A Look at How Medicare Pays a Hospital for an Inpatient Claim

Recipients of Medicare, should have an understanding of how the system pays hospitals for an impatient claims. Understanding how Medicare works can demystify the process.

Here is an overview of Traditional Medicare. Traditional Medicare came into being in 1965 through the federal government. It covered approximately two-thirds of adult Americans over 65. Traditional Medicare was never created to and was never intended to cover all heath care expenses.

In 1997 the Balanced Budget Act created the Managed Medicare/Medicare Advantage option, meaning commercial insurance agencies sold traditional Medicare but with possible added services specific only to each insurance company selling them. Then in 1982, Congress changed how hospitals received reimbursement when a beneficiary was an inpatient.

With traditional Medicare, the hospital is paid based on the diagnosis of the patient treated during a stay as an inpatient. In other words, invoices indicating total time spent are submitted, but the hospital is paid for the diagnosis – not the charges. Furthermore, the payment system is different for every insurance plan, Medicaid (on a per state basis), traditional Medicare and managed Medicare Advantage.

Below is a hypothetical example:
Jane spent two weeks in ICU. The final bill was $130,000. Jane has traditional Medicare and a supplemental insurance plan that pays the inpatient deductible. (For 2017, the deductible is $1,316)

The hospital is paid one sum for the aggregate diagnosis. That one payment is referred to as a diagnosis-related group (DRG) payment.

The total hospital bill for Jane is $130,000
The diagnosis-related group payment from Medicare is $12,000
Medicare holds on to the deductible, which is $1,316 (due either from patient or supplemental insurance)
Total Medicare payment is $10,684

Anyone receiving that kind of a bill would likely have trouble finding the funds to pay it. However, here is the twist to this example. The “hospital” must write off the difference between the $130,000 ICU cost and the diagnosis-related group single payment of $12,000. That means there is no additional amount billed out to the patient other than the inpatient deductible.