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CMS Issues Rules on Observation Status

 THE NEW RULES ARE INTENDED TO ADDRESS ISSUES RAISED BY HOSPITALS' INCREASED USE OF OBSERVATION STATUS (AS OPPOSED TO INPATIENT ADMISSIONS) DRIVEN IN PART BY RECOVERY AUDIT CONTRACTORS' (RAC) DENIALS OF REIMBURSEMENT FOR IN-PATIENT STAYS

     The Centers for Medicare and Medicaid Services (CMS) has issued new rules effective October 1, 2013 designed to address certain issues raised by hospitals' increased classification of patients' overnight hospital stays as "observation" rather than as inpatient admissions. CMS has reported that the percentage of Medicare beneficiaries receiving observation services for more than 48 hours has increased from approximately 6% in 2006 to approximately 8% in 2011. The difference in classification matters because it can have significant implications on reimbursements to providers and on patients' out-of-pocket expenses. For example, patients treated during observation hospital stays are covered under Medicare Part B rather than under Medicare Part A, meaning that they are responsible for Part B's 20% co-payments for physician and other services and that Medicare does not pay for prescription drugs provided in the hospital. In addition, Medicare does not count time spent in a hospital under observation as part of the three day prior hospital inpatient stay required for post-discharge coverage of skilled nursing facility (SNF) care, meaning that patients can be held responsible for the entire SNF cost.

     One factor driving the increased use of observation status has been the Recovery Audit Contractors' (RAC) denials of reimbursement for in-patient admissions as not reasonable or medically necessary. These findings have created problems because the RAC auditors can and do go back three years, but hospitals only have year from the date of service to file Medicare claims. Consequently, a RAC audit finding that an in-patient stay was not warranted can require a hospital to re-pay monies for care provided to a patient but be outside the time for timely filing of a Part B Medicare claim.

     Medicare has expressed concern with the increased use of observation status and has acknowledged the role of RAC audit findings in driving the increase. Consequently, the new rules address some (but not all) of providers' and patients' issues. In its preamble to the new rules, CMS stated that the new rules "were designed to ... reduce the frequency of extended observation care when it may be inappropriately furnished and provide payment to hospitals for the reasonable and necessary services they provide to inpatients."

     The new rules require RAC auditors to presume that patients who are expected to remain in the hospital for two overnights are appropriate for inpatient admission and consequently for payment under Part A and to count all time patients spend in the hospital from the initiation of care in applying the two night admissions' benchmark. However, when auditors find that hospitals are abusing this presumption for non-medically necessary inpatient admissions, the audits may disregard the two night presumption.

     Significantly, the rules did not change the requirement that patients be admitted for three days (as opposed to receiving treatment in a hospital under observation status) in order to be eligible for coverage for post-discharge SNF. Legislation that would address this issue, the Improving Access to Medicare Coverage Act of 2013, is pending in Congress.

     In addition, the rules did not change the requirement that claims for Medicare services be submitted within one year of the date of service as had been requested by the provider community. Although the one year timeframe is set by statute, CMS has the authority to create exceptions. It chose not to, however, assuming that the new presumptions on the appropriateness of two night hospitals admissions and the new instructions to RAC auditors will resolve any issues.