Medicare Claims Processing Manual Chapter 3 Guide

Name: Medicare Claims Processing Manual (Pub. 100-04)
Creator: Centers for Medicare & Medicaid Services
License: https://www.usa.gov/government-works

TL;DR

Chapter 3 of the Medicare Claims Processing Manual covers inpatient hospital billing. It explains payment under the inpatient prospective payment system and MS-DRGs, outlier and transfer payments, disproportionate share and capital payments, how covered and noncovered days are counted, the rule that brings preadmission outpatient services onto the inpatient claim, adjustment bills, transplant billing, and the separate payment systems for rehabilitation, long-term care and psychiatric hospitals.

Chapter 3 at a glance

Current revision: Rev. 13757; Issued April 30, 2026
Effective: April 1, 2026; Implemented April 6, 2026
Sections: 279; 18 top-level sections
Official PDF: 409 pages; clm104c03.pdf
Transmittals in history: 202; Listed at the end of the chapter
Monthly searches: 50; Google Ads, US, October 2026

What chapter 3 governs for billing

Section 20 explains payment under the inpatient prospective payment system. The hospital is paid a fixed amount per discharge based on the MS-DRG, which is assigned by the grouper from the principal diagnosis, secondary diagnoses, procedures, discharge status and other claim data (20.2). The section covers operating payments and outliers for extraordinarily costly cases (20.1 and 20.1.2), disproportionate share and capital payments (20.3 and 20.4), rural referral centers, sole community and Medicare-dependent hospitals (20.5 and 20.6), and billing applicable to PPS (20.7). Section 160 adds the new technology add-on payment.

Section 40 holds the utilization rules. The day count rules decide covered and noncovered days (40.1 and 40.2), transfers between IPPS hospitals are paid a per diem up to the full DRG amount (40.2.4), and section 40.3 brings outpatient services onto the inpatient claim: outpatient diagnostic services furnished by the admitting hospital, or an entity it wholly owns or operates, during the 3 days before admission (1 day for a hospital that is not paid under IPPS) are billed with the admission, as are related nondiagnostic services. Section 50 covers adjustment bills and late charges.

The chapter also carries the billing rules for transplants (90), swing beds (60), specific situations such as replaced devices (100.8), and the other inpatient payment systems: inpatient rehabilitation facilities (140), long-term care hospitals (150), religious nonmedical health care institutions (170 and 180) and inpatient psychiatric facilities (190), each with its own classification, payment and claims requirements.

Sections billing teams use most

Section numbers and headings are CMS's; the notes are ours. Each section number opens the official chapter 3 PDF at the page where that section starts.

Key sections of Medicare Claims Processing Manual Chapter 3: Inpatient Hospital Billing
Section	CMS heading	Why it matters
20.1.2	Outliers	Outlier payments for cases whose costs exceed the fixed-loss threshold.
20.2	Computer Programs Used to Support Prospective Payment System	The grouper and pricer programs that assign the MS-DRG and compute payment.
40.2.4	IPPS Transfers Between Hospitals	IPPS transfers between hospitals and the per diem transfer payment.
40.3	Outpatient Services Treated as Inpatient Services	Outpatient services in the days before admission that are billed on the inpatient claim.
50	Adjustment Bills	Adjustment bills, tolerance guidelines and claim change reasons.
140.2	Payment Provisions Under IRF PPS	Payment provisions under the inpatient rehabilitation facility PPS.
190.11	Benefit Application and Limits-190 Days	The 190-day lifetime limit for care in freestanding psychiatric hospitals.

How chapter 3 shows up on claims and denials

Inpatient denials are mostly medical necessity and coding decisions. An admission that review finds not reasonable and necessary is denied with reason code 50, after which the hospital may bill certain services under Part B as described in chapter 4 section 240. Outpatient services that fall inside the preadmission window belong on the inpatient bill, so a separate outpatient claim for them is denied or recouped.

DRG validation changes the group rather than denying the stay. When a reviewer drops a secondary diagnosis or changes the principal diagnosis the DRG is reassigned and the payment difference is recouped, so the remittance shows an adjustment rather than a denial. Errors in admission or discharge data, such as discharge status, are corrected with an adjustment bill under section 50.

