What should this service pay?
RVUs, DRG weights, APCs, per diems, case rates, percent of charges, PMPM.
The unit of payment decides who carries the risk of a longer stay or a sicker patient.
Payer Contracts and Reimbursement
Every claim is paid according to a formula somebody agreed to: a Medicare fee schedule, a DRG base rate, a per diem, a percentage of charges, a capitation rate. Payer contracts write those formulas down. This tutorial explains how the main reimbursement methods work, how to read and model a contract, how to find and recover underpayments, and how to prepare a negotiation, with the 2026 Medicare rates that most commercial contracts are built on.
What did we actually agree to?
Fee schedule year, lesser-of, carve-outs, escalators, timely filing, audit rights.
The rate exhibit is a third of the contract. The rest decides whether you ever see the rate.
Did the payer pay it?
Expected reimbursement versus the allowed amount on the remittance.
Underpayments are quiet. Nothing in the 835 says "we paid you less than the contract."
The big picture
Reimbursement is the set of rules that turn a coded claim into a dollar amount. For Medicare and Medicaid the rules are public and published in regulation. For commercial, Medicare Advantage and Medicaid managed care plans, the rules are private contracts, and most of them borrow Medicare's methods and simply change the numbers.
That is why the revenue cycle cannot be understood without the payment formulas. A coder chooses a DRG; the contract decides what the DRG is worth. A registrar picks a plan; the contract decides whether the hospital is in network at 140% of Medicare or out of network at a percentage of charges. A denial analyst appeals a bundled line; the contract decides whether the payer's edit policy was even allowed to apply. The contract is the reference point for every expected-reimbursement calculation, every variance work queue, and every negotiation.
In practice three groups own this work. Managed care contracting negotiates and signs. Decision support or finance models what a contract will produce. Revenue integrity and the payment variance team compare what was paid against what was modeled and chase the difference. The rest of the revenue cycle feeds them: accurate charges, accurate codes, clean remittances, and the payer behavior data that becomes the next negotiation's evidence.
Why it matters in numbers
Price gap
254% of Medicare
What employers and private insurers paid hospitals, on average, for inpatient and outpatient care combined in 2022 (RAND round 5.1, published December 2024). Only Arkansas was below 170% of Medicare; eight states were above 300%. Commercial contracts are where most of a hospital's margin lives.
Medicare physicians
$33.40 per RVU
The CY 2026 Medicare physician conversion factor for clinicians outside advanced APMs, up 3.26% because of a one-year 2.5% statutory increase. The proposed CY 2027 factor falls back to $32.84 (−1.68%) as that increase expires. Contracts pegged to "current year Medicare" move with it.
Medicare Advantage
+2.48% for 2027
The final CY 2027 MA rate announcement (April 2026) raises plan payments about 2.48%, more than $13 billion, after an advance notice of 0.09%. Plans pass pressure on rates straight into provider negotiations.
Who is involved
- Managed care contracting
- Negotiates rates and terms with commercial, MA and Medicaid managed care plans; owns the contract calendar (terms, notice dates, escalators) and the relationship with payer provider-relations staff.
- Decision support / finance
- Builds the contract model: loads terms into the contract management system, calculates expected reimbursement per claim, and projects the revenue effect of proposed rates.
- Revenue integrity and payment variance
- Compares expected to actual payment on every remittance, works underpayments, and feeds payer behavior (denials, delays, policy changes) back to contracting.
- Coding, CDI and charge capture
- Produce the inputs the formulas run on: DRG assignment, CPT/HCPCS and modifiers, revenue codes, units, charges. A contract pays the claim as coded, not the care as delivered.
- Patient access
- Identifies the plan and product correctly. A contract usually covers specific product lines (HMO, PPO, exchange, MA, Medicaid); the wrong product means the wrong rate or no contract at all.
- Payer provider relations and network management
- The plan's counterpart: proposes rates from the plan's cost targets, maintains the fee schedule and payment policies, and resolves disputes before they become litigation.
- Legal and compliance
- Reviews termination, indemnity, audit, confidentiality and antitrust exposure; checks that price transparency and surprise-billing rules are reflected.
- Government payers
- CMS and the Medicare Administrative Contractors (MACs) for Medicare; state Medicaid agencies and their MCOs. No negotiation: the rules are the rates.
What goes wrong
Silent underpayments
A payer loads an old fee schedule year, misses a negotiated escalator, applies an edit the contract excludes, or pays a per diem for fewer days than the stay. The 835 looks normal. Without a contract model, nobody notices.
Terms that outrun the rates
A good rate exhibit paired with a weak lesser-of clause, a 90-day timely filing limit, unlimited audit look-back, or payment policies "incorporated by reference" that the payer changes unilaterally.
Contracts nobody loaded
Amendments signed but never entered in the contract management system; evergreen contracts rolling over for years at the same rates; products added to a plan that the contract never priced.
Reimbursement methods, mapped
Every payment method answers one question: what is the unit of payment? The smaller the unit (a line item), the more risk the payer carries for volume. The larger the unit (a case, a member-month), the more risk the provider carries for intensity and length of stay. Everything else is detail.
| Method | Unit of payment | Where you see it | Who carries the risk | What to watch |
|---|---|---|---|---|
| Fee schedule (RBRVS) | Each CPT/HCPCS line, priced from RVUs × GPCI × conversion factor | Medicare physician fee schedule; most commercial professional contracts as a percentage of Medicare | Payer bears volume risk; provider bears coding and efficiency risk | Which year's RVUs and conversion factor; facility vs non-facility; modifier payment rules; multiple-procedure reductions |
| Percentage of billed charges | Each line, as a discount from the chargemaster price | Older hospital contracts, out-of-network settlements, carve-outs, workers' comp in some states | Payer bears almost all risk; provider is paid more when charges rise | Lesser-of clauses, charge-increase caps, rate re-opener if the chargemaster changes |
| Case rate (MS-DRG, APR-DRG) | One payment per inpatient discharge, scaled by a relative weight | Medicare IPPS; Medicaid (often APR-DRG); commercial inpatient contracts | Provider bears length-of-stay and intensity risk; outliers share the extreme cases | Grouper version, base rate, outlier terms, transfer rules, carve-outs for implants and drugs |
| Per diem | One payment per inpatient day, often tiered by level of care | Commercial and Medicaid managed care inpatient, behavioral health, SNF, rehab | Provider bears intensity risk per day; payer bears length-of-stay risk, so expect concurrent review | Day counting (admit day, discharge day, observation conversion), tier definitions, stop-loss at a charge threshold |
| APC / OPPS | Ambulatory payment classification per service, with packaging of ancillaries | Medicare hospital outpatient; many commercial contracts use a percentage of OPPS | Provider bears the cost of packaged items; payer bears volume | Status indicators, comprehensive APCs (J1), site-neutral rates for off-campus departments, the 340B offset |
| ASC fee schedule | Per procedure, from the OPPS relative weights scaled to the ASC conversion factor | Medicare ASC payment; commercial ASC contracts often a percentage of Medicare ASC or a grouper-based fee schedule | Similar to OPPS; device-intensive procedures handled separately | Covered procedures list, device-intensive rules, multiple-procedure discount |
| Capitation (PMPM) | Fixed amount per member per month regardless of use | HMO primary care, delegated medical groups and IPAs, MA global risk, Medicaid MCO contracts with the state | Provider bears utilization, intensity and population risk | Age/sex rate bands, carve-outs, risk adjustment, stop-loss, IBNR reserves, member attribution |
| Bundled / episode payment | One target price for all services in a defined episode (for example, 30 or 90 days after surgery) | Medicare TEAM (mandatory since January 2026), BPCI Advanced, CJR-X (from 2028), commercial bundles | Provider bears the cost of readmissions, post-acute care and complications in the window | Episode triggers and exclusions, target price method, reconciliation timing, quality gates |
| Shared savings / shared risk | Fee-for-service plus a retrospective settlement against a spending benchmark | MSSP and ACO REACH, MA value-based agreements, commercial ACO contracts | Depends on the track: upside only, or two-sided with losses | Benchmark method, minimum savings rate, sharing rate, quality score, attribution, risk score caps |
| Pay for performance / withholds | A percentage of the base rate held back and earned on quality or efficiency metrics | Commercial, MA and Medicaid managed care overlays on any of the above | Provider bears measurement risk | Measure definitions, data source, timing of the payout, whether the withhold is new money or your own |
Medicare's fee schedules are the reference set
Commercial contracts rarely invent a method. They point at one of Medicare's and multiply. Knowing which Medicare system prices a service tells you which contract exhibit applies, and which annual rule changes the rate.
