Medicare Allowed Amount Definition

Maximum amount on which payment is based for covered health care services. This may be called “eligible expense,” “payment allowance” or “negotiated rate.” If your provider charges more than the medicare allowed amount, patient no need to pay that amount when they are participating with Medicare insurance.

After reviewing the definitions in rules or provided by the health insurers, OFM found that:

** Allowed amount is the maximum amount that a payer will pay a provider for a service.

** Allowed amount applies to services that are included or allowed in the health care plan or the government program.

** Allowed amount applies to services provided by providers who are contracted with the health care plan (in-network).

** Allowed amount varies for providers who are not contracted with the subscriber’s health care plan (out-of-network).

Allowed amount may not cover all the provider’s charges. In some cases, subscribers may have to pay the difference.

** Allowed amount may be determined by a fee schedule such as Medicare’s.

** Usual customary and reasonable (UCR) amount is sometimes used to determine the allowed amount.

Medicare-allowed amounts are public information set on an annual basis. There is a set fee schedule available at that allows you to view what Medicare approves for procedure codes and services. Among Medicare providers, 99% agree to the Medicare-allowed amount as payment in full, regardless of the amount
they bill Medicare.

Below are a few examples of what Medicare approves for some major health care services.

Procedure – Average Billed amount – Medicare Allowed Amount – Medicare Pays

Replacement of left lower heart chamber valve using artificial valve on heart-lung machine $19,882.36 $249.91 $195.93 $26.99 $13.50

Heart artery bypass to repair one artery $17,547.70 $214.91 $168.48 $23.22 $11.61

Repair of knee joint $13,209.22 $1,292.88 $1,013.61 $139.64 $69.82

Biopsy of large bowel using an endoscope $2,069.00 $223.21 $167.17 $28.02 $14.01

Specialty care transport $2,046.00 $713.42 $555.88 $78.77 $39.39

Ultrasound of vena cava, groin graft, or vessel blood flow $1,361.00 $178.60 $127.29 $25.66 $12.83

Knee X-ray (4+ views) $232.00 $38.14 $26.39 $5.88 $2.94

New patient office visit or other outpatient visit (typically 20 minutes) $185.00 $72.39 $56.75 $7.82 $3.91

Blood test, lipids (cholesterol and triglycerides) $137.00 $15.51 $15.20 $0.16 $0.08

Source:, January 2016; please visit to see current procedures and doctors in your area. Data is based on University of Wisconsin Hospital doctors in the Madison, WI area. This document is for illustration purposes only.

This is an advertisement for insurance. Neither Wisconsin Physicians Service Insurance Corporation nor its agents are connected with the federal Medicare program. Our products are not connected with or endorsed by the United States government or the federal Medicare program.

Reason codes, and the text messages that define those codes, are used to explain why a claim may not have been paid in full. For instance, there are reason codes to indicate that a particular service is never covered by Medicare, that a benefit maximum has been reached, that non-payable charges exceed the fee schedule, or that a psychiatric reduction has been made. Under the standard format, only reason codes approved by the American National Standards Institute (ANSI) Insurance Subcommittee and Medicare-specific supplemental messages approved by CMS may be used.

The ANSI reason codes were designed to replace the large number of different codes used by health payers in this country, and to relieve the burden of medical providers to interpret each of the different coding systems. Although reason codes and CMS message codes will appear in the body of the remittance notice, the text of each code that is used will be printed at the end of the notice to facilitate interpretation. The approximately 10,000 different messages used by Medicare carriers nationwide have been reduced to fewer than 400 messages. The standard messages may expand or change occasionally as the need arises, but CMS plans to limit the frequency of such changes.

Code Description

98 The hospital must file the Medicare claim for this inpatient non-physician service.
99 Medicare Secondary Payer Adjustment amount
A3 Medicare Secondary Payer liability met.
A4 Medicare Claim PPS Capital Day Outlier Amount.
A5 Medicare Claim PPS Capital Cost Outlier Amount.

