Glossary of Reimbursement Terms

A   B   C   D   E   F   G   H   I   J   K   L   M   N   O   P   Q   R   S   T   U   V   W   X   Y   Z


Actual Acquisition Cost (AAC)

Actual acquisition cost is the cost (invoice price) of a drug to a pharmacy, physician, or hospital that is providing the product to a patient. Some insurers require providers to submit pharmaceutical invoices with claims to demonstrate actual acquisition cost.


Any process by which a claim or dispute gets settled is called adjudication. In the case of medical claims, adjudication generally means the process used to get a claim paid. This can involve re-billing, appealing, or using legal means to reach a payment settlement.

Advance Beneficiary Notice (ABN)

Advance beneficiary notice, formerly known as the waiver of liability, is a written notice to a Medicare beneficiary that Medicare may not pay for an item or service based upon lack of medical necessity. The patient must sign the ABN and the patient may be billed if the claim is subsequently denied.

Affordable Care Act (ACA)

The Affordable Care Act, also known as ObamaCare, expands Medicaid coverage to low-income Americans. It ends pre-existing condition exclusions except for grandfathered plans that were purchased on or before March 23, 2010. It ends lifetime limits on most covered health benefits.

Allowable (Medicare Allowable)

Allowable is the term for the total fee schedule amount allowed by Medicare and other payers. For Medicare Part B, 80% of the allowable is paid by Medicare and 20% by the patient.

Ambulatory Payment Classifications (APC)

Ambulatory payment classification is a Medicare prospective payment system for the hospital outpatient clinic. Ambulatory payment classifications do not impact physicians' offices. Ambulatory payment classifications are clinically consistent groups that receive a defined payment. Patients may pay 20% or more of the APC.


The provider may address a denial of a claim by submitting an appeal. The purpose of an appeal is to ensure correct payment is made for a reasonable and necessary service. Under Medicare Part B, appeals can be filed under the following conditions: (1) the claim was assigned; (2) the claim was not assigned and the claim was denied due to medical necessity and the beneficiary could not have known that services would not be covered; or (3) the provider acted as an authorized representative of the beneficiary.


Under Medicare, if the provider accepts assignment, they must agree to bill Medicare directly and to accept the Medicare allowable as the full reimbursement amount.

Assignment of Benefits (AOB)

Assignment of benefits is a form or other certification that patients must sign to authorize a third party or payers to pay the provider for services rendered.

Average Sales Price (ASP)

The average price from manufacturer to all purchasers, net of all discounts, rebates, charge backs, and credits for drugs, is the average sales price. The ASP will be determined using sales reports provided by manufacturers that will include information on total units sold and total revenue for each drug. The Medicare-allowed amount for most physician-administered drugs is based on ASP plus 6%.

Average Wholesale Price (AWP)

The average wholesale price is a pricing point established by wholesalers, upon which many pharmaceutical pay rates are based. The AWP is officially determined through surveys of wholesalers' listed wholesale price, and it is equivalent to a suggested retail price. The AWP is published in the Red Book and First Databank.

Back to Top



A person enrolled in an insurance program is a beneficiary of that plan. A Medicare beneficiary is enrolled in the Medicare program and has a health insurance claim (HIC) number.


A benefit is a drug, supply, service, or procedure included as a covered item in an insurance contract or public program.

Bundled Payment

An inclusive payment that includes two or more related services and/or supplies is a bundled payment. An example of a bundled payment is the global surgical payment which includes all services and supplies used in a certain period, which may be 0, 10, or 90 days, depending upon the fee schedule and procedure code.

Back to Top



A cap is a fixed amount that will be paid by a health plan for all services or a single item or service. For example, in some Medicare supplements, there can be an annual cap on drug payments of $2,000 to $3,000.


Carve-outs are certain types of therapies or drugs, such as contraceptives, growth hormones, and injectable drugs, which are excluded from coverage by HMOs and PPOs at the option of the employer or as negotiated by a contracting provider. Alternatively, carve-outs can refer to specific services (e.g., mental health, prescription drugs) that are managed outside of a traditional insurance program by a specialty agent.