Codes you are likely to see on the remittance when a claim runs into this chapter's rules. The code pages explain each code's meaning, root causes and the usual fix.

Remittance codes associated with Medicare Claims Processing Manual Chapter 3: Inpatient Hospital Billing
Code	Type	When it appears
50	Claim adjustment reason code	Inpatient admission or service not reasonable and necessary.
97	Claim adjustment reason code	Preadmission outpatient services bundled into the inpatient stay.
16	Claim adjustment reason code	Claim data missing or invalid, such as discharge status or admission date.
18	Claim adjustment reason code	Duplicate of an inpatient claim already processed.

Current revision and recent transmittals

The chapter PDF posted on cms.gov is current through Rev. 13757, issued April 30, 2026, effective April 1, 2026, implemented April 6, 2026 (change request 14262). That revision changed sections 90.1.2 (Billing for Kidney Transplant and Acquisition Services), 90.2 (Heart Transplants), 90.4.2 (Billing for Liver Transplant and Acquisition Services), 90.5 (Pancreas Transplants With Kidney Transplants), 90.5.1 (Pancreas Transplants Alone (PA)), 90.6 (Intestinal and Multi-Visceral Transplants). Its subject line reads: “Implementation CR - Send Transplant Program Hospital Type and the New Organ Types to the Fiscal Intermediary Shared System (FISS) on Provider Enrollment Chain & Ownership System (PECOS) Extract Files and for FISS to Process so PECOS is the System of Record for the Transplant Program Hospital Type and for the Organs Type Transplanted at the Hospital”.

The newest rows of the transmittal history printed at the end of the chapter (202 revisions in all). Rows whose subject could not be read reliably from the PDF table are left out; the PDF has the complete list.

Newest transmittals for Medicare Claims Processing Manual Chapter 3: Inpatient Hospital Billing
Revision	Issued	Subject	CR
R13757CP	April 30, 2026	Implementation CR - Send Transplant Program Hospital Type and the New Organ Types to the Fiscal Intermediary Shared System (FISS) on Provider Enrollment Chain & Ownership System (PECOS) Extract Files and for FISS to Process so PECOS is the System of Record for the Transplant Program Hospital Type and for the Organs Type Transplanted at the Hospital	14262
R13398CP	September 4, 2025	Fiscal Year (FY) 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) PPS Changes	14203
R13364CP	August 14, 2025	Inpatient Psychiatric Facilities Prospective Payment System (IPF PPS) Updates for Fiscal Year (FY)	14206
R12948CP	November 6, 2024	Allogeneic Hematopoietic Stem Cell Transplantation (HSCT) for Myelodysplastic Syndromes (MDS) National Coverage Determination (NCD) 110.23	13604
R12830CP	September 9, 2024	Inpatient Psychiatric Facilities Prospective Payment System (IPF PPS) Updates for Fiscal Year (FY) 2025-	13766
R12615CP	May 2, 2024	New Biweekly Interim Payments for Inpatient Prospective Payment System (IPPS) Separate Payment for Additional Resource Costs of Establishing and Maintaining Access to Buffer Stocks of Essential Medicines	12615

Sections ordered by the date in the revision note printed under each heading.

Most recently revised sections of Medicare Claims Processing Manual Chapter 3: Inpatient Hospital Billing
Section	Heading	Revision
90.1.2	Billing for Kidney Transplant and Acquisition Services	Rev. 13757, April 30, 2026; effective April 1, 2026
90.2	Heart Transplants	Rev. 13757, April 30, 2026; effective April 1, 2026
90.4.2	Billing for Liver Transplant and Acquisition Services	Rev. 13757, April 30, 2026; effective April 1, 2026
90.5	Pancreas Transplants With Kidney Transplants	Rev. 13757, April 30, 2026; effective April 1, 2026
90.5.1	Pancreas Transplants Alone (PA)	Rev. 13757, April 30, 2026; effective April 1, 2026
90.6	Intestinal and Multi-Visceral Transplants	Rev. 13757, April 30, 2026; effective April 1, 2026
150.4	Qualification Criterion for LTCHs	Rev. 13398, September 4, 2025; effective October 1, 2025
190.4.1	Standardization Factor	Rev. 13364, August 14, 2025; effective October 1, 2025

Section index

Every section in the chapter's table of contents, grouped under its top-level heading, with the PDF page where it starts. Open a heading to see its subsections.

