in Medicaid would increase their assignment rates from 42.9 to 44.6 percent. Aggregating both the Medicaid participants and non-participants, we find that the voluntary assignment rate would increase slightly. The total assignment rate would decrease slightly under such a policy. Since the estimated coefficients in the regression model were the same for each specialty, the differences in the simulated assignment rates reflect the different specialty-specific assignment rates prior to the policy change as well as specialty differences in the percent increase in reasonable fees from each policy alternative.

Among internists, the voluntary assignment rates of physicians not participating in Medicaid will increase from 15.7 to 20.5 percent (assuming an elasticity of .5) if reasonable fees were raised to the level of prevailing ones. The total assignment rate would increase much more moderately, from 25.8 to 27.2 percent. As with the other specialties, the majority of internists participate in Medicaid. Thus, the aggregate assignment rate response will be much smaller than the response for physicians who don't participate.

For all of the simulations, we are assuming that the price response to a change in reasonable fees is the same for both Medicaid participants and non-participants. As our theoretical model pointed out however, those not participating in Medicaid are expected to exhibit a larger price response to a change in reasonable fees than are participants. In reality therefore, we might exhibit a price elasticity response of .75 for non-Medicaid participants and one of .25 for the Medicaid participants. The .50 elasticity may thus represent an understatement of the assignment rate response of Medicaid participants and an overstatement of the response of non-participants.

The effect of this differential response by physicians is unclear. Medicaid-participating physicians account for a larger share of the Medicare market, not only in terms of numbers but also in terms of Medicare output per physician. Their assignment rates are less responsive to a change in reasonable fees than are the assignment rates of physicians not participating in Medicaid. Thus one would initially expect a relatively small increase in assignment rates from all physicians, when a large proportion of them participate in Medicaid and when they account for a large proportion of total output. However, private price response to a given change in reasonable fees should be lower among physicians participating in Medicaid than among those not participating. The effect on reducing non-assigned demand (and hence part of the denominator of the assignment rate) from a given increase in reasonable fees should therefore be greater among physicians who do not participate in Medicaid than among those who do. (Non-assigned demand will decline more as the elasticity of price with respect to a change in reasonable fees increases). Given these results, it is not possible to determine which group of physicians will experience a larger increase in price from a given change in reasonable fees.

Summary and Conclusions

This paper has investigated the effect of private prices and Medicare reasonable fees on both the voluntary and total Medicare assignment rates of physicians. Because Medicare assignment rates are an important indicator of the out-of-pocket cost burden for medical services on the elderly, increases in assignment rates are desirable, since they reduce this burden.

Using a simple theoretical model which viewed the physician firm as a monopolistic competitor, we were able to predict the assignment rate responses of certain groups of physicians to changes in private prices and Medicare reasonable fees. The theoretical model was useful in pointing out that physicians participating in both Medicaid and Medicare should exhibit different responses to changes in the price variables than physicians who participate only in the Medicare market. In brief, the assignment rates of Medicaid participating physicians were not expected to respond positively to increases in reasonable fees.

A second important implication of the model was that increases in reasonable fees would induce physicians to increase the private price of their services. The magnitude of this response depends on the elasticity of the demand curve facing the physician. Because of the relationship between price and reasonable charges, any effort to close the gap between the two revenue variables by raising reasonable charges will be met by further increases in price.

Finally, the model pointed out that a change in reasonable fees will affect demand for services as well as supply. Assuming price is constant, increasing reasonable fees will reduce quantity demanded among assigned patients and increase the quantity of physicians services demanded by non-assigned patients. The assignment rate is dependent on the relative sizes of assigned and non-assigned output. Thus, assignment rates may rise or fall in response to an increase in reasonable fees, depending on what happens to both assigned and non-assigned output. The uncertain response of price to the increase in reasonable fees further complicates the issue.