Categorically Needy

Categorically needy is a Medicaid category that refers to individuals given public assistance under the Social Security Act because they are low income, and are aged, blind, disabled, or members of families with dependent children. Because of the category to which they belong, they are eligible for benefits.

C Code

A C code is a Level II HCPCS code temporarily assigned to a new drug, device, or procedure for use with the Medicare hospital outpatient prospective payment system (HOPPS).


A claim is a form submitted to the insurer for the payment for items and services that are covered under the insurance contract.

Claims Review

Claims review is a process carried out by an insurer whereby claims are approved or rejected for reimbursement based on a set of standard criteria. (See Drug Utilization Review.)

Clean Claim

For Medicare purposes, a claim the carrier will pay without review because it passes all claim edits and is transmitted in an acceptable format or on an acceptable form is a clean claim. Clean Medicare claims transmitted electronically will be paid in 14 days.

Centers for Medicare & Medicaid Services (CMS)

The Centers for Medicare & Medicaid Services is the agency that oversees the Medicare, Medicaid, and SCHIP programs for the federal government. The primary duties of this agency are to implement policy, process/review claims, maintain program integrity, and manage Congressional budget allocations for health care expenditures for these programs.


CMS-1450 (UB-04) is the claim form used by hospitals to summarize detailed charges for insurance billing. Almost all payers accept the CMS-1450.


CMS-1500 is the claim form used to bill Part B Medicare and is used by most of the other payers to pay or deny professional fees and other office-based services.


Coding refers to the alphanumeric systems used by hospitals, physicians, and other medical care providers to identify services to state, federal, and international agencies and to classify services on claim forms submitted to insurers. All medical procedures and diagnoses must be described on claim forms with numerical and written designations from one of the recognized "coding" systems (e.g., CPT, ICD-9, and HCPCS).


Co-insurance is a portion per claim of the balance of covered medical services for which a beneficiary is responsible after paying the deductible. Under Medicare Part B, the co-insurance amount is 20% of the allowable or sum of the allowables for a date or dates of service.

Coordination of Benefits (COB)

Coordination of benefits is the provision designed to limit benefits for patients with more than one health insurance plan such that no more than 100% of expenses are covered, and to designate the order in which the multiple carriers are to pay benefits. Coordination of benefits also ensures that the patient's out-of-pocket expenses are limited to the extent possible under the assigned insurance plans.


Co-payment is the portion of the allowed payment where the insured or covered persons pay a specified flat amount per unit of service or unit of time (e.g., $10 per visit) and their insurer pays the rest of the cost. The co-payment is incurred at the time the service is provided. The amount paid does not vary with the cost of the service (unlike co-insurance, payments that are a fixed percentage of the cost). This term is frequently but incorrectly used interchangeably with co-insurance.

Covered Services

A covered service is an appropriate and necessary hospital, medical, and miscellaneous health care service utilization by the insured that entitles him/her to a payment of benefits under the scope of a health insurance policy. These typically are items meeting criteria that include safety, effectiveness, acceptance by the local medical community, non-experimental status, government approval, and other criteria as outlined in the health insurance plan.

Current Procedural Terminology (CPT) Codes

CPT codes are five-digit codes developed and updated by The American Medical Association that are used to describe procedures. The procedures described are usually performed by or supervised by physicians.

Back to Top



A fixed annual payment that a patient must make for medical services before any insurance reimbursement is available is a deductible. The amounts vary widely by insurer and contract. As with Medicare, the deductible may vary for hospital and medical services.


Denials, particularly for Medicare claims, may describe three types of claim determinations: non-coverage, medical necessity, and un-bundling. Non-coverage denials may not be appealed because Medicare never covers the service. Un-bundling denials denote claims that are denied because Medicare (or other payer) concludes that a service is included in another billed service and are not separately payable. Un-bundling denials may not be appealed, and resubmittal of the claim may be indicated if documentation supports the use of an appropriate modifier. Medical necessity denials are subject to appeal, if the case has documentation to demonstrate care was reasonable and necessary for the patient's diagnosis.

Drug Benefit Program

A drug benefit program is an optional coverage program for prescriptions usually offered by HMOs. In 2006 Medicare beneficiaries will be able to enroll in Medicare Part D, an optional drug benefit. The Medicare Part D drug benefit will be available through Medicare Advantage (managed care) programs, as well as through "stand-alone" prescription drug plans (PDPs).