10 General Inpatient Requirements · p. 11 · 5 subsections

Open section 10 in the PDF
10.1 Claim Formats · p. 11
10.2 Focused Medical Review (FMR) · p. 12
10.3 Spell of Illness · p. 12
10.4 Payment of Nonphysician Services for Inpatients · p. 15
10.5 Hospital Inpatient Bundling · p. 16

20 Payment Under Prospective Payment System (PPS) Diagnosis Related Groups (DRGs) · p. 17 · 50 subsections

Open section 20 in the PDF
20.1 Hospital Operating Payments Under PPS · p. 21
20.1.1 Hospital Wage Index · p. 22
20.1.2 Outliers · p. 23
20.1.2.1 Cost to Charge Ratios · p. 24
20.1.2.2 Statewide Average Cost to Charge Ratios · p. 27
20.1.2.3 Threshold and Marginal Cost · p. 28
20.1.2.4 Transfers · p. 28
20.1.2.5 Reconciliation · p. 29
20.1.2.6 Time Value of Money · p. 32
20.1.2.7 Procedure for Medicare contractors to Perform and Record Outlier Reconciliation Adjustments · p. 33
20.1.2.8 Specific Outlier Payments for Burn Cases · p. 38
20.1.2.9 Medical Review and Adjustments · p. 38
20.1.2.10 Return Codes for Pricer · p. 39
20.2 Computer Programs Used to Support Prospective Payment System · p. 41
20.2.1 Medicare Code Editor (MCE) · p. 41
20.2.1.1 Paying Claims Outside of the MCE
20.2.1.1.1 Requesting to Pay Claims Without MCE Approval · p. 48
20.2.1.1.2 Procedures for Paying Claims Without Passing through the MCE · p. 48
20.2.2 DRG GROUPER Program · p. 49
20.2.3 PPS Pricer Program · p. 50
20.2.3.1 Provider-Specific File · p. 51
20.3 Additional Payment Amounts for Hospitals with Disproportionate Share of Low-Income Patients · p. 54
20.3.1 Clarification of Allowable Medicaid Days in the Medicare Disproportionate Share Hospital (DSH) Adjustment Calculation · p. 63
20.3.1.1 Clarification for Cost Reporting Periods Beginning On or After January 1, 2000 · p. 63
20.3.1.2 Hold Harmless for Cost Reporting Periods Beginning Before January 1, 2000 · p. 65
20.3.1.3 Disproportionate Share Hospital (DSH) Policy Changes Effective for Cost Reporting Periods beginning on or after October 1, 2009 · p. 68
20.3.1.4 Disproportionate Share Hospital (DSH) Policy Changes Effective for Cost Reporting Periods beginning on or after October 1, 2012 · p. 69
20.3.2 Updates to the Federal Fiscal Year (FY) 2001 · p. 69
20.3.2.1 Inpatient Hospital Payments and Disproportionate Share Hospital (DSH) Thresholds and Adjustments · p. 69
20.3.3 Prospective Payment Changes for Fiscal Year (FY) 2003 · p. 71
20.3.4 Prospective Payment Changes for Fiscal Year (FY) 2004 and Beyond · p. 72
20.4 Hospital Capital Payments Under PPS · p. 72
20.4.1 Federal Rate · p. 73
20.4.2 Hold Harmless Payments · p. 74
20.4.3 Blended Payments · p. 75
20.4.4 Capital Payments in Puerto Rico · p. 75
20.4.5 Old and New Capital · p. 75
20.4.6 New Hospitals · p. 76
20.4.7 Capital PPS Exception Payments · p. 76
20.4.8 Capital Outliers · p. 77
20.4.9 Admission Prior to and Discharge After Capital PPS Implementation Date · p. 78
20.4.10 Market Basket Update · p. 78
20.5 Rural Referral Centers (RRCs) · p. 78
20.6 Criteria and Payment for Sole Community Hospitals and for Medicare Dependent Hospitals · p. 79
20.7 Billing Applicable to PPS · p. 81
20.7.1 Stays Prior to and Discharge After IPPS Implementation Date · p. 81
20.7.2 Split Bills · p. 82
20.7.3 Payment for Blood Clotting Factor Administered to Hemophilia Inpatients · p. 83
20.7.4 Cost Outlier Bills With Benefits Exhausted · p. 90
20.8 Payment to Hospitals and Units Excluded from IPPS for Direct Graduate Medical Education (DGME) and Nursing and Allied Health (N&AH) Education for Medicare Advantage (MA) Enrollees

