CO-74 Reason Code (CARC 74) 2026: Indirect Medical Education (IME) Adjustment

CO-74 is an indirect medical education adjustment. It shows up on inpatient claims from teaching hospitals. Medicare adds an IME amount to each inpatient payment to cover the higher costs of running a resident training program. When a payer reports CARC 74, it’s usually removing that IME piece from its own payment, or adding it, under the contract. The most common case is a Medicare Advantage plan that carves out IME because Original Medicare pays it to the hospital directly. (Primary sources: X12 Claim Adjustment Reason Codes · CMS Indirect Medical Education).

In brief: CO-74 means “Indirect Medical Education Adjustment.” A teaching hospital sees it when a payer removes or adds the IME part of an inpatient payment. For Medicare Advantage patients, the plan often leaves IME out, and the hospital gets it from its Medicare contractor by sending an IME-only claim with condition codes 04 and 69. Check the contract, file that claim, and reconcile both payments.

Part of our denial codes library. Written by Manikandan J, CPC, CRCR, who has reconciled hospital inpatient payments for payers and billing companies. Published 20 October 2026. Last updated: 20 October 2026. Code wording is quoted word for word from X12.

X12 description of CARC 74

Field	Official X12 text
Description	“Indirect Medical Education Adjustment.”
Start	01/01/1995

Source: X12 Claim Adjustment Reason Codes, checked 20 October 2026.

Denial code 74, CARC 74 and reason code 74

You may search for denial code 74, CARC 74 or reason code 74. They all point here. With CO, the adjustment comes from the contract and is never a patient balance.

What IME is and who gets it

Indirect medical education is an add-on Medicare pays to teaching hospitals for each inpatient stay. It reflects costs that come with training residents, such as extra tests, slower workflows and sicker patients. A teaching hospital is a hospital with an approved residency program. Its IME amount depends on its ratio of residents to beds. A carve-out is a contract term that takes one part of a payment out of what the plan pays, because someone else pays it.

Payer type	Does it pay IME?	Where IME comes from
Original Medicare	Yes, in the IPPS payment	Built into each inpatient claim
Medicare Advantage	Often no, by contract	The hospital’s Medicare contractor (MAC), via an IME-only claim
Medicaid	Varies by state	State graduate medical education programs
Commercial	Only if the contract says so	Negotiated rates

CMS explains how the IME adjustment is set for teaching hospitals.

The IME-only claim for Medicare Advantage patients

For an MA patient, a teaching hospital sends two claims. One goes to the MA plan for the stay. The other goes to the Medicare contractor so the hospital gets IME and the stay counts in Medicare’s calculations. Noridian, a Medicare contractor, lists the setup for this shadow billing:

• Type of bill 11X, sent as covered.
• Condition code 04, an information-only bill.
• Condition code 69, which asks for the IME and graduate medical education supplemental payment. Teaching hospitals only.

If the hospital skips this claim, it can lose the IME for that stay. The MA plan’s CO-74 carve-out then leaves a real gap.

Why CO-74 needs attention

• No IME-only claim filed. The plan carved out IME, but nobody billed the MAC.
• Carve-out on a non-teaching stay. For example, the plan applied CARC 74 to a hospital that doesn’t qualify.
• Wrong IME rate. The plan used an old IME factor for a carve-out it calculates itself.
• Contract says pass-through. The contract says the plan pays full Medicare rates, including IME, but the plan removed it.
• Partial MA enrollment. The patient joined or left MA during the stay, so IME billing is split.

How to work a CO-74

1. Confirm teaching status and that the hospital has an IME factor for the year.
2. Read the contract. Does the plan pay Medicare rates with IME, or carve it out?
3. File the IME-only claim to the MAC with condition codes 04 and 69 if it’s an MA stay.
4. Check the plan’s math if it removed IME, using the hospital’s current IME factor.
5. Reconcile both payments so the plan payment plus the MAC IME equal what you expected.
6. Dispute any carve-out the contract doesn’t allow.

Worked example (illustrative)

A teaching hospital treats an MA patient for pneumonia. The plan pays the DRG and reports CAS*CO*74*1320.00, removing the IME part. The contract allows that carve-out. The revenue team checks and finds no IME-only claim went to the MAC. They send one as type of bill 111 with condition codes 04 and 69. The MAC pays the IME, and the stay now reconciles. The team also adds a work queue that creates the IME-only claim for every MA inpatient stay.

Prevention checklist

• [ ] Build an automatic IME-only claim for every MA inpatient stay at a teaching hospital.
• [ ] Load each MA contract’s IME terms into your contract model.
• [ ] Update the IME factor each federal fiscal year.
• [ ] Match plan remits and MAC IME payments in one report.
• [ ] Track CO-74 amounts by plan to catch carve-outs the contract doesn’t allow.

Related codes

• CO-45: charge exceeds fee schedule or contracted amount.
• CO-23: impact of prior payer adjudication.
• CO-69: day outlier amount.
• CO-24: charges covered under a capitation agreement.
• Full CARC and RARC list for code lookups.
• Denial codes hub for every code we cover.

Key takeaways

CO-74 is an indirect medical education adjustment on a teaching hospital’s inpatient claim. Medicare Advantage plans often carve IME out, and the hospital collects it from its Medicare contractor with an IME-only claim using condition codes 04 and 69. Check the contract, file that claim every time, and reconcile both payments.

FAQ

Sources

How we checked: every code quote on this page was compared word for word with the X12 CARC list on 20 October 2026.

• X12, Claim Adjustment Reason Codes (CARC 74, 75). Accessed 20 Oct 2026.
• CMS, Indirect Medical Education (IME). Accessed 20 Oct 2026.
• Noridian JE Part A, Medicare Advantage inpatient claim shadow billing. Accessed 20 Oct 2026.

Last updated: 20 October 2026 · This page is educational and doesn’t replace payer contracts or coding rules.