Drug Utilization Review (DUR)

Also known as drug utilization evaluation (DUE), drug utilization review is a process to monitor the frequency and usage of prescriptions. Typically, a DUR committee examines the number of prescriptions per member per month and the average cost per prescription. The utilization and costs of pharmaceuticals are reviewed for each physician, physician group, medical specialty, retail pharmacy, employee group, and member. Health maintenance organizations, hospitals, pharmacy benefit managers (PBMs), and some other payers commonly perform DUR.

Dually Eligible Patients

Patients who are eligible for Medicaid and Medicare, also known as "Medi-Medis," are dually eligible patients.

Back to Top



Exclusions are clauses in an insurance contract that deny coverage for select individuals, groups, locations, properties or risks.

Explanation of Benefits (EOB)

The explanation of benefits is a communication tool used by insurance companies to explain their payment for services billed on a specific claim and what the patient owes. A check or proof of money transferred often accompanies the EOB.

Back to Top


Fee Schedule

A fee schedule is a listing of the maximum fees that an insurer will pay for certain services. Physician fee schedules usually are based on CPT codes.

Fiscal Intermediary

An insurance company that is contracted by CMS to administer the Medicare program for Part A (hospital, inpatient, and outpatient claims) is a fiscal intermediary.

Food and Drug Administration (FDA)

The Food and Drug Administration is an agency with the Department of Health & Human Services that determines and monitors the safety and efficacy of drug products.


A list of drug products from which a physician may choose to prescribe for patients is a formulary. Formularies generally are structured by insurance companies to influence the types of prescription drugs dispensed by a pharmacy and by hospitals to limit the brands and types of drugs utilized by the clinical staff.

Fraud and Abuse

Under Medicare rules, fraud describes an act to intentionally deceive or misrepresent a claim presented to a federal program for payment. Fraud includes, but may not be limited to, altering claim forms to obtain higher reimbursement; billing for services which were not done or purchased by the provider; falsely representing services rendered; and, solicitation of or receiving kick-backs or bribes in exchange for referrals. Abuse is a provider incident, which is inconsistent with accepted medical, fiscal, or business practices that directly or indirectly results in unnecessary costs to the Medicare program or to a Medicare beneficiary.

Back to Top


G Codes

G codes are temporary codes used to identify professional health procedures and services that would otherwise be coded in the CPT, but for which there are no CPT codes. In 2005, the AMA introduced new codes to represent select physician drug administration services.

Back to Top



HCPCS codes are billing codes for most procedures, supplies, drugs, and physician services covered under Medicare. The coding system is divided into two levels: Level I consists of CPT codes, and Level II national HCPCS codes describe supply, injection, radiopharmaceuticals, procedures, and miscellaneous codes.

Health Maintenance Organization (HMO)

A health maintenance organization is a prepaid health care plan that provides or arranges comprehensive health services for its enrolled members. HMOs may be organized differently as represented by the following four models:

  • HMO-Group: HMO that contracts with one or more independent group practices that exclusively provides health services to HMO patients;
  • HMO-IPA: HMO that contracts directly with physicians in independent practice, or with one or more associations of physicians in independent practice;
  • HMO-Network: HMO that contracts with two or more independent group practices that provide health services to HMO patients and patients covered by other payers; or
  • HMO-Staff: HMO that delivers health services through a salaried physician group that is employed by the HMO unit.

HIPAA (Health Insurance Portability and Accountability Act of 1996)

The Health Insurance Portability and Accountability Act of 1996 was legislation that addressed four major issues: 1) portability of health insurance benefits; 2) fraudulent claims to federal health programs; 3) transferability and consistency of health data; and 4) privacy of patient-specific health information.

Home Infusion Therapy

Home infusion therapy is the provision of intravenous drugs and biologics in the home, often in conjunction with a home health agency.

Hospital Outpatient Prospective Payment System (HOPPS)

The hospital outpatient prospective payment system is the basis for Medicare reimbursement in the hospital outpatient setting.