Our empirical model estimated the elasticity of the assignment rate to private prices and reasonable fees. We estimated assignment rate regressions using as a dependent variable the physicians' Medicare assignment rate defined in terms of RVS units. Our results indicate that the RVS assignment rates of physicians not participating in Medicaid are positively related to the Medicare reasonable fee. A 1 percent increase in reasonable fees will induce a 5.1 percent increase in the voluntary assignment rates of these physicians and a 1.4 percent increase in their total assignment rate. A similar increase in billed charge will reduce the voluntary assignment rate by 6.0 percent and the total assignment rate by 2.0 percent. Assignment rates of physicians participating in Medicaid exhibit a much smaller response to changes in the revenue variables, although the response is in the same direction. A 1 percent increase in reasonable fees will increase the voluntary assignment rate by 1.7 percent but will not significantly affect the total assignment rate of these physicians. An equivalent increase in billed charge will reduce the voluntary assignment rate by 2.8 percent and the total assignment rate by .6 percent.

Using the regression results from our RVS assignment rate equations, and assuming a number of different relationships between prices and reasonable fees, we predicted specialty-specific assignment rates under a policy option which would raise reasonable fees to the level of prevailing ones. Given the simulation results, it appears that physicians would not increase their assignment rates substantially if reasonable fees increase between 11 and 20 percent. In addition, such an increase would increase Medicare program costs significantly. It would also increase the out-of-pocket cost to Medicare voluntary-assigned beneficiaries because of the coinsurance rate. This should lead to a decline in the amount of services demanded at the reasonable fee. An increase in the reasonable charge will initially lower the out-of-pocket costs of non-assigned beneficiaries. However, this reduction in out-of-pocket costs will be limited because of the relationship between prices and reasonable fees.

Although the simulation results do not predict a substantial increase in the assignment rate from raising reasonable fees to the level of prevailing ones, improvements in medical care access among the elderly may still occur. Increasing the Medicare reasonable fee should increase physician willingness to participate in the Medicare program and may therefore increase Medicare output. Because an increase in reasonable fees will also reduce the price of non-assigned services, both assigned and non-assigned output may increase. The result could be little or no change in the assignment rate, although access might be improved considerably.

Also, since the time period covered by this study, there has been a significant change in the determination of reasonable fees. The economic index went into effect in 1976 and acts to constrain the rate of increase in Medicare prevailing fees. (Thus the difference between reasonable fees and the effective prevailing fee is smaller than it is in this study). Assuming physicians increase their private fees at a rate greater than that permitted by the index, the result will be a movement toward the use of a fee schedule in the Medicare market. The index will also modify the relationship between a physician's private price and his/her reasonable fee, so that current increases in private prices will have a smaller impact on the future value of a physician's Medicare reasonable fee than was the case under the CPR system. The long run impact of a Medicare fee schedule on the availability of Medicare services will depend on the Medicare fee level relative to the physician's private market price. In areas where the gap between the fee schedule and private price widens considerably, we may see a decline in the willingness of physicians to provide Medicare services on assignment.

The simulations in this paper have been performed assuming that any policy changes which increase Medicare reasonable fees would be applied to all Medicare claims. Another alternative is to apply a bonus to claims taken on assignment only. In terms of the model, such a policy would eliminate the increase in non-assigned demand resulting from an increase in reasonable fee. This effect would, in turn, reduce the price response to a reasonable fee change among physicians not participating in Medicaid, and should eliminate any response among Medicaid participants. The result would be a larger increase in assignment rates at a lower total cost to the program than that which would occur when reasonable fees are raised for all Medicare services.

In this paper, we have focused exclusively on the Medicare assignment rate and how changing reasonable fees would affect it. While we currently do not know the private price impact of increasing reasonable fees, or the behavior of physicians under some of these alternative policy measures, this study has furthered our understanding of the nature and complexity of the problem. By understanding the impact that a variety of different factors have on altering the distribution between assigned and non-assigned output, we gain additional insight into the response of physicians to alternative reimbursement strategies and the effect that changes in policy will have on the medical care cost burden of the elderly.

Acknowledgments

The author wishes to thank her colleagues Jack Hadley, John Holahan, Robert Lee, and William Scanlon for their helpful comments and suggestions. She also thanks Jon Gabel, Peter McMenamin, and Ira Burney of HCFA for comments on a previous draft. Patty Tigue contributed excellent research assistance.

The assignment rate simulations and the empirical work on the RVS assignment rate equations were supported by Contract No. 600-76-0054. Extensions of the theoretical model to consideration of the assignment rate, some of the procedure specific empirical work, and additional related research not presented in this paper were supported by Grant No. 18-P-9700813-01. Both the contract and grant are from the Health Care Financing Administration, USDHEW.

