Module 2
How Traditional Medicare Pays
Administered prices for hospitals, physicians, and everyone else. One blueprint underlies a dozen payment systems, and learning it once is enough.
By the end of this module, you will be able to:
- Calculate an inpatient payment from a base rate, wage index, and DRG relative weight
- Explain how RVUs and a conversion factor produce a physician payment
- Predict the distortion that follows from any given unit of payment
- Paying Hospitals The inpatient prospective payment system pays a fixed amount per discharge based on diagnosis. It was Medicare's first serious attempt at paying for value. About 5 min
- Paying Physicians Every physician service carries relative value units converted to dollars by a single number. As of 2026 there are two of those numbers, and the gap rewards risk. About 5 min
- The Common Architecture Medicare runs a dozen separate payment systems. They share one blueprint, and learning it once means you can read any of them. About 4 min
Module quiz
Answer all questions to see your score.
1. What is the productivity adjustment in an annual payment update?
The FY 2026 IPPS update was a 3.3 percent market basket increase reduced by a 0.7 percentage point productivity adjustment, so the net update was 2.6 percent.
2. Why do the two CY 2026 physician conversion factors matter for value-based care?
The qualifying APM conversion factor is updated +0.75 percent annually against +0.25 percent for everyone else. The 2026 gap between $33.57 and $33.40 is small, but it widens every year.
3. A payment system that pays per day of care creates which characteristic distortion?
Every payment unit rewards something specific. Per-day payment rewards extending the stay, per-discharge payment rewards more admissions and earlier discharge, and capitation rewards avoiding utilization.