Medicare Conditional Payment Reduction for Procurement Costs (2026)

By John Mahoney · October 29, 2026 · 8 min read

When a Medicare beneficiary settles a personal injury or malpractice claim, Medicare expects to be repaid for the treatment it paid for "conditionally," meaning on the assumption that a primary payer would eventually be found. The question every settlement conference turns on is how much. The answer is rarely the number on the Conditional Payment Letter. By regulation, Medicare reduces its recovery to account for what it cost the beneficiary to obtain the settlement, and the reduction follows one of two formulas depending on whether Medicare paid less than the settlement or at least as much. This post walks through both, explains what counts as a procurement cost, lays out the timing after the demand letter, and shows how to estimate the figure before the client is asked to accept a number.

The authority: 42 C.F.R. § 411.37

The regulation is short. Its paragraph (a) sets the condition for any reduction at all: Medicare reduces its recovery to take account of the cost of procuring the judgment or settlement, but only if (i) the procurement costs were incurred because the claim was disputed and (ii) those costs were borne by the party against which CMS seeks to recover. In practice that means the beneficiary's own attorney fees and litigation costs. Costs paid by someone else, or costs of a claim that was never contested, do not qualify.

Paragraphs (c) and (d) carry the two formulas. Paragraph (e) is the exception that matters when a case goes badly: if CMS has to file suit because the party that received payment opposes CMS's recovery, the recovery amount becomes the lower of the Medicare payment or the settlement minus the party's total procurement costs, with no proportional reduction.

Formula one: Medicare paid less than the settlement (paragraph (c))

This is the usual case. The regulation's three steps:

1. Determine the ratio of the procurement costs to the total judgment or settlement payment.
2. Apply that ratio to the Medicare payment. The product is the Medicare share of procurement costs.
3. Subtract the Medicare share of procurement costs from the Medicare payments. The remainder is the Medicare recovery amount.

Put plainly: Medicare pays the same proportion of fees and costs that its claim bears to the total settlement. If fees and costs ate 40 percent of the settlement, Medicare's claim is cut by 40 percent.

Formula two: Medicare paid as much as or more than the settlement (paragraph (d))

When Medicare's conditional payments equal or exceed the judgment or settlement amount, the ratio method disappears. The recovery amount is simply the total judgment or settlement payment minus the total procurement costs. Medicare takes everything that is left after the beneficiary's fees and costs are paid. The beneficiary nets nothing from the settlement itself. That result is why the waiver and compromise paths, discussed below, exist.

Side by side

What counts as procurement costs

The regulation speaks of "the cost of procuring the judgment or settlement." The CMS recovery process asks for those numbers in a specific form: after settlement, the beneficiary or attorney reports the settlement date, the gross amount, and the attorney fees and costs borne by the beneficiary, using the Final Settlement Detail document or the Medicare Secondary Payer Recovery Portal (MSPRP). Those reported figures drive the § 411.37 arithmetic.

• Attorney fees actually charged to the beneficiary under the fee agreement.
• Litigation costs advanced on the case and charged back to the beneficiary: filing fees, expert fees, records, depositions and similar expenses.
• Not included: costs borne by another party, costs on an undisputed claim, and amounts the beneficiary did not actually pay.

Keep the fee and cost ledger clean before settlement. The BCRC applies the reduction to the numbers it is given, and a redetermination request based on "wrong procurement figures" is one of the documented grounds for first-level appeal, which means getting it right the first time avoids a 120-day detour.

Timing: from the CPL to the demand to the interest clock

The procurement reduction happens at one specific point in the BCRC process. Knowing where helps the planning.