30 Medicare Rural Hospital Flexibility Program and Critical Access Hospitals (CAHs) · p. 95 · 6 subsections

Open section 30 in the PDF
30.1 Requirements for CAH Services, CAH Skilled Nursing Care Services and Distinct Part Units · p. 96
30.1.1 Payment for Inpatient Services Furnished by a CAH · p. 97
30.1.1.1 Payment for Inpatient Services Furnished by an Indian Health Service (IHS) or tribal CAH · p. 98
30.1.2 Payment for Post-Hospital SNF Care Furnished by a CAH · p. 98
30.1.3 Costs of Emergency Room On-Call Providers · p. 98
30.1.4 Costs of Ambulance Services · p. 99

40 Billing Coverage and Utilization Rules for PPS and Non-PPS Hospitals · p. 99 · 10 subsections

Open section 40 in the PDF
40.1 "Day Count" Rules for All Providers · p. 101
40.2 Determining Covered/Noncovered Days and Charges · p. 104
40.2.1 Noncovered Admission Followed by Covered Level of Care · p. 106
40.2.2 Charges to Beneficiaries for Part A Services · p. 107
40.2.3 Determining Covered and Noncovered Charges - Pricer and PS&R · p. 110
40.2.4 IPPS Transfers Between Hospitals · p. 111
40.2.5 Repeat Admissions · p. 114
40.2.6 Leave of Absence · p. 115
40.3 Outpatient Services Treated as Inpatient Services · p. 116
40.3.1 Billing Procedures to Avoid Duplicate Payments · p. 122

50 Adjustment Bills · p. 122 · 3 subsections

Open section 50 in the PDF
50.1 Tolerance Guidelines for Submitting Adjustment Requests · p. 125
50.2 Claim Change Reasons · p. 126
50.3 Late Charges · p. 129

60 Swing-Bed Services · p. 131

Open section 60 in the PDF

70 All-Inclusive Rate Providers · p. 132 · 1 subsections

Open section 70 in the PDF
70.1 Providers Using All-Inclusive Rates for Inpatient Part A Charges · p. 132

80 Hospitals That Do Not Charge · p. 134 · 1 subsections

Open section 80 in the PDF
80.1 Medicare Summary Notice (MSN) for Services in Hospitals That Do Not Charge · p. 135

90 Billing Transplant Services · p. 136 · 14 subsections

Open section 90 in the PDF
90.1 Kidney Transplant - General · p. 136
90.1.1 The Standard Kidney Acquisition Charge · p. 137
90.1.2 Billing for Kidney Transplant and Acquisition Services · p. 140
90.1.3 Billing for Donor Post-Kidney Transplant Complication Services · p. 140
90.2 Heart Transplants · p. 141
90.3 Stem Cell Transplantation · p. 142
90.3.1 Allogeneic for Stem Cell Transplantation · p. 146
90.3.2 Autologous Stem Cell Transplantation (AuSCT) · p. 151
90.4 Liver Transplants · p. 155
90.4.1 Standard Liver Acquisition Charge · p. 155
90.4.2 Billing for Liver Transplant and Acquisition Services · p. 156
90.5 Pancreas Transplants With Kidney Transplants · p. 162
90.5.1 Pancreas Transplants Alone (PA) · p. 166
90.6 Intestinal and Multi-Visceral Transplants · p. 168

