Why a Medicare Advantage plan owes an out-of-network hospital less than Original Medicare
Medicare pays teaching hospitals the operating IME and the per-diem pass-through for Medicare Advantage patients itself. At NewYork-Presbyterian that is 27.0% of a sepsis stay; at a non-teaching hospital it is almost nothing.
- Applies to
- MA plan payments to non-contracted hospitals
- Rates
- FY2027 inpatient
- Example
- MS-DRG 871, 5 days, three hospitals
On this page
The rule in one paragraph
When a Medicare Advantage HMO or PPO member is treated at a hospital the plan has no contract with, the plan generally has to pay the hospital at least what Original Medicare would have paid, and the hospital has to accept that amount as payment in full. The catch is in “what Original Medicare would have paid”. For a plan’s member, Medicare itself keeps paying a teaching hospital some of what sits in a fee-for-service DRG payment, so the plan does not owe those pieces.
CMS’s payment guide for out-of-network payments, last updated in February 2010, names them. Operating indirect medical education (IME), the teaching add-on, is paid to the hospital by its Medicare contractor on behalf of Medicare Advantage members, so the plan does not pay it. Capital IME is part of the capital payment, so the plan does. Direct graduate medical education and organ acquisition costs are pass-throughs that Medicare settles with the hospital, so the plan does not pay those either. (When the plan’s own member receives a transplant, the plan does pay the full Medicare allowed cost of that organ’s acquisition.)
The plan pays the DRG. Medicare still pays the teaching add-on.
What the plan pays, piece by piece
| Payment piece | Original Medicare claim | Medicare Advantage plan, out of network |
|---|---|---|
| Operating DRG payment (base rate, wage index, DRG weight) | Paid | Paid by the plan |
| Operating IME (the teaching add-on) | Paid | Paid by Medicare, not the plan |
| Capital payment, including capital IME | Paid | Paid by the plan |
| Disproportionate share (DSH) add-on | Paid | Paid by the plan |
| Cost outlier | Paid | Paid by the plan |
| New technology add-on | Paid | Paid by the plan |
| Per-diem pass-through (direct medical education, organ acquisition) | Paid | Paid by Medicare, not the plan |
Three hospitals, one stay
We priced the same claim at three hospitals: MS-DRG 871, five days, discharged October 15, 2026, $95,000 in covered charges, no outlier.
| Hospital | Teaching | Original Medicare | MA plan, out of network | Paid by Medicare outside the plan |
|---|---|---|---|---|
| NewYork-Presbyterian Hospital, New YorkCCN 330101 | Yes | $28,176.18 | $20,580.12 | $7,596.0627.0% |
| Houston Methodist Hospital, HoustonCCN 450358 | Yes | $21,591.04 | $15,842.66 | $5,748.3826.6% |
| Houston Methodist Sugar Land HospitalCCN 450820 | No | $15,772.95 | $15,750.65 | $22.300.1% |
At NewYork-Presbyterian, the $7,596.06 the plan does not owe is $5,183.21 of operating IME and $2,412.85 of pass-through (five days at $482.57). At Houston Methodist it is $1,740.13 of IME and $4,008.25 of pass-through (five days at $801.65). Its Sugar Land hospital, in the same labor market with the same 0.9909 wage index, has no teaching adjustment, so the only difference is a $4.46 daily pass-through.
The gap follows teaching intensity and the pass-through, not the DRG. A flat percentage adjustment for “IME” across hospitals would overpay some and underpay others.
How the hospital collects the rest
The pieces the plan leaves out do not disappear. A teaching hospital submits an information-only claim to its Medicare contractor for each Medicare Advantage inpatient stay, with condition codes 04 and 69, and Medicare pays the IME from that claim. Direct graduate medical education and organ acquisition are settled through the hospital’s cost report.
That is why paying the full Original Medicare total is not the cautious choice it looks like. If a plan pays a teaching hospital the full fee-for-service amount, the hospital can be paid the IME twice: once by the plan and once by Medicare.
Checks for an out-of-network inpatient claim
- Price at Original Medicare for the discharge date and the hospital’s own factors: wage index, teaching and low-income add-ons, cost-to-charge ratios.
- Take out operating IME and the per-diem pass-through. Keep capital (including capital IME), DSH, the outlier and any new technology add-on.
- Compute the outlier with Medicare’s own threshold and the hospital’s charges; the plan owes it (see how the outlier works).
- Split the amount between plan and member according to the plan’s benefits. The figures here are totals before cost sharing.
- Decide on sequestration. Sequestration cuts Medicare’s own claim payments by 2%, after the patient’s deductible and coinsurance, and CMS told plans in 2013 that they may reduce a non-contracted provider’s payment the same way. The figures here are before that reduction.
- Keep the components with the claim. A hospital that disputes the payment will ask which pieces were left out and why.
Questions
Does a Medicare Advantage plan pay IME on an out-of-network inpatient stay?
Not the operating IME: Medicare pays it to the teaching hospital directly for MA members. Capital IME is part of the capital payment, which the plan pays.
Is the plan’s amount a minimum or a maximum?
For a non-contracted hospital it works as both: the plan’s payment plus the member’s cost sharing generally must come to at least this amount, less any 2% sequestration reduction the plan applies to its own share (CMS has said plans may), and the hospital must accept that as payment in full. In-network payments follow the contract.
Why is the difference almost zero at some hospitals?
A hospital without residents has no IME, and its pass-through per diem is small. At Houston Methodist Sugar Land the difference on a five-day stay is $22.30.
Does the plan pay the cost outlier?
Yes. CMS’s guide counts outliers as part of the DRG payment the plan owes.
About these figures
Claim examples were priced in the cmswebpricer.com pricing engine on October 19, 2026, from published rates. They are Original Medicare totals before the patient’s deductible and coinsurance and before the 2% sequestration reduction, and are estimates, not claim determinations. The Original Medicare total includes the hospital’s per-diem pass-through ($2,412.85 here), which CMS’s pricer reflects but Medicare pays through interim payments settled on the hospital’s cost report, not on the claim, so a remittance or a plan’s base may leave it out. The Medicare Advantage figure is the Original Medicare total less operating IME and the per-diem pass-through, which is how this engine prices an out-of-network Medicare Advantage claim. Policy facts follow CMS’s payment guide for out-of-network payments (last updated February 2010), CMS’s May 2013 memo to plans on sequestration, and Medicare contractor billing instructions for information-only Medicare Advantage claims.
Further reading: