How does healthcare reimbursement work?


Editorial team Published on

Medical reimbursement is the process of a healthcare provider getting paid for services, or an employee getting money back from an employer for medical costs.

Because "medical reimbursement" can mean two different things depending on context, here is how both types work:

1. Provider Reimbursement (Insurance & Medical Bills)

When a patient visits a doctor or hospital, the facility does not usually get paid right away. Instead, it goes through a multi-step billing and reimbursement cycle with insurance companies or government programs like Medicare:

  • Verification and Documentation: The office checks the patient's insurance eligibility. The doctor then records the diagnosis, treatment, and clinical findings.
  • Medical Coding: Staff convert the medical services into standardized codes (like CPT or ICD codes).
  • Claim Submission: The provider submits a formal claim to the insurance payer.
  • Adjudication: The insurer reviews the claim to see if the service is covered, necessary, and matches the provider's contract terms.
  • Payment and Reconciliation: The insurer pays the provider an agreed-upon rate. The patient is billed separately for any remaining balance, such as copays, coinsurance, or deductibles.

You can read more about how this works for medical offices through the Healthcare Reimbursement Guide.

2. Employee Reimbursement (HRAs and MERPs)

When an employer reimburses an employee for medical care, it is often handled through a formal plan like a Health Reimbursement Arrangement (HRA information on HealthCare.gov) or a Medical Expense Reimbursement Plan (MERP):

  • Allowance Setup: The employer sets a fixed monthly or annual budget or allowance for the employee.
  • Out-of-Pocket Purchase: The employee pays for qualified medical expenses—such as doctor visits, prescriptions, or individual health insurance premiums—using their own money.
  • Claim Submission: The employee submits an invoice or receipt showing the date, vendor, description, and cost of the care to the employer or plan administrator.
  • Tax-Free Payback: The employer reviews the documentation and reimburses the employee up to their set allowance limit. These payouts are typically tax-free.