To understand the Medicare compensation system for physician services, it is necessary to understand how the relative values of medical services are translated into fee schedule payment amounts. Basically, the relative value of a procedure multiplied by the number of dollars per Relative Value Unit (RVU) is the fee paid by Medicare for the procedure (RVUW physician work, RVUPE practice expense, RVUMP malpractice). The Conversion Factor (CF) is the number of dollars assigned to an RVU. It is calculated by use of a complex formula (Fig 1) that takes into account the overall state of the economy of the United States, the number of Medicare beneficiaries, the amount of money spent in prior years, and changes in the regulations governing covered services. Medicare fees are set according to a relative value scale rather than a free market, payments are made by third parties rather than consumers, and the labor market for physicians is illiquid, so the pricing mechanisms that regulate markets in other parts of the economy are not effective in rationalizing prices. The factors that influence the CF calculation are similar to those that are used in calculating global health care budgets; therefore the principles are durable, even if the precise formula might be altered in the future

Annually, the CF is based on the previous year’s CF and adjusted for the Medical Economic Index, the Update Adjustment Factor, Legislative Change, and Budget Neutrality. The Medical Economic Index is a calculation of the inflation rate for medical services, which is generally higher than inflation in consumer
prices overall. The Update Adjustment Factor encompasses the Sustainable Growth Rate (SGR) that takes into account growth or decline in the Gross Domestic Product, changes in the number of beneficiaries, and certain regulatory adjustments that may affect the demand for and costs of providing Medicare services. This is the mechanism through which the relative proportion of Part B Medicare spending is maintained at an acceptable level with respect to overall government spending and the size of the economy as a whole. The process of setting the CF each year balances increases in demand for medical services and the finite productive capacity of the economy. The calculation is then subject to Budget Neutrality, requiring any increase in the relative expenditures in one area of the Medicare program to be offset by cuts in other areas. The calculation must result in a budget for Medicare that is within $20 million of the target.1

What Is the CF?

The monetary CF is 1 of 3 key elements that determine physician payment under the Medicare Physician Fee Schedule, along with the Resource-Based Relative Value Scale and Geographic Practice Cost Indices (GPCIs) (GPCIW physician work, GPCIPE practice expense). With the Resource-Based Relative Value Scale (RBRVS), an RVU is assigned for each Current Procedural Terminology (CPT) code on the basis of resource costs associated with 1) physician work, 2) practice expense, and 3) professional liability insurance. As determined by Congress at the inception of the RBRVS, all of the CPT codes on the Medicare Fee Schedule are subject to review on an annual basis.1

Each Current Procedural Terminology code RVU is adjusted on the basis of the GPCI associated with each geographic area, adjusting for different medical costs and wage differentials. GPCIsare reviewed every 3 years.

The CF, a national dollar multiplier, is used to “convert” the geographically adjusted RVU to determine the Medicare-allowed payment amount for a particular physician service. The CF is used separately to price facility and nonfacility payment amounts. Facility pricing typically covers services provided to inpatients or in a hospital outpatient clinic setting or other off-site hospital facilities. Nonfacility pricing covers services gen erally provided in a physician office or other freestanding setting such as an Independent Diagnostic Testing Facility.

How Is the CF Calculated? Why Is the Calculation So Complex?

The CF is updated annually according to a complex formula set by statute. Every year, by use of the formula, the Centers for Medicare and Medicaid Services (CMS) must publish an estimated SGR and estimated CF applicable to Medicare payments for physician services for the following year, as well as the data underlying
these estimates. CMS cannot change its overall budget by more than $20 million. The use of this SGR target is intended to control growth of aggregate Medicare spending. The targets are not expenditure limits, but an update to the Physician Fee Schedule to reflect a comparison of actual to target expenditures. If RVU adjustment causes a differential greater than that $20 million or exceeds the target, CMS uses the Budget Neutrality factor to bring overall payments down to an acceptable level.

Under statute, the update for each year is determined by comparing cumulative actual expenditures with cumulative target expenditures since April 1, 1996, through the end of the year before the year in question. As an example, the update for 2013 compares the cumulative actual with cumulative target expenditures from
April 1, 1996, through December 31, 2012. The calculation is as follows for 2013:

2013 Non-Facility Pricing Amount [(Work RVU * Work
GPCI) (Transitioned Non-Facility PE RVU * PE GPCI) (malpractice expense [MP] RVU * MP GPCI)] * CF 2013 Facility Pricing
Amount [(Work RVU *Work GPCI) (Transitioned Facility PE
The CF for calendar year 2013 is $34.0230.

Medicare Maximum Allowable Reimbursements

Unless otherwise indicated, for these Rules, the Medicare procedures and guidelines are effective upon adoption and implementation by the CMS. The particular procedure or guideline to be used is that which is in effect on the date the service is rendered. Whenever there is no specific fee or methodology for reimbursement in the Medical Fee Schedule Rules for a service, diagnostic procedure, equipment, etc., then the maximum amount of reimbursement shall be 100% of the effective CMS’ Medicare allowable amount in effect on the date of service.