- PFSPhysician and other professional services; RVUs × GPCI × CF
- IPPSAcute inpatient; MS-DRG × base rate, federal fiscal year (Oct 1)
- OPPSHospital outpatient; APCs × conversion factor, calendar year
- ASCAmbulatory surgery centers; OPPS weights × ASC conversion factor
- CLFSClinical laboratory; market-based rates under PAMA
- DMEPOSEquipment and supplies; fee schedule with competitive bidding areas
- ASP + 6%Part B drugs; average sales price plus 6% (less sequestration)
- Post-acute PPSSNF (PDPM), home health (PDGM), IRF, LTCH, hospice
The risk ladder
Low provider risk
Percent of charges, fee schedule
Paid for each thing you do. The payer manages risk with utilization management, edits and prior authorization, which is why fee-for-service contracts come with the heaviest administrative rules.
Shared risk
Per diem, DRG, bundles
Paid for an episode or a day. You profit from efficiency and lose on complications. Outlier and stop-loss terms decide how much of the tail you absorb.
Full risk
Capitation, global budgets
Paid for a population. Revenue is fixed; cost is yours. Requires actuarial support, stop-loss insurance, claims data from the payer, and the ability to manage referrals and admissions.
One claim, several methods
A single surgery can be paid four ways at once: the surgeon under a fee schedule, the anesthesiologist under base and time units × an anesthesia conversion factor, the hospital under a DRG or an APC, and an implant as a carve-out at invoice cost plus a percentage. Each has its own contract exhibit, its own claim form (CMS-1500 or UB-04) and its own variance logic. Model them separately.
Physician fee schedule math
Medicare pays professional services with the resource-based relative value scale (RBRVS). Each CPT or HCPCS code carries three relative value units, each is adjusted for geography, and the sum is multiplied by a national conversion factor. Most commercial professional contracts are a percentage of this number, so the formula is worth knowing cold.
The formula
Payment = [(Work RVU × Work GPCI) + (PE RVU × PE GPCI) + (MP RVU × MP GPCI)] × Conversion factor. Medicare then pays 80% of that allowed amount after the Part B deductible, the patient (or a secondary payer) owes 20%, and the 2% sequestration reduction comes off Medicare's share.
- Work RVU
- The clinician's time, skill, intensity and stress for the service. Set through the AMA RUC survey process and CMS review. For CY 2026, CMS applied a −2.5% "efficiency adjustment" to the work RVUs and intraservice time of roughly 7,700 non-time-based codes (procedures, imaging, tests); E/M visits, behavioral health, care management, telehealth and maternity care were exempt.
- Practice expense (PE) RVU
- Staff, equipment, supplies and overhead. Two values per code: non-facility (office, where the practice bears the overhead) and facility (hospital, ASC, where the facility bills separately). From 2026 CMS cut the indirect PE allocated to facility services to half the non-facility amount, shifting money toward office-based practices.
- Malpractice (MP) RVU
- Professional liability cost, updated every three years from premium data. Small for most codes, larger for surgery and obstetrics.
- GPCI
- Geographic practice cost index, one each for work, PE and malpractice, for each of the 100-plus Medicare payment localities. The national average is 1.000 by construction. A statutory floor keeps the work GPCI at 1.000 in lower-cost localities; the Consolidated Appropriations Act, 2026 (signed February 3, 2026) extended that floor through the end of 2026.
- Conversion factor (CF)
- The dollar amount per total RVU, set each year by statute plus a budget-neutrality adjustment. Since 2026 there are two: one for qualifying participants in advanced alternative payment models, one for everyone else.
- Anesthesia
- Priced differently: (base units + time units + modifying units) × a separate anesthesia conversion factor, also geographically adjusted. For 2026: $20.600 (QP) and $20.498 (non-QP).
The 2026 conversion factors, and why there are two
| Item | Figure | Notes |
|---|---|---|
| CY 2025 conversion factor | $32.35 | Single factor for all clinicians |
| CY 2026, qualifying APM participant (QP) | $33.5675 | +3.77%: 0.75% statutory update + 2.5% one-year increase + 0.49% budget neutrality |
| CY 2026, non-QP (everyone else) | $33.4009 | +3.26%: 0.25% statutory update + 2.5% one-year increase + 0.49% budget neutrality |
| One-year 2.5% increase | CY 2026 only | Section 71202 of Public Law 119-21 (July 2025); it expires January 1, 2027 |
| CY 2027 proposed (July 2026) | $33.17 QP / $32.84 non-QP | −1.19% and −1.68%; the 2.5% increase drops out, offset partly by the statutory updates and a +0.53% work RVU adjustment. Final rule expected in November 2026 |
| MIPS payment adjustment | up to ±9% | Applied to Medicare paid amounts two years after the performance year; the performance threshold is 75 points through the CY 2028 performance period |
| Telehealth originating site fee | $31.85 | CY 2026 (HCPCS Q3014) |
The split comes from MACRA: from 2026, clinicians who are qualifying participants in advanced alternative payment models receive a 0.75% annual update and everyone else 0.25%. The gap compounds every year. A practice's QP status is determined by CMS each year from the share of payments or patients that flow through an advanced APM.
Participation status and what the patient can be charged
Participating (PAR)
100% of the fee schedule
Accepts assignment on every claim. Medicare pays 80% of the allowed amount directly; the provider bills the patient only the 20% coinsurance and any unmet deductible.
Non-participating, assigned
95% of the fee schedule
The non-PAR fee schedule is 5% lower. The provider may accept assignment claim by claim; when it does, the arithmetic is the same as PAR but on the smaller allowed amount.
Non-participating, unassigned
Limiting charge: 115% of the non-PAR amount
The provider bills the patient directly, up to 115% of the non-PAR allowed amount (109.25% of the PAR amount). Medicare pays the patient. Collection risk moves to the practice.
RVU payment calculatorRVU defaults are illustrative values in the range of an established-patient office visit; look up the live values in the CMS PFS file. Conversion factors and sequestration are the 2026 figures.
Setting
Participation
How commercial contracts use the fee schedule
Fixed-year basis
"150% of the 2024 Medicare RBRVS"
The RVUs and conversion factor are frozen at a named year. Predictable, and immune to Medicare cuts, but also immune to increases; it needs an escalator to keep pace. Confirm whether the GPCI is frozen too and which locality applies.
Floating basis
"150% of the current Medicare fee schedule"
Rates change every January, and mid-year if CMS corrects the file. The 2026 efficiency adjustment cut proceduralists' work RVUs; a floating contract passed that cut through to the commercial rate on January 1. Model the annual rule every year.
Component basis
Work RVU-only or total-RVU
Some contracts (and most physician compensation plans) count work RVUs only. A payment contract on total RVUs pays more for office procedures with high practice expense; one on work RVUs rewards the clinician's time. Know which one the exhibit means.
Gap codes
Services with no Medicare RVU
Preventive and pediatric codes, vaccines, non-covered services, carrier-priced codes. The contract needs a gap fee schedule, a default percentage of charges, or a named commercial gap methodology, or those lines will pay at whatever the payer decides.
Modifier payment rules travel with the method
Medicare's payment rules, not just its RVUs, come along with an RBRVS-based contract unless the exhibit says otherwise: multiple-procedure reduction (100% / 50% for the second and later surgical procedures), bilateral at 150% (modifier 50), assistant surgeon at 16% (modifier 80), co-surgeons at 62.5% each (modifier 62), the professional/technical split (modifiers 26 and TC), and the imaging and therapy multiple-procedure reductions. Payers often apply their own versions. Ask for the payment policy document by name and attach it to the contract.