100 Billing Instructions for Specific Situations · p. 171 · 11 subsections

Open section 100 in the PDF
100.1 Billing for Abortion Services · p. 171
100.2 Payment for CRNA or AA Services · p. 173
100.3 Resident and Interns Not Under Approved Teaching Programs · p. 174
100.4 Billing for Services After Termination of Provider Agreement · p. 175
100.4.1 Billing Procedures for a Provider Assigned Multiple Provider Numbers or a Change in Provider Number · p. 176
100.5 Review of Hospital Admissions of Patients Who Have Elected Hospice Care · p. 177
100.6 Inpatient Renal Services · p. 178
100.7 Lung Volume Reduction Surgery · p. 179
100.8 Replaced Devices Offered Without Cost or With a Credit · p. 179
100.9 Requirements for Processing Non Veterans Administration (VA) Authorized Inpatient Claims · p. 180
100.10 Requirements for Processing Programs of All-Inclusive Care for the Elderly (PACE) Disenrollments during an Inpatient Stays · p. 181

130 Coordination With the Quality Improvement Organization (QIO) · p. 181

Open section 130 in the PDF

140 Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS) · p. 181 · 33 subsections

Open section 140 in the PDF
140.1 Medicare IRF Classification Requirements · p. 182
140.1.1 Criteria That Must Be Met By Inpatient Rehabilitation Facilities · p. 183
140.1.2 Additional Criteria That Must Be Met By Inpatient Rehabilitation Units · p. 186
140.1.3 Verification Process Used to Determine if the Inpatient Rehabilitation Facility Met the Classification Criteria · p. 188
140.1.4 New IRFs · p. 207
140.1.5 Changes in the Status of an IRF Unit · p. 207
140.1.6 New IRF Beds · p. 207
140.1.7 Change of Ownership or Leasing · p. 208
140.1.8 Mergers · p. 208
140.1.9 Retroactive Adjustments For Provisionally Excluded IRFs or IRF Beds · p. 209
140.2 Payment Provisions Under IRF PPS · p. 210
140.2.1 Phase-In Implementation · p. 211
140.2.2 Payment Adjustment Factors and Rates · p. 212
140.2.3 Case-Mix Groups · p. 212
140.2.4 Case-Level Adjustments · p. 212
140.2.5 Facility-Level Adjustments · p. 214
140.2.5.1 Area Wage Adjustments · p. 214
140.2.5.2 Rural Adjustment · p. 215
140.2.5.3 Low-Income Patient (LIP) Adjustment: The Supplemental Security Income (SSI)/Medicare Beneficiary Data for Inpatient Rehabilitation Facilities (IRFs) Paid Under the Prospective Payment System (PPS) · p. 215
140.2.5.4 Teaching Status Adjustment · p. 220
140.2.5.4.1 FTE Resident Cap · p. 221
140.2.5.5 Outliers · p. 222
140.2.6 Cost-to-Charge Ratios · p. 222
140.2.7 Use of a National Average Cost-to-Charge Ratio · p. 226
140.2.8 Reconciling Outlier Payments for IRF · p. 226
140.2.9 Time Value of Money · p. 229
140.2.10 Procedure for Medicare Contractors to Perform and Record Outlier Reconciliation Adjustments for IRFs · p. 230
140.2.11 Quality Reporting Program · p. 235
140.3 Billing Requirements Under IRF PPS · p. 236
140.3.1 Shared Systems and CWF Edits · p. 239
140.3.1.1 Actions When a Claim Does Not Match the Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI) · p. 240
140.3.2 IRF PPS Pricer Software · p. 241
140.3.3 Remittance Advices · p. 243

150 Long Term Care Hospitals (LTCHs) PPS · p. 244 · 46 subsections

Open section 150 in the PDF
150.1 Background · p. 244
150.2 Statutory Requirements · p. 244
150.3 Affected Medicare Providers · p. 244
150.4 Qualification Criterion for LTCHs · p. 245
150.5 Payment Provisions Under LTCH PPS · p. 246
150.5.1 Budget Neutrality · p. 247
150.5.2 Budget Neutrality Offset · p. 247
150.6 Beneficiary Liability
150.7 Patient Classification System · p. 248
150.8 Relative Weights · p. 248
150.9 Payment Rate · p. 248
150.9.1 Case-Level Adjustments · p. 249
150.9.1.1 Short-Stay Outliers · p. 249
150.9.1.2 Interrupted Stays · p. 258
150.9.1.3 Payments for Special Cases · p. 260
150.9.1.4 Payment Policy for Co-Located Providers · p. 260
150.9.1.5 High Cost Outlier Cases · p. 269
150.10 Facility-Level Adjustments · p. 270
150.10.1 Phase-in Implementation · p. 272
150.11 Requirements for Provider Education and Training · p. 273
150.12 Claims Processing and Billing · p. 273
150.12.1 Processing Bills Between October 1, 2002, and the Implementation Date · p. 274
150.13 Billing Requirements Under LTCH PPS · p. 274
150.14 Stays Prior to and Discharge After PPS Implementation Date · p. 274
150.14.1 Crossover Patients in New LTCHs · p. 275
150.15 System Edits · p. 275
150.16 Billing Ancillary Services Under LTCH PPS · p. 276
150.17 Benefits Exhausted · p. 276
150.17.1 Assumptions for Use in Examples Below · p. 277
150.17.1.1 Example 1: Coinsurance Days < Short Stay Outlier Threshold (30 Day Stay) · p. 277
150.17.1.2 Example 2: Coinsurance Days Greater Than or Equal to Short Stay Outlier Threshold (30 day stay) · p. 279
150.17.1.3 Example 3: Coinsurance Days Greater Than or Equal to Short Stay Outlier Threshold (20 day stay) · p. 281
150.17.1.4 Example 4: Only LTR Days < Short Stay Outlier Threshold (30 day stay) · p. 281
150.17.1.5 Example 5: Only LTR Greater Than or Equal to Short Stay Outlier Threshold (30 day stay)
150.18 Provider Interim Payment (PIP) · p. 284
150.19 Interim Billing · p. 284
150.20 Intermediary Benefit Payment Report (IBPR) · p. 285
150.21 Remittance Advices (RAs) · p. 285
150.22 Medicare Summary Notices (MSNs) · p. 285
150.23 LTCH Pricer Software · p. 285
150.23.1 Inputs/Outputs to Pricer · p. 285
150.24 Determining the Cost-to-Charge Ratio · p. 287
150.25 Statewide Average Cost-to-Charge Ratios · p. 290
150.26 Reconciliation · p. 291
150.27 Time Value of Money · p. 294
150.28 Procedure for Medicare contractors to Perform and Record Outlier Reconciliation Adjustments · p. 296

160 Necessary Changes to Implement Special Add-On Payments for New Technologies · p. 300 · 3 subsections

Open section 160 in the PDF
160.1 Special Add-On Payments For New Technologies · p. 300
160.1.1 Identifying Claims Eligible for the Add-On Payment for New Technology · p. 302
160.1.2 Remittance Advice Impact · p. 302

170 Billing and Processing Instructions for Religious Nonmedical Health Care Institution (RNHCI) Claims · p. 303 · 11 subsections

Open section 170 in the PDF
170.1 RNHCI Election Process · p. 303
170.1.1 Requirement for RNHCI Election · p. 303
170.1.2 Revocation of RNHCI Election · p. 304
170.1.3 Completion of the Notice of Election for RNHCI · p. 304
170.1.4 Common Working File (CWF) Processing of Elections, Revocations and Cancelled Elections
170.2 Billing Process for RNHCI Services · p. 307
170.2.1 When to Bill for RNHCI Services · p. 307
170.2.2 Required Data Elements on Claims for RNHCI Services · p. 307
170.3 RNHCI Claims Processing By the Medicare Contractor with RNHCI Specialty Workload · p. 317
170.3.1 RNHCI Claims Not Billed to Original Medicare · p. 318
170.4 Informing Beneficiaries of the Results of RNHCI Claims Processing · p. 319

180 Processing Claims For Beneficiaries with RNHCI Elections by Contractors without RNHCI Specialty Workloads · p. 319 · 2 subsections

