What it means
CMS decides what Medicare will pay for, how much it will pay and how providers must submit claims. Hospitals, clinics, laboratories, equipment suppliers and care homes that treat Medicare patients all bill according to these rules.
A change in a payment schedule can move a provider's revenue by millions of dollars with very little warning. The agency was originally called the Health Care Financing Administration, and was renamed in 2001.
Alongside Medicare and Medicaid, it oversees the Children's Health Insurance Programme and the federal side of the health insurance marketplaces created under the Affordable Care Act. It also sets quality and safety standards that facilities must meet to be paid.
Payment is often formula driven. For inpatient hospital stays, Medicare uses diagnosis related groups, a system that sorts patients into categories based on their condition and treatment, and pays a set amount for each category rather than reimbursing every item.
This gives hospitals a strong incentive to manage costs, because they keep any saving and bear any overspend. Rules are updated on an annual cycle, with proposed changes published for public comment before they are finalised.
Finance teams in healthcare therefore build rate changes into their budgets and forecasts each year. A provider that ignores the proposals can be caught out by a cut in reimbursement that was visible months earlier.
For non-healthcare businesses, CMS matters too. Insurers, software suppliers, consultancies and investors all watch its announcements, since a new rule can create or remove entire markets.
Employers also feel the effect, because Medicare payment levels influence what private insurers negotiate with hospitals.
In practice
Real-world examples.
Example
A regional hospital group prepares its annual budget. Its finance team reads the proposed inpatient payment rule and models a 2% increase in the base rate, so it can plan staffing and capital spending on a realistic revenue assumption.
Example
A medical device company sells a new diagnostic scanner. It hires a reimbursement consultant to find out whether Medicare will pay for scans using the device, because hospitals are unlikely to buy equipment that earns no payment.
Example
A private equity firm considers buying a chain of home health agencies. Its analysts study how Medicare pays for home health visits and test what happens to the chain's profit if the payment rate falls by 5%.
Formula
Calculation
Simplified inpatient payment = hospital base rate x relative weight of the diagnosis group
Suppose a hospital's base rate is $6,000 and a patient is placed in a group with a relative weight of 1.5. The simplified payment is 6,000 x 1.5 = $9,000. If the hospital treats the patient for a total cost of $7,500, it keeps a margin of 9,000 - 7,500 = $1,500. If the treatment cost $10,500, it would absorb a loss of 10,500 - 9,000 = $1,500. Real payments include further adjustments for wages and teaching status, so this is a simplified illustration.Case study
Seen in the real world.
Harbourview Care Group is an illustrative, fictional operator of 12 nursing facilities. About 60% of its revenue comes from Medicare and Medicaid, so the chief financial officer watches CMS announcements closely.
When a proposed rule suggests a 3% cut to a payment category that makes up $9,000,000 of annual revenue, the CFO calculates an annual hit of $270,000. She then asks each facility manager to find savings in supplies and agency staffing to offset it before the final rule arrives.
In this illustrative story the final rule softens the cut to 1.5%, so the shortfall is about $135,000. Because the group started early, it covers the gap from savings it had already identified and avoids a rushed round of redundancies.
Watch out
Common mistakes.
- Confusing Medicare with Medicaid, when Medicare mainly covers older and disabled people and Medicaid covers people on low incomes and is run jointly with the states.
- Assuming CMS is an insurance company, when it is a government agency that sets rules and pays claims but does not sell commercial policies.
- Treating payment rules as stable, when annual updates can change a provider's revenue noticeably from one year to the next.
Questions
People also ask.
Does CMS pay hospitals directly?
It pays providers through contractors that process claims, and in the case of Medicare Advantage it pays private insurers a fixed amount per member instead.
How does CMS relate to the Department of Health and Human Services?
CMS is one of the operating divisions of the department, alongside agencies such as the Food and Drug Administration.
Why should a finance team outside healthcare care?
Because its rules influence insurance costs, supplier demand and investment opportunities across a very large part of the economy.
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