Inpatient MS-DRG payment
Medicare pays acute inpatient stays under the Inpatient Prospective Payment System (IPPS): one payment per discharge, determined by the Medicare Severity Diagnosis Related Group (MS-DRG) the stay is grouped into. The method is forty years old, updated every October 1, and copied, with different numbers, by Medicare Advantage, many Medicaid programs and most commercial inpatient contracts.
The formula
Operating payment = [(Standardized amount × labor share × wage index) + (standardized amount × non-labor share)] × DRG relative weight × (1 + IME + DSH), plus a capital payment (capital federal rate × geographic adjustment × weight), plus an outlier payment for extraordinarily costly cases, plus add-ons for new technology and uncompensated care. Quality programs then adjust the result by up to a few percent.
The pieces
- MS-DRG and relative weight
- The grouper assigns one of about 770 MS-DRGs from the principal diagnosis, procedures, secondary diagnoses (CC/MCC), sex, age and discharge status. Each DRG carries a relative weight: average cost of that DRG relative to the average of all cases (1.0). A weight of 2.0 pays twice the base. Weights are recalculated each year from MedPAR claims; FY 2027 added 14 MS-DRGs and deleted 18.
- Standardized amount (base rate)
- The national average operating cost of a weight-1.0 case, split into a labor-related share and a non-labor share. FY 2026: $6,752.61. FY 2027 (from October 1, 2026): $6,848.98 for hospitals that report quality data and use certified EHR technology, a net rate increase of about 1.4% after budget-neutrality adjustments (market basket 3.2% less 0.9 points productivity = 2.3% update).
- Wage index and labor share
- The labor share (66% when the wage index is above 1.0, 62% when it is 1.0 or below) is multiplied by the hospital's area wage index, which compares local hospital wages with the national average. The non-labor share is not adjusted. A wage index of 1.20 adds 20% to two-thirds of the base.
- Capital payment
- A separate federal capital rate ($524.15 FY 2026; $540.03 FY 2027) × a geographic adjustment factor derived from the wage index × the DRG weight, with its own IME and DSH factors. Usually 5% to 8% of the operating payment.
- IME and DSH
- Indirect medical education for teaching hospitals (based on the resident-to-bed ratio) and disproportionate share for hospitals serving many low-income patients. Both are percentage add-ons to the per-case payment; since 2014 most DSH money is paid instead as uncompensated care payments from a national pool (about $7.94 billion in FY 2027).
- Outliers
- When a case's estimated cost (charges × the hospital's cost-to-charge ratio) exceeds the DRG payment plus a fixed-loss threshold, Medicare pays 80% of the excess. The threshold is $40,397 for FY 2026 and $49,346 for FY 2027. Outlier spending is targeted at 5.1% of IPPS payments.
- Transfers
- A patient transferred to another acute hospital, or discharged to post-acute care under a transfer-DRG, is paid a per diem (the DRG payment ÷ geometric mean length of stay, doubled on the first day) up to the full DRG. Discharge status codes drive this and are a classic audit target.
- Quality programs
- Hospital Value-Based Purchasing redistributes 2% of base DRG payments; the Readmissions Reduction Program can cut payments by up to 3%; the HAC Reduction Program takes 1% from the lowest-performing quartile. Failing to report quality data or to use certified EHR technology cuts the annual update (for FY 2027: 1.5% instead of 2.3% without quality reporting, −0.1% without EHR use, −0.9% with neither).
MS-DRG payment calculatorStandardized amounts, capital rates, labor shares and outlier thresholds are the FY 2026 and FY 2027 federal figures. The DRG weight, wage index, IME, DSH and charges are inputs you supply; the defaults are illustrative.
FY 2026 and FY 2027 side by side
| Item | FY 2026 | FY 2027 |
|---|---|---|
| Operating standardized amount (full update) | $6,752.61 | $6,848.98 |
| Labor share, wage index > 1.0 / ≤ 1.0 | 66% / 62% | 66% / 62% |
| Capital federal rate | $524.15 | $540.03 |
| Outlier fixed-loss threshold | $40,397 | $49,346 |
| Market basket less productivity | — | 3.2% − 0.9 = 2.3% |
| Net change in the operating rate | — | about +1.4% |
| Uncompensated care pool | — | about $7.94 billion (+2.9%) |
How other payers use DRGs
Medicare Advantage
Original Medicare rates as the floor
A non-contracted hospital must be paid at least what Original Medicare would have paid (42 CFR 422.214), including outliers and IME. Contracted MA rates are negotiated, usually as a percentage of the Medicare DRG payment, and the contract should state which year's IPPS factors and which wage index apply.
Commercial DRG contracts
Base rate × weight, your way
The payer sets its own base rate (often "$X per weight") and names a grouper and version (MS-DRG v43 for FY 2026, or 3M APR-DRG for severity-adjusted pediatrics and Medicaid). Check: is the weight table updated when CMS updates it? Is there an outlier at a charge threshold, and at what percentage? Are implants, high-cost drugs and transfers carved out?
Medicaid
APR-DRG and state base rates
Most state Medicaid programs and their MCOs pay inpatient care under APR-DRG with a state base rate well below Medicare's. Supplemental and directed payments make up part of the gap; H.R. 1 (July 2025) caps new state directed payments at 100% of Medicare in expansion states and 110% in non-expansion states, with grandfathered payments phased down 10 percentage points a year from 2028.
Episode models
TEAM and CJR-X
The mandatory Transforming Episode Accountability Model started January 1, 2026 (through 2030) for five surgical episodes in selected areas, and the nationwide CJR-X joint replacement model starts January 1, 2028. The DRG payment still arrives; a reconciliation against a target price follows, and the hospital is accountable for 30 days of post-discharge spending.
Coming in FY 2029: market-based DRG weights
CMS finalized a plan to estimate MS-DRG relative weights from the median Medicare Advantage negotiated charge per DRG reported on hospital cost reports, beginning with cost reporting periods in CY 2026 and applying to the FY 2029 weights. Hospitals must now report that median MA negotiated charge by MS-DRG on the cost report. Contracting and finance need a reliable way to compute it from the contract management system and the price transparency machine-readable file.
OPPS, ASC and site-neutral payment
Hospital outpatient services are paid under the Outpatient Prospective Payment System: each separately payable HCPCS code maps to an Ambulatory Payment Classification (APC) with a relative weight, multiplied by a conversion factor, with most ancillary items packaged into the primary service. Ambulatory surgery centers use the same weights at a lower conversion factor. The policy fight of the decade, site-neutral payment, is about whether the hospital rate should exist at all for care that could be delivered in an office.
How an outpatient claim is priced
- 1
Status indicator Per HCPCS line
Addendum B assigns each code a status indicator. J1: comprehensive APC, one payment for the whole claim. S / T: separately paid (T lines get the multiple-procedure reduction). N: packaged, no separate payment. Q1–Q3: conditionally packaged. K: separately paid drugs and biologicals. A: paid under another fee schedule (lab, therapy, PFS).
- 2
APC and relative weight Per payable line
Each separately payable code is grouped into an APC of clinically similar, similar-cost services. The APC's weight × the conversion factor = the national unadjusted payment. For 2026 the conversion factor is $91.415 (3.3% market basket less 0.7 points productivity, a 2.6% update), or $90.967 for hospitals subject to the 340B remedy offset.
- 3
Wage adjustment 60% labor share
Sixty percent of the payment is multiplied by the hospital's IPPS wage index; 40% is not adjusted. Rural sole community hospitals get a 7.1% add-on; cancer hospitals have their own adjustment.
- 4
Packaging and drugs Per claim
Drugs costing $140 or less per day are packaged; above that they are paid separately at ASP + 6%. Supplies, most imaging contrast, and many ancillary services are packaged into the primary APC. A packaged line still needs a charge on the claim, because future weights are set from reported costs.
- 5
Outliers and cost sharing Per claim
An outlier is paid when cost exceeds 1.75 × the APC payment and the APC payment plus a fixed-dollar threshold ($6,225 for 2026, down from $8,000); Medicare pays 50% of the excess. The patient's coinsurance is 20% of the APC rate, capped at the inpatient deductible per service.