Open section 180 in the PDF
180.1 Recording Determinations of Excepted/Nonexcepted Care on Claim Records · p. 322
180.2 Informing Beneficiaries of the Results of Excepted/Nonexcepted Care Determinations by the Non-specialty Contractor · p. 323

190 Inpatient Psychiatric Facility Prospective Payment System (IPF PPS) · 62 subsections

Open section 190 in the PDF
190.1 Background · p. 324
190.2 Statutory Requirements · p. 324
190.3 Affected Medicare Providers · p. 324
190.4 Federal Per Diem Base Rate
190.4.1 Standardization Factor · p. 326
190.4.2 Budget Neutrality · p. 326
190.4.2.1 Budget Neutrality Components · p. 327
190.4.3 Annual Update · p. 327
190.4.4 Calculating the Federal Payment Rate
190.5 Patient-Level Adjustments · p. 329
190.5.1 Diagnosis-Related Groups (DRGs) Adjustments · p. 329
190.5.2 Application of Code First · p. 331
190.5.3 Comorbidity Adjustments · p. 334
190.5.4 Age Adjustments · p. 335
190.5.5 Variable Per Diem Adjustments · p. 335
190.6 Facility-Level Adjustments · p. 336
190.6.1 Wage Index · p. 336
190.6.2 Rural Location Adjustment · p. 337
190.6.3 Teaching Status Adjustment · p. 337
190.6.3.1 Full-Time Equivalent (FTE) Resident Cap · p. 337
190.6.3.2 Reconciliation of Teaching Adjustment on Cost Report · p. 338
190.6.4 Emergency Department (ED) Adjustment · p. 339
190.6.4.1 Source of Admission for IPF PPS Claims for Payment of ED Adjustment
190.6.5 Cost-of-Living Adjustment (COLA) for Alaska and Hawaii · p. 341
190.7 Other Payment Policies · p. 342
190.7.1 Interrupted Stays · p. 342
190.7.2 Outlier Policy · p. 343
190.7.2.1 How to Calculate Outlier Payments · p. 344
190.7.2.2 Determining the Cost-to-Charge Ratio · p. 345
190.7.2.3 Outlier Reconciliation · p. 348
190.7.2.4 Time Value of Money · p. 351
190.7.2.5 Procedures for Medicare Contractors to Perform and Record Outlier Reconciliation Adjustments · p. 352
190.7.3 Electroconvulsive Therapy (ECT) Payment · p. 356
190.7.4 Stop Loss Provision (Transition Period Only) · p. 357
190.8 Transition (Phase-In Implementation) · p. 358
190.8.1 Implementation Date for Provider · p. 358
190.9 Definition of New IPF Providers Versus TEFRA Providers · p. 359
190.9.1 New Providers Defined · p. 359
190.10 Claims Processing Requirements Under IPF PPS · p. 360
190.10.1 General Rules · p. 360
190.10.2 Billing Period · p. 361
190.10.3 Patient Status Coding · p. 361
190.10.4 Reporting ECT Treatments · p. 361
190.10.5 Outpatient Services Treated as Inpatient Services · p. 362
190.10.6 Patient is a Member of a Medicare Advantage Organization for Only a Portion of a Billing Period · p. 362
190.10.7 Billing for Interrupted Stays · p. 362
190.10.8 Grace Days · p. 362
190.10.9 Billing Stays Prior to and Discharge After PPS Implementation Date · p. 362
190.10.10 Billing Ancillary Services Under IPF PPS · p. 363
190.10.11 Covered Costs Not Included in IPF PPS Amount · p. 363
190.10.12 Same Day Transfer Claims · p. 363
190.10.13 Remittance Advice - Reserved · p. 364
190.10.14 Medicare Summary Notices and Explanation of Medicare Benefits · p. 364
190.11 Benefit Application and Limits-190 Days · p. 364
190.12 Beneficiary Liability · p. 364
190.12.1 Benefits Exhaust · p. 365
190.13 Periodic Interim Payments (PIP) · p. 365
190.14 Intermediary Benefit Payment Report (IBPR) · p. 366
190.15 Monitoring Implementation of IPF PPS Through Pulse · p. 366
190.16 IPF PPS System Edits · p. 366
190.17 IPF PPS PRICER Software · p. 367
190.17.1 Inputs/Outputs to PRICER · p. 367