Back to Top


Individual Determination

Medicare contractors may review claims on an individual basis regardless of whether local coverage determination (LCD), national coverage decision, or coverage provision in a Medicare manual exists. When making individual determinations, the contractor, carrier, or intermediary must be sure that the claim is coded correctly, the service is appropriate for the condition listed on the claim, and that services were medically necessary.

ICD-9-CM (International Classification of Diseases-9th Revision-Clinical Modification)

ICD-9-CM is a statistical classification system made up of numeric and alphanumeric codes used to describe diseases, symptoms, conditions, and procedures. ICD-9-CM is now used to report diagnoses for billing in all settings and procedures for inpatient billing.


ICD-10 replaced ICD-9 for use in coding and classifying mortality data from death certificates. Its implementation was postponed many years and became effective on October 1, 2015. It was developed by the National Center for Health Statistics as a clinical modification to the system developed by the World Health Organization. The revisions include expanded injury codes and the creation of combination diagnosis/symptom codes to reduce the number of codes needed to fully describe a condition.

Back to Top


J Codes

This national HCPCS Level II code set, J codes, is used to describe drugs covered by the Medicare program.

Back to Top


Letters of Medical Necessity (LMN)

A letter from a patient's physician justifying use of a particular drug for a particular indication is a letter of medical necessity. It is often submitted with a claim or appeal as supporting documentation.

Local Coverage Determinations (LCDs)

Local coverage determination, established by section 522 of the Benefits Improvement and Protection Act (BIPA), is a decision by a Medicare Administrative Contractor (MAC) whether to cover a particular service.

Back to Top


Managed Care

Managed care describes organizations that provide health care services to patients under shared risk arrangements and subcontract with providers to provide the services. They often implement formal programs for ongoing quality assurance and utilization review and significant financial incentives for members to use providers and procedures associated with the plan.

Managed Care Organization (MCO)

A managed care organization is an umbrella term that encompasses health maintenance organizations (HMOs), preferred provider organizations (PPOs), and any variation of organization that provides managed care.


Also known as Title XIX, Medicaid is a joint federal/state health insurance program for low-income persons who receive public assistance or whose medical expenses are high enough to "spend-down" their income in order for the recipients to qualify for the program. This program is administered by each state and has fairly tight restrictions on payment for many items and services.

Medically Necessary

Medically necessary services or supplies are those which meet the following standards:

  • they are appropriate and necessary for the symptoms, diagnosis, or treatment of the medical condition;
  • they are provided for the diagnosis or direct care and treatment of the medical condition;
  • they meet the standards of good medical practice within the medical community in the service area;
  • they are not primarily for the convenience of the plan member or a plan provider; and
  • they are the most appropriate level or supply of service that can be provided safely.
Note: Medically necessary does not automatically mean covered. A medically necessary service may be excluded from coverage by a patient's health insurance plan. (See Exclusion.)


Medicare provides health insurance benefits to elderly (aged 65 or older) and disabled Americans. It is funded by the federal government and administered by the CMS. Medicare has two parts: Part A - Hospital Insurance and Part B - Supplemental Medical Insurance. Part A covers institutional services such as hospitalization, nursing home care, hospice, and the services of a home health agency. Part B covers outpatient services such as physician services, laboratory, radiology, ambulance, durable medical equipment, orthotics, prosthetics, and drugs administered incident to a physician's services.

Medicare Administrative Contractor (MAC)

As required by section 911 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), CMS is replacing its previous claims payment contractors for the Medicare Part A and Part B benefits. The A/B Medicare Administrative Contractors (MACs) replace fiscal intermediaries and carriers. There are 15 MACs assigned to different regional jurisdictions throughout the United States.

Medicare Advantage

The Medicare Advantage program has replaced the Medicare Plus Choice program. Under the Medicare Advantage program a beneficiary may elect to replace the standard fee-for-service benefits under Parts A and B of Medicare by enrolling in an HMO or PPO. Managed care plans may administer the program differently than the rest of the Medicare program. For example, they may have lower co-insurance payments or have prescription drug benefits. They must also abide by coverage policies passed by Congressional action, e.g. the Medicare Cancer Coverage Improvement Act.

Medicare Modernization Act (MMA)

The Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003 adds a voluntary prescription drug benefit to Medicare.