The ASC fee schedule
Method
OPPS weights × $56.322
The CY 2026 ASC conversion factor is $56.322 ($55.224 for centers that do not report quality data), updated by the same 2.6% as OPPS. For office-based procedures the ASC rate is capped at the PFS non-facility practice expense amount. Device-intensive procedures pay the device portion at the OPPS amount.
Covered procedures list
560 codes added in 2026
CMS added 560 procedures to the ASC covered procedures list for 2026, including 271 that came off the inpatient-only list. The IPO list itself is being eliminated over three years: 285 services removed in 2026, a proposed 637 more in 2027, and full elimination by January 1, 2029. Each move shifts surgical volume between the DRG, APC and ASC exhibits of your contracts.
Site-neutral payment, 2026 and 2027
| Policy | Who | Rate | Status |
|---|---|---|---|
| Section 603 (BBA 2015) | Off-campus provider-based departments that began billing after November 2, 2015 ("non-excepted"; modifier PN) | PFS-equivalent rate, set at 40% of the OPPS rate | In effect since 2017 |
| Clinic visits (G0463) | All off-campus PBDs, including excepted ones (modifier PO) | 40% of OPPS | In effect since 2019 (fully 2020) |
| Drug administration (APCs 5691–5694) | Excepted off-campus PBDs; rural sole community hospitals exempt | PFS-equivalent (40% of OPPS); about $290 million saved in 2026 | In effect January 1, 2026 |
| Imaging without contrast (APCs 5521–5524 and composite ultrasound, CT, MRI) | Excepted off-campus PBDs; rural SCHs exempt | PFS-equivalent; about $260 million estimated | Proposed for January 1, 2027 (July 2026 proposed rule) |
| 340B remedy offset | Hospitals enrolled in Medicare on or before January 1, 2018 | −0.5% on non-drug items in 2026 (about $275 million); CMS proposed 3% a year from 2027 to recover the $7.8 billion by 2029 | In effect; 2027 proposal pending |
| 340B drug payment | 340B hospitals, except children's, cancer and rural SCHs | Proposed ASP − 33.4% for 340B-acquired drugs in 2027 (non-340B drugs stay at ASP + 6%) | Proposed; litigation likely |
What site-neutral does to a contract
A commercial contract at "a percentage of OPPS" inherits every site-neutral cut on the day CMS applies it, unless the exhibit freezes the rate year or excludes the PFS-equivalent methodology. A contract that pays the hospital outpatient department a facility fee plus the physician a professional fee at non-facility rates is also a target for payer "site of service" policies that redirect or deny the facility fee. Check both the rate exhibit and the payer's payment policy manual.
Modifiers that drive the rate
PO marks a service at an excepted off-campus department (paid at the OPPS rate, except for the site-neutral services above). PN marks a non-excepted off-campus department (PFS-equivalent). ER marks an off-campus emergency department. Missing or wrong modifiers misprice the claim and create audit exposure in both directions.
Per diems, case rates, capitation and value-based terms
Commercial and government managed care plans mix Medicare's methods with their own. The same contract can pay a surgery as a case rate, a medical admission as a tiered per diem, the clinic as a percentage of the fee schedule, and primary care as capitation, with a quality withhold on top. Each method has arithmetic worth modeling before you sign.
Per diem
Tiers
Medical, surgical, ICU, NICU, OB, behavioral
A daily rate per level of care, with critical care, NICU and specialty units paid at multiples of the medical-surgical rate. Rates vary widely by market and payer; the contract exhibit is the only reliable source. Tier definitions (revenue codes, unit types) decide which rate applies, and disputes over "ICU day versus step-down day" are common.
Day counting
Admit day in, discharge day out
Most contracts pay the admission day but not the discharge day; observation hours that convert to inpatient may or may not count. Leave-of-absence days and days denied on concurrent review are excluded. Read the definition; model a 4-day stay and check the payer's count on the first remittances.
Stop-loss
Charges above a threshold
Per diem contracts usually carry a stop-loss: once billed charges exceed, say, $150,000, the stay converts to a percentage of charges above (or from the first dollar). Stop-loss is the per diem equivalent of a DRG outlier and is the most frequently underpaid term in hospital contracts.
Concurrent review
Every day must be authorized
Because the payer carries the length-of-stay risk, per diem contracts come with aggressive utilization review. Days denied as "not medically necessary" are a contractual write-off; the appeal path is in the contract's dispute section, not the plan's member appeal process.
Case rates and percentage of charges
| Term | What it means | Model it |
|---|---|---|
| Flat case rate | One price per procedure or admission type (for example, a fixed amount for a normal vaginal delivery), regardless of charges or length of stay | Compare with your cost per case and with the DRG-based alternative at your case mix; ask for an outlier provision at a charge or day threshold |
| DRG case rate | Payer base rate × DRG weight; see chapter 04 | Verify grouper version, weight-table update rule, outlier and transfer terms, and carve-outs |
| Percentage of charges | A discount from billed charges (for example, 55% of charges = a 45% discount) | Payment rises with the chargemaster; payers respond with charge caps, "lesser-of" terms and re-openers if charges increase more than an agreed percentage per year |
| Lesser-of | The payer pays the lesser of billed charges and the contract rate | Any service billed below the fee schedule (an under-priced chargemaster item) is paid at the lower charge. Price every chargemaster line above the highest contracted rate for it |
| Carve-outs | Items excluded from the case rate or per diem and paid separately: implants (invoice cost + 10% to 20% is common), high-cost drugs, blood, dialysis, specialty procedures | Each carve-out needs a documentation rule (invoice attached, NDC on the claim) and its own expected-reimbursement logic |
| Escalators | Automatic annual increases (a fixed percentage, CPI-linked, or stepped amounts in the exhibit) | Load the effective dates in the contract system; audit the first remittance after each step |
Capitation
Capitation pays a fixed amount per member per month (PMPM) for a defined scope of services, whether or not the member is seen. Primary care capitation in commercial HMOs might cover office visits and basic in-office services; a global-risk arrangement in Medicare Advantage might cover everything but a few carve-outs, with the medical group taking a percentage of the plan's premium. The PMPM is usually banded by age and sex and, in MA and Medicaid, adjusted by risk score.
The arithmetic is simple: revenue = members × PMPM × months. The management is not. Revenue is fixed, so margin depends on utilization, referral control, and the accuracy of the capitation roster. Three documents matter: the division of financial responsibility (DOFR) matrix that says which party pays for each service category, the eligibility roster that determines who you are paid for (reconcile it monthly against your patient list), and the stop-loss or reinsurance terms that cap the loss on any single member.
Roster reconciliation
Members assigned to you but never seen are revenue; members you treat who are not on the roster are uncompensated. Retroactive additions and terminations must be reconciled with the payer monthly, with retro limits in the contract.
IBNR
In a global-risk contract you owe claims that have been incurred but not reported. Reserve for them from the first month. Underestimating IBNR is the classic way a capitated group goes insolvent.
Encounter data
Capitated services still need encounter claims. The payer uses them for risk adjustment, quality measures and rate setting; missing encounters lower next year's PMPM and risk scores.
Bundled payments and value-based terms
- Episode (bundled) payment
- A target price for everything in a defined episode: the anchor hospitalization or procedure plus post-discharge care for 30, 60 or 90 days. Fee-for-service claims are paid as usual; at reconciliation, spending above the target is repaid and spending below it is shared. Medicare's TEAM model (mandatory, January 2026 to December 2030) covers five surgical episodes with 30-day windows; CJR-X (from January 2028) covers joint replacement nationwide with 90-day episodes.
- Shared savings (one-sided)
- A benchmark is set from historical spending, trended forward. If actual spending for attributed members is below the benchmark by more than the minimum savings rate (MSR), the provider receives a share (commonly 40% to 50% in upside-only MSSP tracks), scaled by a quality score. No downside.
- Shared risk (two-sided)
- The same, but spending above the benchmark by more than the minimum loss rate is owed back, up to a loss cap. Higher sharing rates (up to 75% or more in advanced tracks) in exchange for downside exposure. Participation in an advanced APM can qualify clinicians for the higher QP conversion factor.
