Medicare reimbursement is the payment Medicare makes to healthcare providers, hospitals, and insurance plans for services delivered to people enrolled in the program. Rather than paying whatever a provider charges, Medicare uses its own formulas to determine what each service is worth, and those approved amounts become the basis for what providers receive. The system is complex, with entirely different payment models depending on whether you see a doctor in a clinic, stay in a hospital, or get care through a private Medicare Advantage plan.
How Medicare Pays Doctors and Clinicians
When you visit a doctor or other clinician who accepts Medicare, the payment is calculated using the Physician Fee Schedule. Every medical service has a value assigned to it, expressed in relative value units (RVUs). These units reflect three things: how much physician work the service requires, how much it costs to run the practice (staff, rent, equipment), and how much the provider pays for malpractice insurance.
To turn those value units into a dollar amount, Medicare multiplies them by a single national number called the conversion factor. For 2025, that conversion factor is $32.35, which is actually a 2.83% decrease from the 2024 rate of $33.29. This conversion factor changes yearly through congressional action and CMS rulemaking, and it has been a source of frustration for physicians who argue it hasn’t kept pace with inflation.
The calculation doesn’t stop there. Medicare adjusts payments across 89 geographic areas in the United States to reflect local cost differences. If your doctor practices in a high-cost city, the labor portion of the payment gets adjusted upward based on local wages. Practice expenses like staff salaries and rent also get geographic adjustments, though supplies and equipment do not, since those are purchased in a national market at roughly uniform prices. These geographic adjustments mean the same office visit can reimburse differently in Manhattan than in rural Kansas.
How Hospitals Get Paid
Hospital stays under Medicare Part A follow a completely different model called the Inpatient Prospective Payment System (IPPS). Instead of paying for each individual test and treatment during your stay, Medicare assigns your case to a diagnosis-related group (DRG) based on your condition, and the hospital receives a flat payment for that entire episode of care. Each DRG carries a payment weight based on the average resources needed to treat patients with that diagnosis.
The base payment rate is split into labor and non-labor portions, with the labor share adjusted by a local wage index. From there, several add-ons can increase the payment. Hospitals that serve a high percentage of low-income patients receive a disproportionate share hospital (DSH) adjustment. Teaching hospitals with medical residents get an additional percentage for indirect medical education costs. And if a particular case turns out to be unusually expensive, the hospital can receive an outlier payment to protect against major financial losses.
This system gives hospitals a financial incentive to treat patients efficiently. If the actual cost of care comes in below the DRG payment, the hospital keeps the difference. If costs exceed it, the hospital absorbs the loss (unless the case qualifies as an outlier).
Medicare Advantage: A Different Payment Model
If you’re enrolled in a Medicare Advantage plan, the government doesn’t pay providers directly for each service. Instead, CMS sends a monthly per-person payment to the private insurance company running your plan, and that insurer then manages your care and pays providers from that pool of money.
The maximum CMS will pay a plan for an average enrollee in a given county is called the benchmark, and it’s based on a percentage of what traditional Medicare spends in that area. The percentages vary by county spending levels. In the highest-spending counties, benchmarks are set at 95% of traditional Medicare spending. In the lowest-spending counties, benchmarks can reach 115% of traditional Medicare spending. Middle-tier counties fall at 100% or 107.5%.
These payments are also adjusted for how sick each enrollee is, using a risk adjustment system. Plans receive more money for enrollees with more documented health conditions. This has created a well-documented problem: Medicare Advantage insurers aggressively document diagnoses through chart reviews and home health assessments, making their enrollees appear sicker on paper than they would under traditional Medicare. MedPAC found that in 2023, 85% of Medicare Advantage enrollees were in plans whose coding practices inflated risk scores beyond CMS’s existing 5.9% correction. The result is that CMS often pays more for a Medicare Advantage enrollee than it would have spent covering that same person in traditional Medicare.
What Reimbursement Means for Your Costs
How much you pay out of pocket depends partly on whether your provider “accepts assignment,” meaning they agree to accept Medicare’s approved amount as full payment. Providers who accept assignment can only charge you the standard deductible and coinsurance. Most providers fall into this category.
Non-participating providers, however, can charge up to 15% above the Medicare-approved amount. This extra charge, called the limiting charge, comes out of your pocket. So if Medicare approves $100 for a service, a non-participating provider could bill you up to $115. This is worth checking before scheduling an appointment, especially for specialty care.
Performance-Based Payment Adjustments
Medicare no longer pays purely based on volume. Through the Merit-based Incentive Payment System (MIPS), clinicians earn a performance score from 0 to 100 based on quality measures, cost efficiency, improvement activities, and how they use electronic health records. That score then adjusts their Medicare payments up or down.
Clinicians scoring below 18.75 points face the maximum negative adjustment of -9%. Those scoring between 89 and 100 points receive a positive adjustment that can exceed 9% depending on a scaling factor applied across all participants. The scaling factor ranges between 0 and 3, and its exact value depends on how scores are distributed across all MIPS-eligible clinicians in a given year. The system is budget-neutral, meaning the money funding bonuses for high performers comes from the penalties applied to low performers.
Telehealth Reimbursement
Medicare now reimburses many telehealth visits, though the rules differ by service type. Behavioral health telehealth services have been permanently freed from geographic restrictions, meaning you can receive mental health care via video from your home regardless of whether you live in a rural or urban area. Starting in 2024, telehealth visits provided to patients at home are paid at the same rate as in-office visits, eliminating a previous gap that made telehealth less financially viable for providers.
There are some strings attached. For mental health telehealth services, you’ll need at least one in-person visit within 12 months of each telehealth session, with that requirement taking full effect after 2027. Other telehealth services, like follow-up visits for hospital or nursing facility patients, had their frequency limits permanently removed in 2026.
How Quickly Claims Get Paid
Medicare has legally mandated timelines for processing claims. Electronic claims, which are now the standard, can be paid as soon as 13 days after receipt, with a minimum holding period of 14 days required by law. Paper claims take longer, with a 29-day minimum. These timelines apply to “clean” claims, meaning everything was submitted correctly with no errors or missing information. Claims with problems get kicked back and can take significantly longer to resolve.