• Authorize representation. At engagement, file a Proof of Representation (attorney) or Consent to Release (information only) with the BCRC and report the pending claim. The BCRC answers with a Rights and Responsibilities letter.
• Conditional Payment Letter (CPL). Within 65 days of the RAR letter. This is an interim total of the claims Medicare considers related, with a Payment Summary Form. Dispute unrelated claims by diagnosis code or date; the BCRC allows 45 calendar days to review a dispute. If the case was reported after settlement, a Conditional Payment Notice issues instead and a response is due within 30 calendar days, or a demand issues automatically with no reduction for fees and costs.
• Report the settlement. Promptly after settlement, send the date, gross amount, fees and costs. This is where the procurement figures enter.
• Final demand letter. States the demand amount after the procurement-cost reduction, the interest rate, and appeal and waiver rights. Interest begins to accrue on the demand date.
• Day 0 to day 60. Pay in full, by check to Medicare or through the MSPRP, to avoid interest. Interest is assessed only if the debt is unresolved at day 60, and then for each full 30-day period from the demand date. Payments apply to interest first, then principal.
• Day 90. An Intent to Refer letter goes out automatically if full payment or a valid documented defense has not been received, even while an appeal is pending.
• Day 150. Referral to the Department of the Treasury (offset of federal payments including Social Security, administrative wage garnishment, private collection) and possible referral to the Department of Justice, which may seek double damages.

The interest rate is the Medicare overpayment and MSP debt rate certified quarterly by the Treasury under 42 C.F.R. § 405.378. The tool's reference table, taken from the Noridian JE Part B overpayment interest rate page (last updated July 17, 2026), lists 11.875 percent for the quarter beginning July 21, 2026, with rates between 11.125 and 12.5 percent across the preceding three years. CMS publishes each new quarter in a transmittal, so confirm the quarter that covers your demand date. Appeal and waiver requests do not stop accrual; if either is granted, the interest is refunded.

A worked example (hypothetical)

The figures below are invented for illustration. No real patient, claim or demand is described.

The patient settles a liability claim for a gross $90,000. The fee agreement is one-third, so attorney fees are $30,000, and $6,000 in costs were advanced and charged back. The Conditional Payment Letter shows $24,000 in related Medicare payments.

• Procurement costs: $30,000 + $6,000 = $36,000.
• Medicare paid $24,000, which is less than the $90,000 settlement, so paragraph (c) applies.
• Procurement ratio: $36,000 ÷ $90,000 = 0.40.
• Medicare share of procurement costs: $24,000 × 0.40 = $9,600.
• Medicare recovery: $24,000 − $9,600 = $14,400.
• Net to the patient: $90,000 − $36,000 − $14,400 = $39,600.

Now suppose the demand letter for $14,400 sits unpaid for 95 days while the firm waits on a disbursement question. Interest is assessed because the debt was unresolved at day 60, and three full 30-day periods have run. At the 11.875 percent default rate the estimator computes $14,400 × (0.11875 ÷ 12) × 3, which is $142.50 per period and $427.50 in total, for an estimated $14,827.50 due. The Intent to Refer letter would already have gone out at day 90.

Change one input and the paragraph flips. If the same patient had settled for $15,000 with $5,000 in fees and $1,000 in costs while Medicare had paid $22,000, Medicare's payments exceed the settlement and paragraph (d) applies: recovery is $15,000 − $6,000 = $9,000, and the patient nets nothing from the settlement. That is the moment to look at a waiver request under § 1870(c) of the Social Security Act (Form SSA-632), which the beneficiary may file on grounds of equity, hardship or being without fault, or a compromise request to the BCRC, which is decided on ability to pay, cost of collection and litigative risk and is not appealable.

Smaller settlements: two shortcuts to know about

For small physical-trauma liability cases, CMS offers alternatives to the full process; the tool checks the settlement amount against each threshold:

• Fixed Percentage Option. Medicare accepts 25 percent of the gross settlement. The CMS Demand Calculation Options page describes a $5,000 cap and states it "will be raised to $10,000, effective October 2, 2023," while the NGHP Beneficiary Reference Guide (July 2024) still says $5,000; confirm with the BCRC. The election must precede any demand, and if approved the beneficiary cannot appeal the amount or request a waiver.
• Self-Calculated Conditional Payment Amount. For physical-trauma liability cases at or below $25,000 where treatment ended at least 90 days before submission and the incident was at least six months earlier. The beneficiary gives up the appeal but keeps the right to request a waiver.
• Final Conditional Payment process on the MSPRP. Once per case, within 120 days of settlement, with a strict step sequence; missing any step voids it and it cannot be restarted.