- Quality withhold
- The payer holds back a percentage of the base rate (1% to 5% is typical) and pays it out if measures are met. Treat it as at-risk revenue, model the measures, and negotiate a data feed so you can see your performance before the settlement.
- Pay for performance (P4P) and Stars incentives
- Bonus payments tied to HEDIS, CAHPS, readmissions or MA Star Ratings measures. Often funded from the plan's quality bonus; often paid 12 to 18 months after the measurement year. Record them as contingent revenue.
- Risk adjustment in the rate
- MA and Medicaid capitation and most benchmarks are adjusted by risk scores. Coding completeness (documented, supported HCCs) changes revenue directly. RADV audits and extrapolation make unsupported codes expensive.
Medicare Advantage and Medicaid managed care specifics
Medicare Advantage, contracted
Negotiated, often "% of Medicare"
MA plans pay contracted providers whatever the contract says; most hospital and physician contracts are pegged to Original Medicare rates (95% to 110% is a commonly cited range for hospitals, but it varies by market and is not a published figure). The contract should state which Medicare rate year, whether sequestration is applied (plans may contractually mirror it), and the plan's prior authorization and appeal processes.
Medicare Advantage, non-contracted
Original Medicare rates by regulation
Under 42 CFR 422.214, a non-contracted provider must accept, as payment in full, what Original Medicare would have paid (less the enrollee's cost sharing). Emergency and urgently needed services are always paid this way. The plan's prompt payment obligation for non-contracted clean claims is 30 days (42 CFR 422.520).
Medicaid managed care
State fee schedules, MCO contracts, directed payments
MCOs negotiate, but the state's fee-for-service rate is the anchor and often the ceiling. Supplemental and state directed payments (under 42 CFR 438.6(c)) lift effective rates for hospitals and physicians in many states; H.R. 1 limits new directed payments to Medicare levels (110% in non-expansion states) and phases grandfathered ones down from 2028. Prompt pay: 90% of clean claims within 30 days and 99% within 90 days (42 CFR 447.45) for fee-for-service, with MCO contracts following similar standards.
Workers' compensation and auto
State fee schedules
Most states set workers' comp medical fee schedules by regulation, frequently as a multiple of Medicare. Payment disputes go through the state's workers' comp process, not the payer's appeal process. Balance billing the injured worker is prohibited.
Anatomy of a payer contract
A participation agreement has three layers: the base agreement (legal terms), the rate exhibits (the money), and the documents incorporated by reference (the provider manual, payment policies, and medical policies that the payer can change). The rate exhibit gets the attention. The other two decide how much of the rate you keep.
- Parties, products and affiliates
- Who is bound (the hospital, the employed group, each tax ID and NPI) and which of the payer's products the rates apply to: commercial HMO/PPO/POS, exchange plans, Medicare Advantage, Medicaid managed care, self-funded (ASO) groups, and rental or "affiliate" networks. An all-products clause obliges you to join every current and future product at these rates. Negotiate product by product, and require notice and consent before new products are added.
- Term, renewal and termination
- Initial term (one to three years), then evergreen automatic renewal unless either party gives notice. Termination without cause usually requires 90 to 180 days' notice; termination for cause has a cure period. The notice window is a date on your contract calendar: miss it and the rates roll over for another year.
- Rates and rate exhibits
- Separate exhibits per service category (inpatient, outpatient, professional, ancillary, behavioral) with the method, the basis (fee schedule year, grouper version), the percentages, escalators with effective dates, and the lesser-of rule. Make the exhibit self-contained: a reader should be able to price a claim from it without calling anyone.
- Carve-outs and high-cost items
- Implants, drugs, blood, specialty services paid outside the case rate or per diem. The exhibit must say how: invoice plus a percentage, ASP-based, a fee schedule, or a percentage of charges, and what documentation triggers the separate payment.
- Claims submission and timely filing
- The clean-claim definition, required formats (837, UB-04 fields, NDCs on drug lines), and the filing limit measured from the date of service or discharge. Ninety days is aggressive; 180 days or one year is common. Secondary claims should run from the primary remittance date. Ask for a good-cause exception and for the payer's acknowledgment (277CA) to count as receipt.
- Prompt payment and interest
- When a clean claim must be paid (30 or 45 days is typical), what interest accrues if it is not, and whether state prompt-pay law applies to the payer's self-funded business (it usually does not; ERISA preempts it, so negotiate the term).
- Utilization management and prior authorization
- Which services require authorization, the decision timeframes, retro-authorization windows, peer-to-peer rights, and the consequence of a missed authorization (full denial versus a percentage penalty). Pin the PA list to the contract or require notice before it changes.
- Coding and payment policies
- Which edit set applies (NCCI, the payer's proprietary edits, or a named vendor's), modifier policies, multiple-procedure reductions, readmission and never-event rules, and bundling. The dangerous phrase is "in accordance with the payer's payment policies as amended from time to time." Require 60 to 90 days' written notice of any policy change that reduces payment and the right to terminate if it does.
- Audit, overpayment recovery and offsets
- How far back the payer can audit and recoup (12 to 24 months is common; some states cap it), whether it can offset against unrelated claims, the notice and appeal rights before recoupment, and extrapolation. Mirror the look-back: your right to submit underpayment claims should be at least as long as theirs to recoup.
- Dispute resolution
- Internal provider dispute process with deadlines, then escalation to a joint operating committee, mediation or binding arbitration. Payment disputes under the contract are separate from member appeals; use the right channel or the clock runs out.
- Credentialing and effective dates
- When a new provider can be paid under the contract (date of credentialing approval, or retroactive to the application date), and whether claims before that date are denied or held. Delegated credentialing speeds this up.
- Member hold-harmless and balance billing
- Members cannot be billed for covered services beyond cost sharing, including when the payer denies for a provider error (no authorization, late filing). Non-covered services can be billed only with an advance written waiver where allowed.
- Confidentiality and transparency
- Rates are confidential between the parties, but federal price transparency rules already require hospitals and plans to publish negotiated rates in machine-readable files. Gag clauses that stop you from sharing rates with your own consultants or benchmarking are no longer defensible; remove them.
- Most-favored-nation and anti-steering clauses
- An MFN clause promises the payer your lowest rate; an anti-steering or anti-tiering clause stops the payer from steering members away from you. Both attract antitrust scrutiny and several states restrict them. Involve counsel.
- Assignment and change of control
- Whether the contract survives a merger, acquisition or new tax ID, and whether an acquired practice inherits the system's rates (usually only with the payer's consent, and often not for the first year).
Contract loading checklist
Example: Riverside Medical Group and Northwind Health Plan (fictional)
Riverside's professional agreement with Northwind (payer ID 99999) pays "145% of the Medicare physician fee schedule in effect on the date of service, Illinois locality, non-facility," with a lesser-of clause and Northwind's "Professional Reimbursement Policies, as amended." In January 2026 the floating basis passed CMS's 2.5% increase through automatically; in January 2027 it will pass the proposed cut through just as automatically. Riverside's negotiation goal for the renewal: a fixed-year basis (the 2026 file) with a 3% annual escalator, and 90 days' notice before any policy change that lowers payment.
Modeling expected reimbursement
Expected reimbursement is the amount the contract says a specific claim should pay, calculated before the payer answers. It is the foundation of net revenue estimation, variance detection, and every negotiation scenario. If you cannot compute it per claim, you cannot know whether you are being paid correctly.
Building the model
- 1
Load the terms as rules Contract management system
Each exhibit becomes a pricing rule: method, basis, percentage, carve-outs, lesser-of, outlier/stop-loss, modifier rules, escalator schedule. Rules are versioned by effective date so a 2025 date of service prices under 2025 terms.
- 2
Attach the reference tables Annual and quarterly
Medicare PFS RVU files (quarterly updates), GPCIs, MS-DRG weight tables and groupers by version, OPPS Addendum A and B, ASC rates, ASP files, state Medicaid fee schedules, your chargemaster. A model with a stale RVU file is confidently wrong.
