In a surprising development, more hospitals will get full payment for outpatient services, including observation, after their inpatient claims are denied, according to a CMS memo. The reason: HHS administrative law judges (ALJs) are ordering Medicare administrative contractors (MACs) to pay for Part B services when Part A claims are denied, so CMS has decided to go along. Even though it’s contrary to Medicare manual provisions, CMS says, it told MACs to pay hospitals according to the ALJ decisions. The one catch: To get paid for it, the word “observation” must be mentioned in the decisions as a sort of substitute physician order.

“There’s a very good argument that hospitals should get the [payment] difference between inpatient and outpatient admissions rather than getting zeroed out, and CMS came three-quarters of the way toward admitting it,” says Minneapolis attorney David Glaser, with Fredrikson & Byron.

Hospitals have been up in arms over their loss of almost all Medicare reimbursement if a recovery audit contractor (RAC) or other auditor determines that an inpatient admission wasn’t medically necessary because an outpatient setting (with or without observation) was appropriate. Although hospitals can reclassify inpatients as outpatients using condition code 44, there’s a small window that hospitals often can’t crawl through in time. And only about 10% of hospitals may rebill Part A denials under Part B through CMS’s A/B rebilling demonstration. That means the majority of hospitals are permitted to charge Medicare only for ancillary services if the admission is voided by an auditor. However, when hospitals lose their appeals of inpatient denials because the admissions were not reasonable and necessary, sometimes the ALJs order MACs and fiscal intermediaries (FIs) to instead pay the hospital for outpatient services and/or outpatient with observation services.

The ALJ’s reasoning is that an inpatient case is therefore an outpatient case, an idea championed by hospitals but inconsistent with Medicare manuals (Chapter Six, Sec. 10 and 20.6 of the Medicare Benefit Manual and Chapter One, Sec. 50.3 of the Medicare Claims Processing Manual). ALJs, however, are bound by laws and regulations, not manuals, which they use as guidance.

Because of a spate of these ALJ decisions, CMS told the MACs and FIs to take “unusual steps…necessary to comply with the ALJ decisions.” When ALJs determine the claim should be paid as an outpatient because inpatient was not reasonable and necessary, MACs and FIs are required to instruct hospitals within 30 days to submit a new outpatient claim with the accurate HCPCS codes and line-item charges for the services provided. If this included observation, hospitals can bill for that too, but there’s a caveat: “the observation charges should not be included if the ALJ only specified payment for outpatient care or services,” the CMS memo states. “However, if the ALJ specified ‘observation level of care’ or ‘including observation care,’ line item charges for observation may be added if otherwise appropriate as the ALJ is specifically substituting the order to admit for the order for observation.” Hospitals have 180 days to submit the revised claim. CMS cautions “this instruction should not be construed or interpreted as a change in the policy outlined in these manual sections.”

This is a good move by CMS, Glaser says, but he would prefer to see the Medicare manuals revised to allow Part B rebilling when Part A claims are denied. He also has raised some concerns about the memo. For one thing, the memo is written as narrowly as possible, giving credit for observation only when the ALJ mentions it. “If the judge doesn’t say the magic word — ‘observation’ — the hospital doesn’t get credit for it? That is crazy,” he says. It also puts the ALJ into the shoes of the ordering physician, which is odd, Glaser adds.

And he’s bothered by the whole “gotcha” nature of CMS admission policy. CMS’s admission policy is poorly drafted, Glaser contends. It describes three different standards for admission in the course of four sentences in the Medicare manuals:

• The first test is that, if the patient is expected to be in the hospital overnight, he or she is an inpatient;

• The second test calls for an anticipated stay of more than 24 hours; and

• The third says 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.

One thing is common to all three tests: “It is how long you think the patients will be there,” not how long they actually stay, Glaser says. If the physician anticipated trouble and admitted the patient but it was a false alarm, Medicare should still pay the claim, according to the manual, he says. But that’s not what’s happening. MACs are denying the claims and RACs are declaring them overpayments, and now, even if ALJs want to remedy that, the hospital may still be out of luck unless the term “observation” is included.

That’s why Glaser urges hospitals to appeal short-stay cases and to ask the judge to specifically recommend observation.

CMS’s directive makes Medicare payment policy trickier. “I am so frustrated by this whole process, which becomes more and more complicated every day,” says Colleen Dailey, clinical coordinator of defense audits for WellSpan Health in York, Pa. She’s also worried that ALJs won’t include the observation language, which renders the CMS memo “futile.”

Meanwhile, WellSpan is struggling on another front. While it scrambled to comply with CMS deadlines for submitting documentation to RACs and appealing their denials, Maximus, one of the qualified independent contractors (QICs) that rules on second-level appeals of RAC overpayment determinations (“reconsiderations”), has announced it won’t meet its deadline.

In an Aug. 7 letter to WellSpan, Maximus says “Medicare requires that we issue a decision on your appeal within 60 days of receipt of an approval request….We do not believe we will be able to complete our review of your appeal and issue a reconsideration decision within the 60-day timeframe.” In compliance with Medicare rules, Maximus gave the hospital two options: it can wait for Maximus to get to its appeal, or it can go straight to the ALJ. “They are not held to deadlines like we are,” she notes.

The appeal is for a denial that irked her in the first place. It’s for a claim for admission of an 89-year-old patient who was falling frequently and came to the hospital for nausea, vomiting and diarrhea. She had C Difficile and a urinary tract infection. Dailey says the RAC denials are based only on the history and physical, which mentions just abdominal pain. “You can’t send home an 89-year-old person who has nausea, vomiting and diarrhea and is in renal failure,” she says. An admission decision requires reading through the entire medical record, including nursing notes.

© 2012 by Atlantic Information Services, Inc. All Rights Reserved.

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