200 Electronic Health Record (EHR) Incentive Payments · p. 369 · 3 subsections

Open section 200 in the PDF
200.1 Payment Calculation · p. 369
200.2 Submission of Informational Only Bills for Maryland Waiver Hospitals and Critical Access Hospitals (CAHs) · p. 370
250.18 Incomplete Colonoscopies (Codes 44388, 45378, G0105 and G0121)

Using this chapter in a denial or appeal

Start with the remittance. The claim adjustment reason code says what happened to the line, the remark code narrows it, and the group code says who is liable. Match that to the section of the chapter that sets the rule, then read the section in the official PDF rather than a summary: the wording that matters, such as a time limit, a modifier requirement or a documentation element, is usually a single sentence. Check the revision note under the section heading, because a rule that changed after the date of service may not apply to the claim, and an effective date earlier than the issue date can make a new rule reach back.

When the chapter supports the claim, cite it precisely in the redetermination request: the publication number, chapter, section and revision. When it does not, the fix is usually a corrected claim or better documentation rather than an appeal, and a coding or format rejection is corrected and resubmitted because it carries no appeal rights. Manual instructions bind the Medicare Administrative Contractor, so they settle most first-level disputes; at the hearing level, administrative law judges give them substantial deference without being bound by them. If the issue turns on whether a service is covered at all, read the matching Benefit Policy Manual chapter and any national coverage determination or local coverage determination as well, because coverage and billing rules are written in different places.

How QuickIntell works with Claims Processing Manual chapter 3

QuickRCM covers eligibility, claim readiness, denials, posting and A/R with configurable automation and human review, which is where the billing rules in this chapter are checked before a claim goes out. QuickCode supports qualified coder review of the coding and modifier questions the chapter answers.

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Frequently asked questions: chapter 3

Where is the 3-day payment window in the Claims Processing Manual?

Chapter 3 section 40.3, Outpatient Services Treated as Inpatient Services. It applies to outpatient diagnostic services and related nondiagnostic services furnished by the admitting hospital or an entity it wholly owns or operates during the 3 days before admission, or 1 day for hospitals not paid under IPPS.

How does Medicare pay an IPPS transfer?

Section 40.2.4 explains that the transferring hospital is paid a per diem amount, twice the per diem for the first day and the per diem for each following day, up to the full MS-DRG payment.

Does chapter 3 cover inpatient rehab and LTCH billing?

Yes. Section 140 covers the inpatient rehabilitation facility PPS, section 150 the long-term care hospital PPS and section 190 the inpatient psychiatric facility PPS.

Sources

Every figure on this page is taken from the CMS publications below, as released by the Centers for Medicare & Medicaid Services. Projection built 2026-10-10. Verify against the primary file before billing or contracting decisions. The reference methodology explains how each figure is computed from these files.

Medicare Claims Processing Manual, Chapter 3: Inpatient Hospital Billing
Version Rev. 13757, issued 2026-04-30 · effective 2026-04-01 · file clm104c03.pdfSHA-256 b02bd622dd8494a5…
Medicare Claims Processing Manual (Pub. 100-04)
Version 39 chapter PDFs; newest revision Rev. 13836 (chapter 14), issued 2026-06-24 · effective 2026-09-27 · file 100-04-claims-processing-manual/*.pdf (39 chapters; SHA-256 of their sha256sum listing)SHA-256 f87bc3bcd9d1570d…

Disclaimer

This guide summarizes a CMS manual chapter in our own words for billing teams; section headings and transmittal subjects are quoted from the chapter PDF. The chapter itself is the authority, and it changes by transmittal. Not legal, clinical or billing advice.

Found a figure that does not match the CMS file? Report a data correction with the CMS file and the value you expected; the request reaches the editorial team through the contact form.

Medicare Claims Processing Manual Chapter 3: Inpatient Hospital Billing