- 3
Price every claim at submission Day 0
The system groups the claim, applies the rule and writes the expected allowed amount and expected payer payment (after estimated cost sharing) to the account. This is the number your net A/R valuation uses.
- 4
Compare on the 835 At posting
Allowed amount on the remittance versus expected allowed. Differences beyond a tolerance go to the variance work queue with a reason category (chapter 09).
- 5
Run scenarios Negotiation and budget
Re-price last year's claims under proposed terms: a payer offer of "Medicare + 60% fixed at 2026" versus "current-year Medicare + 65%," a chargemaster increase under a lesser-of clause, or the volume shift when 637 procedures leave the inpatient-only list.
Numbers the model produces
- Expected allowed amount
- What the contract says the payer should recognize for the claim before cost sharing. The comparison point for the 835's allowed amount.
- Expected net revenue
- Expected allowed, less estimated uncollectible patient balances and bad debt, less anticipated denials. Used to value A/R and to book revenue under ASC 606.
- Yield (net-to-gross)
- Expected (or actual) payment ÷ gross charges, by payer and service line. Falls when the chargemaster rises faster than contract rates; rises when rates improve. A quick way to compare payers on one axis.
- Payment as a percentage of Medicare
- Re-price each payer's claims at Medicare rates and divide. The common currency of negotiation, and the measure RAND and price transparency analysts use.
- Case mix index
- Average DRG weight of the discharges. A rise in CMI increases DRG revenue without any rate change; a fall can hide a documentation problem. Track it separately from rates.
- Contract sensitivity
- How much expected revenue moves per 1% change in a term: the fee schedule percentage, the per diem, the stop-loss threshold, the carve-out markup. Tells you where to spend negotiating capital.
Contract term comparisonPrices one service three ways and shows what a chargemaster increase does to each. All rates are fictional, for illustration; enter your own.
Model the whole book, not the average
A payer offer that raises the inpatient base rate 4% and cuts outpatient surgery to a percentage of OPPS may be a net loss for a hospital with a large ambulatory surgery program and a gain for one without. Re-price the actual claims from the last 12 months under both sets of terms, by service line, before responding.
Data quality limits the model
Claims with the wrong plan code, missing modifiers, unlisted codes or charges below the fee schedule produce false variances. The first month of a new contract model is mostly fixing registration and charge capture. That is a feature: the model finds the upstream errors the payer has been silently paying less for.
Underpayments and recovery
An underpayment is a claim the payer adjudicated and paid, but at less than the contract requires. It is not a denial: the 835 carries a normal CO-45 contractual adjustment and a normal paid amount, and auto-posting closes the account. Finding it takes a model; recovering it takes a process with deadlines.
Where the variance comes from
| Cause | What you see | Example | Fix and recovery |
|---|---|---|---|
| Wrong fee schedule year or locality | Every professional line short by the same few percent | Payer still pricing at the 2025 conversion factor in 2026 | Send a rate dispute with the exhibit and a claim list; ask for a mass reprocessing project rather than claim-by-claim appeals |
| Missed escalator | Variance starts on the escalator's effective date | 3% step on January 1 not loaded by the payer | Same; include the amendment page and effective date |
| Lesser-of applied to under-priced charges | Allowed equals the billed charge, below the fee schedule | Injection charge set at $18 when the contract pays $31 | Not recoverable; fix the chargemaster. Audit all lines priced below the highest contract rate |
| Bundling edit the contract excludes | CO-97 on a line the contract lists as separately payable | Payer's proprietary edit bundles a code NCCI allows | Appeal citing the contract's edit-set clause; escalate as a policy dispute if systematic |
| Multiple-procedure reduction misapplied | Second procedure at 25% or the highest-valued line reduced | Payer ranks by billed charge rather than by fee schedule amount | Reprocessing request with the ranking rule from the payment policy |
| Modifier payment rule | Modifier 50 paid at 100% not 150%; modifier 62 paid at 50% not 62.5% | Co-surgeon claims at the wrong percentage | Reprocessing; include the policy or Medicare rule the contract adopts |
| DRG grouper or weight mismatch | Payer's DRG differs from yours or uses last year's weight | Payer on MS-DRG v42 weights after October 1 | Dispute with the grouper output; check whether the contract requires weight updates on CMS's schedule |
| Outlier or stop-loss not paid | Case rate paid; nothing for charges above the threshold | $210,000 stay with a $150,000 stop-loss threshold paid at the flat per diem | Highest-dollar category; many payers require a separate request with an itemized bill. Build a queue for every claim above the threshold |
| Per diem day count | Fewer days paid than the stay | Discharge day excluded by the payer, included by the contract; observation-to-inpatient day dropped | Dispute with the contract's day definition and the UB-04 dates |
| Carve-out missed | Implant line packaged into the case rate | Invoice not attached, or revenue code 0278 not recognized | Resubmit with the invoice; fix the claim edit so implant lines never leave without it |
| Sequestration or cost sharing applied wrongly | Commercial claim reduced 2%; MA cost sharing above the Original Medicare amount | MA plan applies sequestration though the contract is silent | Depends on contract language; dispute if the contract does not allow it |
| Interest not paid | Late payment with no interest line (PLB or separate payment) | Clean claim paid on day 70 under a 45-day prompt-pay term | Request interest under the contract or state law; some states let regulators penalize the plan |
| Silent PPO / rental network repricing | A payer you have no contract with pays at "network rates" | A TPA accesses your rates through a leased network | Check the contract's affiliate clause; if access was not authorized, bill at full charges or the out-of-network terms |
Expected vs actual variance finderEnter the contract's expected allowed amount and the remittance figures. The tool classifies the variance, separates rate problems from cost-sharing and denial effects, and sets the dispute deadline.
Likely cause
The recovery process
- 1
Detect and categorize At posting
The contract model flags the variance and the analyst assigns a cause category. Group by payer and cause before working anything: ten claims with the same cause are one dispute, not ten.
- 2
Validate Day 1–5
Confirm the claim was coded and billed correctly and the model's rule is right. A third or more of initial variances are your own errors (plan mapping, charge below rate, missing modifier). Fix those at the source.
- 3
Submit the dispute Within the contract's window
Use the payer's provider dispute or reconsideration process (not the member appeal process) with the contract exhibit page, your calculation, the 835, and the claim list. Reference the contract section and the dollar amount.
- 4
Escalate Day 45–90
No response or an unsupported denial of the dispute goes to the payer's provider representative, then the joint operating committee named in the contract, with a summary by cause and dollars. Systematic causes become a reprocessing project with an agreed claim universe and date range.
- 5
Settle, post and feed back Close
Post recoveries against the original accounts (not as unapplied cash) so yield and variance reporting are right. Record the cause, the days to recover and the amount, and send the summary to contracting for the next negotiation.
Measuring the program
Variance rate
Underpaid dollars ÷ expected dollars, by payer. Trend it monthly; a step change usually means a payer system change or a missed escalator.
Recovery rate and days to recover
Recovered ÷ validated underpayments, and the average days from detection to cash. Both justify the team and expose slow payers.
Root cause mix
Share of variances caused by your own data versus the payer's pricing. The first should fall over time; the second is negotiation evidence.
Overpayments count too
The same model finds overpayments. Under Medicare's 60-day rule an identified overpayment must be reported and returned within 60 days, and commercial contracts give the payer recoupment rights. Treat positive variances with the same discipline: investigate, document and refund where owed. A variance program that only looks one way is a compliance problem.
Payer scorecards and negotiation prep
A negotiation is won months before it starts, with data: what each payer pays relative to Medicare and to cost, how it behaves (denials, delays, policy changes, underpayments), what your volume and quality are worth to it, and what the market publishes about everyone else's rates. The scorecard turns that into a case.
