Medicare Fee-for-Service

Medicare Fee-for-Service (FFS) is a program that provides hospital insurance (Part A) and supplementary medical insurance (Part B) to eligible citizens. Part A is provided to persons 65 and over who qualify for Social Security benefits and pays for hospital, skilled nursing facility, home health, and hospice care. Part B is optional coverage that pays for physician, outpatient hospital, home health, laboratory tests, durable medical equipment, designated therapy, outpatient prescription drugs, and other services not covered by Part A. Medicare processes over one billion FFS claims per year.

Agency Accountable Official: Ellen Murray, Assistant Secretary for Financial Resources

Program Accountable Official: Shantanu Agrawal, M.D., Deputy Administrator and Director for the Center for Program Integrity, Centers for Medicare & Medicaid Services

Total Payments
Improper Payments
Improper Payment Rate


Current Measure: ID, ‘measure1_current’, true); ?>

Target: ID, ‘measure1_target’, true); ?>

Description: ID, ‘measure1_description’, true); ?>

Update Frequency: ID, ‘measure1_frequency’, true); ?>

Data Current as of: ID, ‘measure1_date’, true); ?>

Current Measure: ID, ‘measure2_current’, true); ?>

Target: ID, ‘measure2_target’, true); ?>

Description: ID, ‘measure2_description’, true); ?>

Update Frequency: ID, ‘measure2_frequency’, true); ?>

Data Current as of: ID, ‘measure2_date’, true); ?>

Current Measure: ID, ‘measure3_current’, true); ?>

Target: ID, ‘measure3_target’, true); ?>

Description: ID, ‘measure3_description’, true); ?>

Update Frequency: ID, ‘measure3_frequency’, true); ?>

Data Current as of: ID, ‘measure3_date’, true); ?>

Program Comments

The Department of Health and Human Services (HHS) is committed to reducing the incidence of improper payments made by the Medicare FFS program. In order to reduce these improper payments, it is essential to accurately account for where, how, and why these improper payments occur. Beginning in Fiscal Year (FY) 2012, in consultation with the Office of Management and Budget (OMB), HHS refined the improper payment methodology to account for the impact of rebilling denied Part A inpatient hospital claims for allowable Part B services when a Part A inpatient hospital claim is denied because the services (i.e. improper payments due to inpatient status reviews) should have been provided as outpatient services. HHS continued this methodology in FY 2015. This approach is consistent with: (1) Administrative Law Judge (ALJ) and Departmental Appeals Board (DAB) decisions that directed HHS to pay hospitals under Part B for all of the services provided if the Part A inpatient claim was denied, and (2) recent Medicare policy changes that allow rebilling of denied Part A claims under Part B. HHS calculated an adjustment factor based on a statistical subset of inpatient claims that were in error because the services should have been provided as outpatient. This adjustment factor reflects the difference between what was paid for the inpatient hospital claims under Medicare Part A and what would have been paid had the hospital claim been properly submitted as an outpatient claim under Medicare Part B. Additional information regarding the adjustment factor can be found on pages 166-167 of HHS’s FY 2012 AFR (available at Application of the adjustment factor decreased the overall improper payment rate by 0.4 percentage points to 12.1 percent, or $43.3 billion in projected improper payments. As a result, HHS believes that this adjustment results in a more accurate reflection of improper payment estimates in the Medicare FFS program. The FY 2015 Medicare FFS improper payment rate decreased from 12.7 percent in FY 2014 to 12.1 percent in FY 2015, meeting and exceeding the FY 2015 improper payment rate target of 12.5 percent. This decrease was driven by a reduction in improper payments for inpatient hospital and Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) claims. The primary causes of improper payments are insufficient documentation and medical necessity errors. Insufficient documentation errors for home health claims were the major contributing factors to the FY 2015 improper payment rate. The improper payment rate for home health claims increased from 51.4 percent in FY 2014 to 59.0 percent in FY 2015. In order to reduce improper payments and protect the Medicare Trust Funds, HHS finalized changes to the face-to-face encounter documentation requirements for episodes beginning on or after January 1, 2015. HHS anticipates that these changes, which simplify home health documentation requirements, will: improve provider compliance; ease provider administrative burden; and protect the integrity of the Medicare program. Insufficient documentation errors were also the primary cause of improper payments for Skilled Nursing Facility (SNF) claims. The improper payment rate for SNF claims increased from 6.9 percent in FY 2014 to 11.0 percent in FY 2015.