What to request next

• The Conditional Payment Letter and the Payment Summary Form, line by line, so unrelated diagnosis codes and dates can be disputed before the demand issues.
• The signed fee agreement and the firm's cost ledger for the matter, reconciled to what will be reported as procurement costs.
• The Final Settlement Detail document or MSPRP settlement report as submitted, with the date of submission.
• The demand letter itself: the demand amount, the stated interest rate, the demand date (the interest clock), and the appeal and waiver instructions.
• The CMS transmittal or contractor rate page for the quarter covering the demand date, to confirm the interest rate.
• If a redetermination is contemplated, the documentation supporting it: unrelated diagnoses, duplicate claims or corrected procurement figures. The request is due within 120 days of receiving the demand, and only the party that received the demand may appeal.
• For a waiver request, Form SSA-632-BK and the income, asset and expense records it asks for.
• The Section 111 reporting status from the insurer, since the insurer's Total Payment Obligation to Claimant report tells the BCRC a settlement occurred and triggers recovery if the debt is unresolved.

What the tool does not do

The estimator does arithmetic under 42 C.F.R. § 411.37 and estimates interest from a date you supply. It does not know which claims on the Payment Summary Form are actually related to the injury, so it cannot tell you what to dispute. It does not apply paragraph (e), which only matters if CMS sues. It does not decide whether a waiver or compromise will be granted, whether a Fixed Percentage or Self-Calculated election is wise, or what Medicare Advantage or Part D plans may separately claim. The demand letter controls; treat the output as a planning figure for the settlement conference and the client letter, and check each input against the CPL and the fee ledger.

Frequently asked questions

Does Medicare always reduce its conditional payment recovery for attorney fees?

Under 42 CFR 411.37(a) the reduction applies only when procurement costs were incurred because the claim was disputed and were borne by the party Medicare is recovering from. If a case is reported after settlement and the Conditional Payment Notice is not answered within 30 days, the BCRC's process issues a demand with no reduction for fees and costs. And if CMS has to sue because the party opposes recovery, paragraph (e) sets the recovery at the lower of the Medicare payment or the settlement minus procurement costs, with no proportional reduction.

When does interest start on a Medicare conditional payment demand?

Interest accrues from the date of the demand letter, but it is assessed only if the debt is not repaid or otherwise resolved within 60 days of that date. It is then charged for each full 30-day period from the demand date at the quarterly Treasury rate certified under 42 CFR 405.378. Payments are applied to interest first. Filing an appeal or waiver request does not stop accrual; if the appeal or waiver succeeds the interest is refunded.

What does the free Medicare Conditional Payment Estimator actually do?

You enter the gross settlement, attorney fees, costs, the conditional payment amount from the CPL or demand, and optionally the days since the demand and the interest rate. It picks the correct 42 CFR 411.37 paragraph, computes the procurement ratio, Medicare's share of procurement costs, the recovery amount, the net to the beneficiary, and an interest estimate, and shows whether the settlement amount falls within the Fixed Percentage Option or Self-Calculated thresholds. The BCRC demand letter controls; the tool is for planning.

What if Medicare paid more than the whole settlement?

Then 42 CFR 411.37(d) applies instead of (c). The recovery amount is the total settlement minus total procurement costs. The beneficiary nets nothing from the settlement itself in that scenario, which is why the paragraph (d) arithmetic should be run before the number is accepted and why the waiver and compromise paths exist.

Related: Medicare liens in personal injury settlements and ERISA subrogation claims against a settlement.