The payer scorecard
| Dimension | Metric | Source | Why it matters at the table |
|---|---|---|---|
| Rate | Payment as a percentage of Medicare, by service line; yield; cost coverage (payment ÷ cost) | Contract model, cost accounting | The anchor for the rate ask; shows which lines are below cost |
| Volume and mix | Cases, visits, charges and net revenue by product; share of the payer's members you treat | PM/EHR, decision support | Leverage: how much of the plan's network you are, and how much of your revenue it is |
| Denials | Initial denial rate, final denial rate, overturn rate, top CARCs, PA denial rate | 835 analytics, denial management | Administrative cost you can price into the rate, and terms to fix (PA lists, edit sets) |
| Payment behavior | Days from clean claim to payment, prompt-pay compliance, interest paid, underpayment rate, days to resolve disputes | Variance program, A/R aging | Evidence for prompt-pay interest, policy-change notice and dispute timelines |
| Administrative burden | PA requests per 1,000 claims, records requests, audits and recoupments, policy changes per year | Authorization and audit logs | Translate to FTE cost; ask for gold-carding and audit limits |
| Quality and outcomes | Readmissions, complications, patient experience, Star-measure performance for the plan's members | Quality department, payer reports | Supports a higher rate or a value-based bonus; the plan's Star Ratings depend partly on you |
| Market | Competitors' negotiated rates from price transparency files; the plan's local market share; RAND and state benchmarks | Hospital MRFs, Transparency in Coverage files, published studies | Independent evidence that your ask is in range |
Preparing the case
- 1
Know the calendar 12 months before term end
Pull the notice deadline, the current term, any re-opener clauses and the payer's fiscal cycle. Payers set premium rates with regulators months ahead; a rate increase agreed after their filing is harder to get.
- 2
Build the baseline 9–12 months
Re-price 12 months of claims at current terms, at Medicare, and at cost. Identify service lines under cost and terms causing leakage (lesser-of, stop-loss, timely filing, policy changes). Quantify the underpayment and denial history.
- 3
Set objectives and walk-away 6–9 months
Rate targets by service line, non-rate terms ranked by dollar impact, and the point at which termination is better than renewal, with a continuity-of-care plan and patient communication ready if it comes to that. Board and clinical leadership aligned.
- 4
Open with the data 4–6 months
Share the scorecard summary, the ask and the rationale (cost trends, quality, market comparison). Expect the payer's counter to be framed as a total "medical cost trend" number; be ready to show the same total across your proposal.
- 5
Trade terms, not just rates 2–4 months
A fixed-year fee schedule, a reasonable escalator, notice before policy changes, a longer filing limit, a capped audit look-back and a real stop-loss may be worth more over the term than another point on the percentage. Price each trade with the model.
- 6
Paper it and load it Signing to day 30
Read the final exhibits against the term sheet line by line; payers' contract systems and yours should be loaded from the same document. Audit the first remittances.
What to ask for, beyond the percentage
Use the public rate files
Hospital price transparency (45 CFR Part 180) requires every hospital to publish payer-specific negotiated rates in a machine-readable file, and the Transparency in Coverage rule requires plans to publish in-network rates for every provider. Analysts now routinely compare a hospital's rates with competitors' for the same payer and DRG or CPT. Assume the payer has done it. Do it first.
Antitrust lines not to cross
Independent providers may not share or coordinate rates with competitors, jointly negotiate without an integrated arrangement, or agree to boycott a payer. Price transparency files are public data; discussing your strategy with a competitor is not. MFN and anti-steering clauses are under active federal and state scrutiny. Counsel reviews the playbook, not just the contract.
Termination is a tool, with rules
A credible willingness to go out of network is the strongest lever, and the most expensive to use. State laws and the contract usually require member notice 30 to 90 days before termination, continuity of care for members in active treatment (90 days is common; longer for pregnancy and serious conditions), and emergency services remain payable under the No Surprises Act with balance billing prohibited. Plan the operational side (eligibility messaging, estimates, scheduling rules) before the notice goes out.
Rules and regulations
Government reimbursement is written in the Social Security Act and Title 42 of the Code of Federal Regulations, updated by annual rules. Commercial contracts sit on top of state insurance law, ERISA, federal transparency and surprise-billing rules, and antitrust law. These are the sources to cite.
Medicare · Physician fee schedule
SSA §1848; 42 CFR Part 414, Subpart B; CY 2026 PFS final rule (CMS-1832-F)
Establishes the RBRVS, GPCIs and conversion factor, updated each calendar year. MACRA (2015) created the Quality Payment Program (42 CFR Part 414, Subpart O): MIPS adjustments of up to ±9% and, from 2026, the separate 0.75% and 0.25% conversion factor updates for qualifying APM participants and everyone else. Section 71202 of Public Law 119-21 added the one-year 2.5% increase for CY 2026. Participation, assignment and the limiting charge are in SSA §1842 and §1848(g).
Medicare · Inpatient
SSA §1886(d); 42 CFR Part 412; FY 2027 IPPS final rule (published August 4, 2026)
MS-DRG classification and weights, the standardized amount, wage index, IME (§412.105), DSH and uncompensated care (§412.106), outliers (§412.80 et seq.), transfers (§412.4), and the quality programs: Hospital VBP (§412.160 et seq.), Readmissions Reduction (§412.150 et seq.) and HAC Reduction (§412.170 et seq.). Mandatory episode models are issued under the Innovation Center's authority in SSA §1115A (TEAM at 42 CFR Part 512).
Medicare · Outpatient and ASC
SSA §1833(t) and §1833(i); 42 CFR Part 419 and Part 416, Subpart F; CY 2026 OPPS/ASC final rule (CMS-1834-FC)
APC grouping, packaging, the conversion factor, outliers and the inpatient-only list. Section 603 of the Bipartisan Budget Act of 2015 (SSA §1833(t)(21)) created the site-neutral rate for non-excepted off-campus departments; CMS extended PFS-equivalent payment to clinic visits (2019) and drug administration at excepted departments (2026), and has proposed imaging for 2027. The 340B remedy and its offset follow the Supreme Court's 2022 decision in American Hospital Association v. Becerra and the 2023 remedy rule.
Federal · Sequestration
Budget Control Act of 2011; 2 U.S.C. §901a; Statutory PAYGO Act of 2010
The 2% reduction to Medicare fee-for-service payments (applied to the Medicare paid amount after cost sharing, not to the allowed amount or the patient's share) remains in effect through the early 2030s under successive extensions. The additional 4% statutory PAYGO sequester that Public Law 119-21 would have triggered for 2026 was waived by Congress on November 12, 2025 (H.R. 5371). Watch each year's appropriations and budget acts for both.
Medicare Advantage
42 CFR Part 422: §422.214 (non-contracted providers), §422.520 (prompt payment), §422.100 and §422.113 (emergency services)
Non-contracted providers are paid at least the Original Medicare amount and must accept it as payment in full; non-contracted clean claims are paid within 30 days; emergency and urgently needed services are covered without authorization at Original Medicare cost sharing. The annual Rate Announcement (CY 2027: +2.48%, issued April 6, 2026) sets plan payments, which flow through to provider negotiations. Plan coverage decisions must follow Traditional Medicare criteria (CY 2024 final rule).
Medicaid
SSA §1902(a)(30)(A); 42 CFR Part 447 (payment, §447.45 timely claims); 42 CFR §438.6(c) (state directed payments); H.R. 1 §71116 (2025)
States set fee-for-service rates by state plan amendment; MCOs pay under their contracts with the state. Directed payments must now stay at or below Medicare rates (110% in non-expansion states) for new arrangements, with grandfathered payments reduced 10 percentage points a year from rating periods beginning January 1, 2028 (CMS guidance February 2, 2026). The Consolidated Appropriations Act, 2026 reduced scheduled Medicaid DSH cuts to $8 billion and delayed them to FY 2029.
Federal · Price transparency
Hospital Price Transparency, 45 CFR Part 180; Transparency in Coverage, 45 CFR §147.212, 29 CFR §2590.715-2715A
Hospitals must post a machine-readable file of standard charges including payer-specific negotiated rates and a consumer-friendly display of shoppable services; plans must post in-network negotiated rates and out-of-network allowed amounts. CMS enforces hospital compliance with civil monetary penalties scaled by bed count. Both files are now standard inputs to negotiation analysis.
Federal · No Surprises Act
Consolidated Appropriations Act, 2021, Title I; 45 CFR Part 149; 42 U.S.C. §300gg-111 and §300gg-131 et seq.