1 While the customary, prevailing, and reasonable charge (CPR) methodology was in force at the time of our study, the imposition of fee controls during the Economic Stabilization Program (ESP) caused the determination of reasonable charges to diverge from the stated methodology. The price controls under the ESP permitted reasonable charges to increase by only a fraction of what their increase would have been using the CPR methodology. Because the controls on Medicare fees were stricter than those placed on private prices, the divergence between Medicare reasonables and private prices increased during the control years. The controls were lifted in 1974. However, since reasonable charges for 1974 and 1975 were based on actual charge data from 1972 and 1973, the increase in reasonable charges in the two years after controls was limited. In addition, since 1976 the rate of increase in prevailing charges has been constrained by the imposition of an economic index. This index permits prevailing fees to increase at some weighted average of 2 components; 1) the increase in the general earnings level of workers and 2) increases in the expenses of the kind incurred by physicians in office practice.

2 In the analysis presented here we assume that the physician faces no additional costs from treating non-assigned patients, and that the probability of payment does not vary for assigned and non-assigned claims. However, since physicians must collect the full price of their services from non-assigned patients but are assured 80 percent payment for services provided on assignment, they may take payment probabilities into account in their assignment decision. While no empirical evidence on payment default is available, it seems reasonable to assume that such default is a function of patient characteristics (income, supplemental health insurance) and size of bill. If this is the case, then we might observe higher assignment rates on expensive services and a higher propensity to assign services to low income, poorly insured patients. Thus, physicians would not provide non-assigned services to all who demand them but only to those where the expected payments are larger than 80 percent of the Medicare reasonable fee. The rest of the output would be provided on assignment.

3 Our analysis assumes that physicians charge only one price to private and Medicare non-assigned patients. Empirical evidence supporting this assumption can be found in Bluck and Lee, 1977; and Sloan, Cromwell, and Mitchell, 1977.

4 The marginal cost schedules are arbitrarily drawn to reflect the market participation of two different physicians. Likewise, the value of Z is arbitrarily selected for graphical purposes.

5 In practice, non-participation in Medicaid may not be equivalent to zero Medicaid output. Due to emergencies or a charity motive, physicians who do not participate in Medicaid may still provide some Medicaid services. In our empirical work we have arbitrarily chosen 500 RVS units of output provided to Medicaid as the cut-off value between participants and non-participants.

6 This analysis assumes that the physician's marginal cost curve remains stationary and that the physician's implicit wage is exogenous. However, it is possible that a physician's implicit wage might rise with increases in prices and reasonable fees. If this occurs, the long run effect of a change in R on the assigned output of non-Medicaid participating physicians is indeterminate. Similarly, this model has not dealt explicitly with the labor/leisure choice of physicians. Using a utility maximizing framework, it would be possible to predict a decline in output as prices rise if the physician is on the backward bending portion of his labor supply curve.

7 Long run and short run impacts are distinguished by whether private price has responded to the new reasonable fee. In the short run we assume such adjustment has not yet occurred.

8 The change in out-of-pocket price represents a movement along the consumers' demand curve, since that curve is defined in terms of the out-of-pocket price. This same phenomenon is represented by an outward shift in the demand curve facing the physician, since at the same price P he/she can provide more services.

9 CRVS assigns a unit value to a medical procedure. Unit value is determined by the price and complexity of the procedure.

10 An additional problem in using the voluntary assignment rate in our empirical work is that the variable is measured with error, because the data did not directly identify which assigned claims were voluntarily assigned. Rather, the number of voluntary assigned claims was computed as the difference between total assigned claims and mandatory assigned claims. Mandatory assigned (Joint Medicare/Medicaid) claims must first pass through Medicare for payment before being submitted to Medicaid. Due to the time lag between payment from the two programs, it is possible that the number of mandatory assigned claims recorded by Medicare in a time period would differ from those recorded by Medicaid. Since the data from Blue Shield are based on date of claim payment rather than date of service, and since our information on mandatory assigned claims was provided by Medicaid while the total of assigned and non-assigned claims was provided by Medicare, it is possible that the number of voluntary assigned claims is measured with error. The direction of measurement error is not known, but will depend on the flow of claims through Medicare to Medicaid and the time lag between payment from the two programs.

