The Medicare allowance, also known as the Medicare-approved amount, is the maximum payment Medicare will make for a covered health service or item. It acts as a standardized benchmark for various healthcare procedures and supplies, guiding financial expectations for both providers and patients.
Understanding the Medicare Allowance
The Medicare allowance is the specific amount Medicare determines is reasonable for a medical service or supply, rather than the amount a provider might initially charge. It applies to services covered under Medicare Part A, which primarily addresses inpatient hospital care, and Medicare Part B, which covers outpatient medical services. For instance, Part A includes hospital stays, skilled nursing facility care, and hospice care. Part B encompasses doctor visits, preventive care, and durable medical equipment. The allowance ensures a consistent valuation for these diverse services across the Medicare program.
How Medicare Allowances Are Established
The Centers for Medicare & Medicaid Services (CMS) is responsible for setting these Medicare allowances. These amounts are primarily determined through the Medicare Fee Schedule (MFS), which assigns values to thousands of medical services. The MFS considers several factors, including the physician’s work, practice expenses such as rent and staff salaries, and malpractice insurance costs. These factors are quantified using Relative Value Units (RVUs), which are then adjusted for geographic variations in costs. Medicare Administrative Contractors (MACs), which are private companies contracted by CMS, then process claims based on these established allowances within their designated geographic jurisdictions.
Impact on Your Healthcare Expenses
The Medicare allowance directly influences a beneficiary’s out-of-pocket healthcare expenses. After Medicare pays its share of the approved amount, patients are typically responsible for deductibles, copayments, and coinsurance. For example, under Part B, beneficiaries generally pay 20% of the Medicare-approved amount after meeting an annual deductible, which is $257 in 2025.
When a healthcare provider “accepts assignment,” they agree to accept the Medicare allowance as full payment for a service. This means they can only bill the patient for the deductible and coinsurance. Conversely, “non-assigned” claims occur when a non-participating provider does not accept the Medicare-approved amount as full payment. In these non-assigned situations, non-participating providers can charge up to a “limiting charge,” which is 15% above the Medicare-approved amount for non-participating providers. Patients are responsible for paying this excess charge in addition to their standard coinsurance and deductible.
Additionally, an Advanced Beneficiary Notice of Noncoverage (ABN) may be issued by a provider if they believe Medicare will not cover a service or item. An ABN informs the patient that they might be financially responsible for the service if Medicare denies payment. Signing an ABN means the patient agrees to pay if Medicare does not, ensuring they make an informed decision before receiving potentially uncovered care.