Understanding Medicare’s Outpatient Mental Health Treatment Limitation

By law, Medicare payment for outpatient mental health services is limited to 62.5 percent of covered expenses incurred in any calendar year in connection with the treatment of a mental, psychoneurotic, or personality disorder for an individual who is not an inpatient of a hospital at the time the expenses are incurred.

Unfortunately, when you offer mental health services to Medicare patients, your usual Medicare payments are reduced. By holding the patient responsible for the difference between the amount paid by Medicare and the full allowed amount, you still be able to collect what he usually would for the service. The key lies in understanding Medicare’s outpatient mental health treatment limitation well enough.

The Medicare carrier computes the limitation as follows: First, it determines the Medicare allowed payment amount for services subject to the limitation. Then, it multiplies this amount by 0.625. Finally, it subtracts any unsatisfied deductible and multiplies the remainder by 0.8 to obtain the amount of Medicare payment. You should hold the beneficiary responsible for the difference between the amount paid by Medicare and the full allowed amount.

For example, let’s imagine a Medicare beneficiary presents to you with an apparent mental disorder. You perform a diagnostic evaluation that costs $350. That service is not subject to the limitation, and it satisfies the patient’s Medicare deductible for the year. You then conduct 10 weekly therapy sessions for which you charge $125 each. The Medicare allowed amount is $90 each, for a total of $900. The Medicare carrier applies the limitation by multiplying 0.625 by $900, which equals $562.50. The carrier then multiplies 0.8 by $562.50, which equals $450 (i.e., the amount of Medicare payment). The beneficiary, in this case, is responsible for $450 (i.e., the difference between the Medicare payment and the allowed amount).

If the primary diagnosis reported for a particular service is the same as or equivalent to a condition described in the DSM, the expense for the service is subject to the limitation except under the circumstances just described. When it is not clear whether the primary diagnosis meets the definition of mental, psychoneurotic, or personality disorders, the Medicare carrier may contact you to clarify the diagnosis. Medicare recognizes that, in some cases, physicians will provide services for both psychiatric and nonpsychiatric conditions. When this occurs, the carrier is required to separate the psychiatric aspects of the treatment from the other charges. If the two components are not readily distinguishable, the carrier will allocate all of the charges to the primary diagnosis.

Three key components of the definition determine the scope of the limitation:


The limitation applies to treatment; it does not generally apply to diagnosis.

Mental, psychoneurotic, or personality disorder:

The limitation applies to the specific psychiatric conditions described in the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders (DSM).

An individual who is not an inpatient of a hospital:

The limitation applies to services provided in outpatient departments, a physician’s office, the patient’s home, a skilled nursing facility, etc., including services provided at comprehensive outpatient rehabilitation facilities. Items and supplies furnished by physicians or other mental health professionals in connection with treatment are also subject to the limitation.

While Medicare’s outpatient mental health treatment limitation can seem pretty broad, there are services that fall outside its scope, including the following:

  • Medical services related to a diagnosis of Alzheimer’s disease or related disorders. Medical management (rather than psychiatric treatment) of Alzheimer’s disease or Alzheimer’s or other disorders coded in the 290 series in DSM is not subject to the limitation. However, when the primary treatment rendered to a patient with such a diagnosis is psychotherapy, it is subject to the limitation.
  • Brief office visits for monitoring or changing drug prescriptions. According to the regulations, the term “treatment” does not include brief office visits for the sole purpose of monitoring or changing drug prescriptions used in the treatment of mental, psychoneurotic, or personality disorders, so these services are not subject to the limitation.
  • Tests and evaluations performed to establish or confirm the patient’s diagnosis are not subject to the limitation. Diagnostic services include psychiatric or psychological tests and interpretations, diagnostic consultations, and initial evaluations. However, follow-up diagnostic services done to evaluate the progress of a course of treatment are subject to limitations.
  • An initial visit to a physician for professional services often combines diagnostic evaluation and initiation of therapy. Because such a visit is neither solely diagnostic nor solely therapeutic, Medicare deems the initial visit to be diagnostic, so that the limitation does not apply. In cases where diagnostic services require more than one visit, Medicare will not apply the limitation to the additional visits. However, when your bill for more than one visit for professional diagnostic services, expect your Medicare carrier to request documentation to justify the bill.
  • Partial hospitalization services not directly provided by a physician. These services are billed by hospitals and community mental health centers to Medicare fiscal intermediaries.

Like so many other Medicare regulations, the outpatient mental health treatment limitation is difficult to understand. With this explanation and the resolve to collect more money from the beneficiary, you can minimize any negative consequences to your practice’s bottom line. We can help you out with these complex Medicare rules. We make sure that you will bill as per Medicare compliances at the same time not compromise your practice’s financial health. We provide end-to-end medical billing services so that you can focus only on your patients. To know about our services you can call us at 888-357-3226 or write to us at info@medicalbillersandcoders.com