Medicare Secondary Payer (MSP)

Under certain circumstances, Medicare may be the secondary payer when beneficiaries have a third-party payer. Medicare may be secondary to Workers' Compensation, automobile, medical no-fault, and liability insurance. Moreover, some beneficiaries have retained private insurance from current or former employers. For ESRD (end-stage renal disease), Medicare is the secondary payer until the patient is eligible for Medicare coverage. The MSP program prohibits Medicare payment in cases where payment is made or can reasonably be expected from another payment source.


Medigap is a private insurance policy purchased independently by a Medicare beneficiary to fill the coverage/reimbursement gaps in Medicare. Medigap policies are designed to supplement Medicare by paying the Medicare deductibles and co-insurance. Medigap policies may also provide coverage, though often limited, for services excluded by Medicare such as outpatient prescription drugs.

Medical Necessity

An item or service that is reasonable and necessary to the treatment of an illness or injury or to improve the functioning of a malformed body part is a medical necessity.


Modifiers are two-digit numeric or alphabetic codes that are attached to HCPCS codes to denote an exceptional or noteworthy billing situation with respect to the definition of the attached code.

Back to Top


National Coverage Decision (NCD)

A national coverage decision is a medical policy decision regarding coverage that applies to all Medicare contractors. In most cases, these decisions supersede decisions made at a local level.

National Drug Code (NDC)

The identifying drug number assigned by the Food and Drug Administration (FDA) is the national drug code. The FDA-assigned NDC code may be 10 or 11 digits. The HIPAA-compliant NDC for billing purposes is made up of 11 digits: the first five digits refer to the manufacturer, the next four digits refer to the drug compound, and the last two digits refer to dosing information.

National Provider Identifier (NPI)

The National Provider Identifier (NPI) is a Health Insurance Portability and Accountability Act (HIPAA) Administrative Simplification Standard. The NPI is a unique, 10-digit identifier for covered health care providers such as physicians, health plans, and clearinghouses. These entities must use NPIs in administrative and financial transactions adopted under HIPAA. CMS requires use of the NPI in place of of legacy provider identifiers for most transactions.

Back to Top


Out-of-Pocket Payments

Medical costs borne directly by a patient without benefits of insurance sometimes are called out-of-pocket costs. These include any or all payments to be absorbed by the patient.

Outpatient Code Editor (OCE)

An outpatient code editor is an editor that is applied to hospital outpatient claims to check the validity of codes and UB-04 (CMS-1450) fields and to detect multiple procedure edits for APCs.

Outpatient Prospective Payment System (OPPS)

The outpatient prospective payment system for hospital outpatient departments became law on August 1, 2000. The basic premise of OPPS is that hospitals will be paid a set fee for HCPCS codes submitted to Medicare through the fiscal intermediary or MAC for Medicare patients. Codes are classified into groups of similar services called ambulatory payment classifications (see APCs). The outpatient prospective payment system was implemented to contain costs in the outpatient department of hospitals.

Back to Top


Pass-Through Drug

A pass-through drug is essentially a carve-out from the original version of the APCs so that it is paid separately from the bundle of items and services included in an APC. This carve-out is allowed for 2 to 3 years and can be reduced due to budgetary constraints. In the original version of the APCs, no drugs other than some chemotherapy drugs had any type of additional payment. In November 1999, the Balanced Budget Refinement Act (BBRA) established a pass-through for drugs, including cancer drugs, and supportive care drugs, orphan drugs, biological response modifiers, EPO, and all drugs approved after December 31, 1996. Drugs can maintain pass-through status for up to 3 years. Each year, the list is changed to include other drugs that meet these criteria. Starting in 2005, payment for pass-through drugs is made on the basis of ASP plus 6%.

PhRMA Directory of Patient Assistance Programs

The Pharmaceutical Research and Manufacturers Association has a web-based directory of programs for patients who have no apparent source of payment for their drug therapy. This directory is available at

Pharmacy Benefits Management (PBM) Company

A pharmacy benefits management company is an organization that manages prescription drug benefits for a health plan, including claim processing, formulary development, development of retail pharmacy networks, pharmaceutical contracting, and rebate management etc., in order to provide cost-effective pharmaceutical care to a plan and its members.