Each year, HHS outlines actions the agency will implement to prevent and reduce improper payments for all categories of errors. While some corrective actions have been implemented, others are in the early stages of implementation. HHS believes these focused corrective actions will have a larger impact over time as they become integrated into business operations. Of particular importance are five corrective actions that HHS believes will have a considerable effect in preventing and reducing improper payments: • First, HHS continues to implement corrective actions to address program payment vulnerabilities related to home health services. o HHS issued a final rule, CMS-1611-F (79 FR 66031, November 6, 2014) to update Medicare’s Home Health Prospective Payment System payment rates and wage index for calendar year 2015. In this rule, HHS finalized changes to the face-to-face requirements for episodes beginning on or after January 1, 2015. HHS believes clarifying the face-to-face requirements will lead to a decrease in these improper payments and improve provider compliance with regulatory requirements, while continuing to strengthen the integrity of the Medicare programs. Specifically, HHS amended the Home Health Agency (HHA) regulation to remove the requirement for the physician narrative as part of the certification of patient eligibility for the benefit, which was required to certify that the home health patient eligibility criteria have been met. Now reviewers can consider all entries in the medical record as supporting documentation when determining medical necessity. o HHS created voluntary draft paper and electronic clinical templates for ordering physicians and ordering hospitals to serve as progress notes and discharge summaries. These templates are currently in the clearance process. The templates will help physicians and hospital staff capture the information needed to complete the face-to-face encounter documentation and will become part of the medical record upon completion. o On October 1, 2015, HHS’ Medicare Administrative Contractors (MACs) began prepayment reviews of home health claims for episodes beginning on or after August 1, 2015, using a Probe and Educate strategy designed to help HHAs understand the new patient certification requirements. • Second, HHS proposed an update to the “Two Midnight” rule, CMS-1633-P (70 FR Volume 80, Number 130, July 8, 2015) regarding when hospital admissions are appropriate for payment under Medicare Part A. At the same time, HHS notified the public of the following two upcoming changes in education and enforcement strategies. o Beginning on October 1, 2015, the Quality Improvement Organizations (QIOs) assumed responsibility to conduct initial patient status reviews of providers to determine the appropriateness of Part A payment for short stay inpatient hospital claims. From October 1, 2015 through December 31, 2015, short stay inpatient hospital reviews conducted by the QIOs will be based on Medicare’s current payment policies. This will allow HHS to redirect MAC medical review efforts to other error prone claim types in order to reduce improper payments. o Beginning on January 1, 2016, QIOs and Recovery Audit Contractors (RACs) will conduct patient status reviews in accordance with the policy changes finalized in the Hospital Outpatient Prospective Payment System rule and effective in calendar year 2016. Effective January 1, 2016, RACs may conduct patient status reviews only for those providers that have been referred by the QIO as exhibiting persistent noncompliance with Medicare payment policies. In addition, ongoing Probe and Educate efforts for the updated “Two Midnight” rule will continue to reduce the overall improper payments. • Third, HHS issued a proposed rule that would build on a successful demonstration program to establish a Master List of Durable Medical Equipment, Prosthetic, Orthotics and Supplies (DMEPOS) items that are frequently subject to unnecessary utilization and potentially could be subject to prior authorization, as well as a Required Prior Authorization List of certain DMEPOS items that would be subject to a prior authorization process. • Fourth, HHS expanded the use of prior authorization in the Medicare FFS program. o On September 1, 2012, HHS instituted a prior authorization demonstration program in seven states with the expectation of reducing improper payments for power mobility devices (PMDs). This demonstration project decreased PMD expenditures in both the demonstration and non-demonstration states. Specifically, based on claims submitted as of August 14, 2015, monthly expenditures for the PMD codes included in the demonstration project decreased from $10 million in September 2012 to $3 million in June 2015 in the non-demonstration states and from $22 million to $5 million in the demonstration states. Prior authorization reviews are being performed timely and feedback from the industry and beneficiaries has been largely positive. HHS leveraged this success by expanding the demonstration to an additional 12 states (Arizona, Georgia, Indiana, Kentucky, Louisiana, Maryland, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, and Washington) effective October 1, 2014, bringing the total number of states participating in the demonstration to 19. HHS also extended the demonstration to August 31, 2018 in FY 2015. • Fifth, in FY 2015, HHS implemented two demonstration projects to test whether prior authorization in Medicare FFS reduces expenditures while maintaining or improving quality of care for certain non-emergent services. These projects will also ensure services are provided in compliance with applicable Medicare coverage, coding, and payment rules before rendering services and paying claims. o In December 2014, HHS implemented a prior authorization demonstration program for repetitive, scheduled non-emergent ambulance transport occurring on or after December 15, 2014 in New Jersey, Pennsylvania, and South Carolina. Section 515 of the Medicare Access and CHIP Reauthorization Act of 2015 expands the prior authorization model for repetitive scheduled non-emergent ambulance transports effective no later than January 1, 2016 to five additional states (North Carolina, Virginia, West Virginia, Maryland, and Delaware) and the District of Columbia. o HHS implemented a prior authorization demonstration program for non-emergent hyperbaric oxygen therapy in Michigan, Illinois, and New Jersey. Providers in Michigan could begin submitting prior authorization requests on March 1, 2015, and providers in Illinois and New Jersey could begin submitting prior authorization requests on July 15, 2015. This multifaceted, adaptive approach to decreasing the improper payment rate is required in order to sustain the Medicare Trust Fund while protecting beneficiaries. Additional information on the program and additional ongoing corrective actions is also provided annually in the Department’s Agency Financial Report (available at