For emergency services, air ambulance and non-emergency services by out-of-network providers at in-network facilities, patient cost sharing is based on the qualifying payment amount (QPA, the plan's median contracted rate) and balance billing is banned. Payment disputes go to open negotiation and then federal independent dispute resolution (IDR), with the arbitrator choosing one party's offer. Out-of-network strategy must be built around these rules.
ERISA and state insurance law
29 U.S.C. §1001 et seq.; state prompt-pay, any-willing-provider and network adequacy statutes
Self-funded employer plans are governed by ERISA, which preempts most state insurance mandates, including prompt-pay interest and many provider-protection laws; those terms must be negotiated into the contract for the payer's ASO business. Fully insured products answer to state insurance departments: prompt-pay deadlines and interest, limits on recoupment look-back, assignment-of-benefits rules, and in a growing number of states, restrictions on MFN and anti-steering clauses.
Antitrust
Sherman Act §1 and §2 (15 U.S.C. §§1–2); FTC Act §5; DOJ/FTC enforcement guidance for health care
Providers that are not clinically or financially integrated may not jointly negotiate or share rate information with competitors; messenger-model arrangements have strict limits. Payer-side MFN clauses have drawn DOJ suits. Hospital mergers are reviewed partly on their expected effect on negotiated prices, which is why price transparency data now appears in merger reviews.
340B
Public Health Service Act §340B; 42 U.S.C. §256b
Eligible hospitals and grantees buy outpatient drugs at discounted prices and are paid for them under Medicare and commercial contracts at the usual rates. Medicare's 2018–2022 cuts were struck down; the remedy repaid hospitals and the offset recovers it from non-drug payments. Payer contracts increasingly contain 340B-specific drug reimbursement terms; read them against the state laws that restrict such terms.
Key numbers 2026–27
| Item | Figure | Context |
|---|---|---|
| Physician fee schedule | ||
| CY 2026 conversion factor, non-QP | $33.4009 | +3.26% from $32.35 in 2025 |
| CY 2026 conversion factor, qualifying APM participant | $33.5675 | +3.77%; 0.75% statutory update vs 0.25% |
| One-year increase in the CY 2026 factor | 2.5% | P.L. 119-21 §71202; expires January 1, 2027 |
| CY 2027 proposed conversion factors | $33.17 QP / $32.84 non-QP | −1.19% / −1.68%; final rule due about November 2026 |
| Efficiency adjustment to work RVUs (2026) | −2.5% | About 7,700 non-time-based codes; E/M and time-based codes exempt |
| Anesthesia conversion factor 2026 | $20.600 QP / $20.498 non-QP | Per unit, geographically adjusted |
| MIPS adjustment range | ±9% | Performance threshold 75 points through CY 2028 |
| Work GPCI floor of 1.000 | through Dec 31, 2026 | Extended by the Consolidated Appropriations Act, 2026 |
| Non-PAR fee schedule / limiting charge | 95% / 115% | Limiting charge = 115% of the non-PAR amount |
| Inpatient (IPPS) | ||
| Operating standardized amount, FY 2026 / FY 2027 | $6,752.61 / $6,848.98 | Full update; FY 2027 from October 1, 2026 |
| Capital federal rate, FY 2026 / FY 2027 | $524.15 / $540.03 | Per weight-1.0 case before geographic adjustment |
| Outlier fixed-loss threshold, FY 2026 / FY 2027 | $40,397 / $49,346 | Medicare pays 80% of cost above DRG payment + threshold |
| FY 2027 update | 3.2% − 0.9 = 2.3% | Net operating rate change about +1.4% after budget neutrality |
| Labor-related share | 66% / 62% | Wage index above 1.0 / at or below 1.0 |
| Quality program exposure | 2% / 3% / 1% | HVBP redistribution / HRRP maximum penalty / HAC Reduction |
| Uncompensated care pool, FY 2027 | about $7.94 billion | +2.9% over FY 2026 |
| Outpatient (OPPS) and ASC | ||
| CY 2026 OPPS conversion factor | $91.415 | +2.6% update; $90.967 with the 340B offset; $89.169 in 2025 |
| CY 2026 ASC conversion factor | $56.322 | $55.224 without quality reporting |
| OPPS outlier fixed-dollar threshold | $6,225 | Down from $8,000; plus 1.75 × APC payment |
| Drug packaging threshold | $140 per day | Separately paid above it at ASP + 6% |
| Site-neutral rate | 40% of OPPS | PFS-equivalent; drug administration at excepted off-campus PBDs from 2026 |
| Inpatient-only list removals | 285 in 2026; 637 proposed for 2027 | Full elimination by January 1, 2029 |
| 340B remedy offset | 0.5% in 2026; 3% proposed for 2027 | Recovering $7.8 billion; proposed completion 2029 |
| CY 2027 OPPS proposed update | 2.4% | 3.2% market basket − 0.8 productivity |
| Across payers | ||
| Sequestration | 2% | In effect; 4% PAYGO sequester waived November 2025 |
| MA payment change, CY 2027 | +2.48% | More than $13 billion; advance notice was +0.09% |
| Private prices vs Medicare (hospital) | 254% | RAND, 2022 claims; Arkansas lowest, eight states above 300% |
| Employer family premium, 2025 | $26,993 | +6% in a year; +26% over five years (KFF) |
| Medicaid state directed payment cap | 100% / 110% of Medicare | Expansion / non-expansion states; grandfathered payments −10 points a year from 2028 |
| Medicaid FFS prompt pay | 90% in 30 days, 99% in 90 days | 42 CFR 447.45 |
| MA non-contracted clean claims | 30 days | 42 CFR 422.520 |
What is changing
In effect 2026
Two conversion factors, site-neutral drug administration, TEAM
The APM/non-APM split, the efficiency adjustment and the facility PE cut reshaped professional rates in January; off-campus drug administration dropped to 40% of OPPS; the mandatory TEAM episodes began. FY 2027 IPPS rates took effect October 1.
Coming January 2027
PFS cut, OPPS site-neutral imaging, 340B changes
The proposed conversion factors fall 1.2% to 1.7%; off-campus imaging without contrast is proposed at the PFS-equivalent rate; the 340B offset is proposed at 3% a year and 340B drugs at ASP − 33.4%. Final rules land in November 2026. The work GPCI floor and the 2.5% increase both need Congress to continue.
Further out
Market-based DRG weights, CJR-X, Medicaid phase-downs
MS-DRG weights from MA negotiated charges in FY 2029; nationwide mandatory joint replacement bundles from January 2028; grandfathered Medicaid directed payments shrinking from 2028 and DSH cuts from FY 2029.
Sources
- Holland & Knight: CMS releases CY 2026 Medicare Physician Fee Schedule final rule (November 2025)
- CMS fact sheet: CY 2027 Medicare Physician Fee Schedule proposed rule (July 2026)
- Illinois Health and Hospital Association: FY 2027 Medicare IPPS final rule summary
- Michigan Health & Hospital Association: CMS releases FY 2027 IPPS final rule (August 2026)
- Illinois Health and Hospital Association: CY 2026 Medicare OPPS final rule summary
- Society of Interventional Radiology: CY 2026 HOPPS/ASC final rule summary
- Applied Policy: CMS proposes major CY 2027 OPPS/ASC changes (July 2026)
- AHA News: CMS finalizes Medicare Advantage rates for CY 2027 (April 6, 2026)
- RAND: Prices paid to hospitals by private health plans, round 5.1 (December 2024)
- KFF: 2025 Employer Health Benefits Survey, summary of findings
- Georgetown CCF: New CMS guidance on H.R. 1's restrictions of state directed payments (February 2026)
- Advisory Board: Medicare sequestration status, including the November 2025 PAYGO waiver
- King & Spalding Health Headlines: Consolidated Appropriations Act, 2026 (February 9, 2026)
Glossary
Knowledge check
Eight questions drawn from the chapters above. Pick an answer to see the explanation.
Score: 0 / 8
For training and reference. This page summarizes general rules and does not replace payer contracts, plan documents, CMS manuals, state law or legal advice. Example names, IDs, rates and payers are fictional; sample contract terms are illustrative only.
Figures checked October 15, 2026.