Orthotics and Prosthetics

Payment shall be 115% of the Tennessee Medicare allowable amount. If the invoice amount exceeds the Medicare payment at the time of delivery, the payment shall be the higher of the invoice amount or 115% of the Medicare allowable amount. Charges for these items are in addition to, and shall be billed separately from all other facility and professional service fees. Supplies and equipment should be coded with CPT® code 99070 if appropriate codes are not available and the maximum reimbursement shall be the usual and customary amount. Fitting and customizing codes may be reimbursed separately according to Medicare guidelines. See Rule 0800-02-18-.11.

Outpatient Services (Including Emergency Room Care if Patient is Not Admitted) All services paid under the OPPS are classified into groups called Ambulatory Payment Classifications (APC). Services in each APC are similar clinically and in terms of the resources they require. The CMS has established a payment rate for each APC. Current APC Medicare allowable payment amounts and guidelines are available online at: The payment rate for each APC group is the basis for determining the maximum total payment to which an Ambulatory Surgery Center (ASC) or hospital outpatient center is entitled, including add-ons, hospital outpatient procedures, multiple procedure discounts and status indicators, according to current CMS guidelines effective on the date of service.

Physical Therapy/Occupational Therapy (PT/OT) and Speech Therapy

Reimbursement for physical, occupational, and speech visits shall not exceed 130% of the Tennessee Medicare allowable amount, no matter where the services are performed- see home health services as an exception. There shall be no payment allowed for any modalities or therapeutic procedures performed in excess of 4 per day, per type of therapy, per employee. This maximum includes combinations. No additional reductions for relative value units (RVUs) should be applied.

For Functional Capacity Evaluations (FCE’s) the four unit (time measurement) maximum may not apply as long as the documentation supports the extra units.

Work Hardening/Conditioning Programs using the approved CPT® codes shall be billed at usual and customary hourly charges for a maximum of 6 hours per day or 60 hour maximum and are subject to utilization review prior approval. Payment is 80% of the billed charges.

Physical, occupational, or speech therapy services in excess of 12 visits may be reviewed pursuant to the employer’s utilization review program. In order to facilitate expedited utilization review, whenever a physician orders PT or OT, the physician should include the diagnosis on the prescription for PT or OT. See Rule 0800-02-18-.09

Providing Behavioral Intervention or Counseling

If a provider assesses, counsels or provides behavioral intervention to a Workers’ Compensation patient for substance and/or alcohol use, or for substance and/or Alcohol use disorder, the provider may charge for the extra time involved using CPT® code 99408 (or CPT® codes 96150-96155, if appropriate) up to a maximum of eighty dollars ($80) in addition to a standard E/M code. An assessment by structured screening must be documented. The code may only be charged if the patient is on a long term (over 90 days) Schedule II medication or a combination of one or more Schedule II, Ill, and/or IV medications. The Medicare allowable fee does not apply to this service. See Rule 0800-02-17-.15.

Amounts in Addition to Per Diem Charges

The following items are not included in the per diem reimbursement to the facility and may be reimbursed separately. All of these items must be listed with the applicable /HCPCS codes.

Durable Medical Equipment — Reimbursement for durable medical equipment and for which billed charges:

(a) Are $100.00 or less shall be limited to 80% of billed charges;
(b) Exceed $100.00 shall be reimbursed at a maximum amount of the supplier or manufacturer’s invoice amount, plus the lesser of 15% of invoice amount
or $1,000.00. These calculations are per item and are not cumulative. Charges for durable medical equipment are in addition to, and shall be billed separately from, all facility and professional service fees.
(c) This Rule shall not apply to durable medical equipment and medical supplies with applicable Medicare allowable amounts. Such durable medical equipment and medical supplies shall be reimbursed at the lesser of the billed charges or 100% of the applicable Medicare allowable amount.

Orthotics and Prosthetics —

Orthotics and prosthetics, not supplied under Rule 0800-02-18-.07, should be coded according to the HCFA Common Procedures Coding System (HCPCS). Payment shall be 115% of Tennessee Medicare allowable amount. If the invoice amounts exceed the Medicare payments amounts at the time of delivery, the payment for orthotics and prosthetics shall be the higher of invoice amounts or 115% of the Tennessee Medicare allowable amount and coded using the HCPCS code. Charges for these items are in addition to,
and shall be billed separately from all other facility and professional service fees.