11 Year dummies are variables which assume the value of 0 or 1, depending on the year. The omitted year in the regression is 1972.

12 Initially we posited a linear relationship between the assignment rate and prices and reasonable fees. However, inspection of the error term indicated that a multiplicative specification was superior in providing a random distribution of the error term across all values of the predicted dependent variable.

13 Regressions for the predicted price equations can be found in Lynn Paringer, “The Medicare Assignment Rates of Physicians: Their Responses to Changes in Reimbursement Policy.” Urban Institute Working Paper 1250-1, March 1979.

14 If physicians have not exhausted assigned demand, the level of Medicaid output at which we segmented our sample is not sufficiently high to select out those physicians who cannot increase output to Medicare as the reasonable fee rises.

18 This is because participation in one or both markets largely reflects the position of the physician's marginal cost curve, and additional variables will not greatly enhance the ability to trace out the MC curve. If we could perfectly separate out those physicians who are unable to increase Medicare output in response to an increase in reasonable fees (i.e., Medicaid participants), then we should exclude the proxy marginal cost variables from the assignment rate equations of these physicians, since the assignment rate should respond to demand conditions only.

• Hadley Jack, Lee Robert. Urban Institute Working Paper 998-8. The Urban Institute; Washington, D.C.: Apr, 1978. Physicians Price and Output Decisions: Theory and Evidence. [ Google Scholar ]
• Health Insurance Benefits Advisory Council. A Report on the Results of the Study of Methods of Reimbursement for Physicians' Services Under Medicare. HIBAC. 1973 Jul; II Appendix A. [ Google Scholar ]
• Hughes Edward. Surgical Workloads in a Community Practice. Surgery. 1972; 7 :315–72. [ PubMed ] [ Google Scholar ]
• Sloan Frank, Mitchell Janet, Cromwell Jerry. Physician Participation in State Medicaid Programs. Journal of Human Resources. 1978;(XIII):211–245. [ PubMed ] [ Google Scholar ]
• Sloan Frank, Steinwald Bruce. Physician Participation in Health Insurance Plans: Evidence on Blue Shield. Journal of Human Resources. 1978 Spring; XIII (No. 2):237–263. [ PubMed ] [ Google Scholar ]

What Part B covers

If you're in a Medicare Advantage Plan or other Medicare plan, your plan may have different rules. But, your plan must give you at least the same coverage as Original Medicare. Some services may only be covered in certain facilities or for patients with certain conditions.

What's covered?

NEW INSULIN BENEFIT!  If you use an insulin pump that's covered under Part B's durable medical equipment benefit, or you get your covered insulin through a Medicare Advantage Plan, your cost for a month's supply of Part B-covered insulin for your pump can't be more than $35. The Part B deductible won't apply. If you get a 3-month supply of Part B-covered insulin, your costs can't be more than $35 for each month's supply. This means you'll generally pay no more than $105 for a 3-month supply of covered insulin. If you have Part B and Medicare Supplement Insurance ( Medigap ) that pays your Part B coinsurance, you plan should cover the $35 (or less) cost for insulin.

Part B covers 2 types of services

• Medically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.
• Preventive services :  Health care to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.

You pay nothing for most preventive services if you get the services from a health care provider who accepts assignment .

Part B covers things like:

• Clinical research  
• Ambulance services
• Durable medical equipment (DME)
• Partial hospitalization
• Intensive outpatient program services (starting January 1, 2024)
• Limited outpatient prescription drugs

2 ways to find out if Medicare covers what you need

• Talk to your doctor or other health care provider about why you need certain services or supplies. Ask if Medicare will cover them. You may need something that's usually covered but your provider thinks that Medicare won't cover it in your situation. If so, you'll have to  read and sign a notice . The notice says that you may have to pay for the item, service, or supply.
• Find out if Medicare covers your item, service, or supply .

Medicare coverage is based on 3 main factors 

• Federal and state laws.
• National coverage decisions made by Medicare about whether something is covered.
• Local coverage decisions made by companies in each state that process claims for Medicare. These companies decide whether something is medically necessary and should be covered in their area.