Pre-authorization (also Prior Authorization)

Pre-authorization is an administrative procedure whereby a health care provider requests permission to institute a treatment plan to a third-party payer insurance company before treatment is initiated. The third-party payer usually reviews the request and either approves or denies it based upon established criteria. The process by which a plan generally determines whether a product or service is medically necessary for a particular patient and therefore what the plan is likely to pay for the product or service provided is prior authorization. Prior authorization by a payer is typically not a guarantee of payment for the product or service.


Pre-certification is a prior assessment by a payer or payer's agent that proposed services, such as hospitalization, is appropriate for a particular patient.

Preferred Drug List (PDL)

A list created by a payer to identify preferred medications is a preferred drug list. Exclusion from a PDL could lead to non-coverage or a higher co-pay for that drug.

Prospective Payment System (PPS)

The prospective payment system is the Medicare system of payments to hospitals based on predetermined amounts. Inpatient discharges are paid through the use of diagnosis-related groups and outpatient encounters are paid through one or more ambulatory payment classifications.

Back to Top


Relative Value Unit (RVU)

A relative value unit provides a basis for comparing services in terms of a set of resources common across all medical services, including work units, practice expense, and malpractice units. The RVU is used to set a fee for each service and it is used by Medicare to set reimbursement levels for physician services.

Revenue Code

Revenue codes are codes on the Medicare CMS-1450 (UB-04) that denote the cost center as defined by Medicare or other payers in which a cost was incurred. These revenue codes are important in terms of tracking costs and charges for Medicare cost reporting. Revenue code 0636 must be used for payment of the pass-through products for outpatient drug claims through APCs.

Back to Top


Specialty Pharmacy Checklist

A checklist that provides some guidance of questions that should be answered or thought through prior to working with a Specialty Pharmacy Provider to achieve favorable outcomes.


Under Medicaid, spend-down refers to a method by which an individual establishes Medicaid eligibility by adjusting gross income through incurring medical expenses until net income (after medical expenses) meets Medicaid financial requirements.

State Pharmacy Assistance Programs (SPAPs)

State pharmacy assistance programs are state-funded programs providing payment assistance for drugs to certain low-income groups generally the aged and disabled.

Supplemental Security Income (SSI)

Supplemental security income is a program of income support for low-income aged, blind, and disabled persons established by Title XVI of the Social Security Act. Patients who receive SSI automatically qualify for Medicaid.

Supplementary Medical Insurance (SMI)

Supplementary medical insurance (also known as Medicare Part B) is a voluntary insurance program that provides insurance benefits for physician services, outpatient hospital services, ambulatory services, and other medical supplies and services to aged and disabled individuals who elect to enroll under the program in accordance with the provisions of title XVIII of the Social Security Act. Enrollee premium payments and contributions from funds appropriated by the Federal government finance the SMI program.

Back to Top


Therapeutic Substitution

Therapeutic substitution is the dispensing of a drug which is the same chemical entity as but a different formulation than the prescribed drug without prior authorization of the prescribing physician; often approved by the Pharmacy and Therapeutics Committee. Therapeutic substitution is used as a cost management tool by HMOs and pharmacy benefit managers.

Third-Party Payer

A third-party payer is any organization, public or private, that pays for health or medical expenses on behalf of beneficiaries or recipients. The individual receiving the service is the first party, the individual or institution providing the service is the second party, and the organization paying for it is the third party.

Time Limit for Claims Filing

Claims for Medicare must be filed at the end of the calendar year following the year that the claim was filed. The exception to this rule is that claims filed in the last three months of the year may be filed by the end of the year following the subsequent year. For example, a claim for a date of service in November 2001 must be filed by December 31, 2003.

Back to Top



The standard, uniform bill (UB) used by hospitals for both inpatient and outpatient claims. It is also called the CMS-1450.

Back to Top


Verification of Coverage

Verification of coverage is a confirmation that a specific treatment is a covered benefit under an existing policy, usually before treatment is provided.

Back to Top



See Advance Beneficiary Notice (ABN).

Wholesale Acquisition Cost (WAC)

The wholesale acquisition cost is a manufacturer's charge to the wholesaler to purchase a drug. The WAC is a published price and does not generally reflect any rebates or discounts.

Back to Top