CMS is putting out feelers for a new payment policy on medically necessary admissions, one of the compliance world’s hottest buttons. While it’s preliminary, CMS’s request for suggestions for a new definition of “admission” may foretell a future where hospitals and physicians have more clarity on Medicare’s site-of-service expectations and CMS and hospitals alike spend less time and energy on auditing whether inpatients should have been outpatients and vice versa.

The proposed 2013 outpatient prospective payment system regulation, announced July 6, reaches out to the industry for ideas on how to address the inpatient versus outpatient/observation compliance challenge. “We have heard from some stakeholders who have suggested a need for us to clarify our current instruction regarding the circumstances under which Medicare will pay for an admission in order to improve hospitals’ ability to make appropriate admission decisions....We are interested in receiving public comments and suggestions regarding whether and how we might improve our current instructions and clarify the application of Medicare payment policies for both hospitals and physicians, keeping in mind the challenges of implementing national standards that are broad enough to contemplate the range of clinical scenarios but prescriptive enough to provide greater clarity.” To underscore CMS’s seriousness about new site-of-service guidance, it was one of four topics discussed at the July 18 hospital open-door forum on the OPPS rule.

CMS apparently is realizing this is a major sore spot for hospitals and physicians, says Washington, D.C., attorney Andy Ruskin, with Morgan, Lewis & Bockius. He also assumes CMS would like to free up RACs, which are bogged down in site-of-service audits, and ease the burden of appeals stemming from them. “No one is saying medically unnecessary care was furnished. It’s just about whether it was at the right level,” Ruskin notes.

The soul-searching about site-of-service compliance is the culmination of several trends, according to the regulation:

• Financial penalties for patients and hospitals: When Medicare beneficiaries are admitted but hospitals realize they don’t qualify as inpatients, there are financial consequences for both beneficiaries and hospitals. Beneficiaries may be reclassified as outpatients using condition code 44 with their informed consent, as long as it’s before discharge, the hospital hasn’t submitted a claim and the attending physician and utilization review committee agree to the change. If this doesn’t work out, hospitals can charge Medicare only for Part B ancillary services (unless they participate in CMS’s Part A-to-B rebilling demonstration). The problem is that outpatients are financially disadvantaged compared to inpatients. Outpatients pay for their own self-administered drugs, for example, while inpatients are off the hook because drugs are included in MS-DRG payments. And outpatient services, including observation, don’t help patients open the doors to a skilled nursing facility. Medicare requires three consecutive inpatient days before a SNF admission.

• Audits and errors: Short stays represent “a significant proportion” of errors identified by the comprehensive error rate testing (CERT) contractor, CMS says. The services were medically necessary but should have been provided in an outpatient setting. Hospitals theoretically could reclassify patients using condition code 44, but they may not have utilization reviewers or case managers working after hours to pull all the levers, CMS says. As a result, hospitals pre-emptively stick more patients in observation to ensure they get Part B reimbursement in case a Medicare contractor voids the admission, the regulation states.

• Observation: Fear of Medicare inpatient denials has kicked up the use of observation. “In recent years, the number of cases of Medicare beneficiaries receiving observation services for more than 48 hours, while still small, has increased from approximately 3 percent in 2006 to approximately 7.5 percent in 2010,” the regulation states. That worries CMS because of the financial burdens for beneficiaries. For example, inpatients pay a one-time deductible for all services provided during the first 60 days in the hospital, while there’s a separate copayment for every outpatient service. That’s one of the issues raised in a class-action lawsuit filed on behalf of beneficiaries against CMS. The lawsuit alleges the beneficiaries were improperly classified as outpatients in observation status when they were receiving inpatient care (RMC 11/21/12, p. 4).

In the regulation, CMS trots out suggestions from “stakeholders” for improving admission payment policies. One suggestion is to clarify instructions on admission decisions. The Medicare Benefit Policy Manual says that admission is a complex medical judgment the physician makes after considering multiple factors, such as the risk that something bad will happen if the patient is sent home.

Another suggestion is for CMS to better define “inpatient,” beyond requiring medical necessity and a physician order, the regulation states. Although Medicare already states that the admission decision should be made within 24 to 48 hours and that anticipating an overnight stay should factor in, CMS wants to know whether it would be “appropriate and useful to establish a point in time after which the encounter becomes an inpatient stay if the beneficiary is still receiving medically necessary care to treat or evaluate his or her condition.”

Short-stay Outlier Policy Could Help

Ruskin has a different suggestion: “Why not just have a short stay outlier policy that pays hospitals on a per-diem basis if the stay is, say, a standard deviation shorter than the average length of stay for a given DRG?” It’s only a question of payment, he notes, since there’s not much difference between inpatient care and outpatient observation status at most hospitals. The per diem could be based on payments for outpatient services. “However, there’d be no confusion as to whether the patient received inpatient or outpatient services, and patients in a hospital bed overnight almost always think of themselves as inpatients,” Ruskin says.

CMS broached the inpatient versus outpatient/observation payment policy in the context of an update to its three-year AB rebilling demonstration. Participating hospitals can resubmit claims for 90% of the allowable Part B payment when the auditor determines that a Medicare patient met the requirements for Part B services but not for an inpatient stay although they waive their appeal rights. Part A inpatient denials by a Medicare administrative contractor, RAC or the comprehensive error rate testing contractor can be rebilled.

View the regulation at http://www.ofr.gov/inspection.aspx?AspxAutoDetectCookieSupport=1.

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