CMS’ Proposed Rules on Observation Status Would Not Help Beneficiaries

The Center for Medicare & Medicaid Services (CMS) recently issued proposed rules and an interim CMS Ruling to allow  hospitals to bill Medicare Part B after a Part A claim is denied. 78 Fed. Reg. 16,632 (March 18, 2013).[1]  These actions address some financial concerns of hospitals about “observation status;” but they do not help beneficiaries at all.  In fact, CMS’s prediction that hospitals will increasingly bill hospital stays under Part B will further reduce beneficiaries’ access to Medicare coverage in skilled nursing facilities (SNFs). 

Observation Status

Observation status refers to the classification of hospital patients as “outpatients,” receiving observation services although, like any inpatient, these patients stay days and nights in the hospital, receive medical and nursing care, diagnostic tests, treatment, medication and food, often for multiple days.[2]  Although care for patients in observation status is usually indistinguishable from care provided to inpatients, the harmful implications for them are significant.  Most significantly, patients who need follow-up care in a SNF are unable to obtain Medicare coverage.  Patients must have an inpatient hospital stay for three or more consecutive days, to meet Medicare SNF coverage criteria.  Hospital stays classified as observation, no matter how long, are considered “outpatient,” and thus do not qualify.  In addition, inpatients owe a single deductible ($1,184 in 2013), often covered by Medigap insurance; outpatients in observation status owe Part B copayments for all services; they must also pay for medications. 

Although they are often paid less for outpatients than for inpatients, hospitals have a financial incentive to classify patients as observation status outpatients to ensure they get some payment. If they classify a patient as an inpatient and a Medicare reviewer later determines that the patient should have been classified as an outpatient, they receive no reimbursement at all for the patient’s care.  When hospitals appeal the denial of inpatient status, some Administrative Law Judges (ALJs) and the Medicare Appeals Council, while sustaining the Part A denial, have authorized payment for medically necessary services under Part B.  78 Fed. Reg., at 16,635.

CMS Request for Comments 2012

In 2012, CMS expressed concern about the increasing amount of time that patients spend in the hospital under observation.  77 Fed. Reg. 45,155 (July 30, 2012) (Notice of Proposed Rulemaking, hospital outpatient prospective payment).  In July 2012, CMS asked for public comment on various approaches to revising CMS policy on observation status, but declined to make any changes in the final rules.  77 Fed. Reg. 68,426-433 (Nov. 15, 2012) (Final Rule).  The proposed rule also described CMS's Part A to Part B Rebilling Demonstration, which allowed hospitals to rebill Part B after a Part A inpatient stay was denied.

Proposed Rules 2013

In the proposed rules published on March 18^th, CMS again acknowledges the significant consequences of observation status for beneficiaries and for hospitals.  78 Fed. Reg., at 16,634-635.  CMS describes its “ongoing concern about recent increases in the length of time that Medicare beneficiaries spend as hospital outpatients receiving observation services.”  78 Fed. Reg., at 16,632.  It reports that observation stays exceeding 48 hours increased from 3% in 2006 to 8% in 2011.  (CMS does not say what number 3% or 8% represents).  78 Fed. Reg., at 16,634.

CMS now proposes one of the changes discussed in 2012 – allowing hospitals to rebill Part B when Part A is denied.  However, CMS proposes to limit hospitals’ rebilling option, requiring that the Part B claim be filed within 12 months of the date of hospital service.  The proposed rules also allow hospitals that originally filed a Part A inpatient claim, using a “self-audit” procedure and also within the one-year period, to withdraw the Part A claim and rebill Medicare for medically necessary inpatient claims under Part B.  Unfortunately, CMS does not propose any solution for beneficiaries stuck in so-called outpatient observation status.

CMS Ruling 1445-R

As an interim measure, and until it publishes final rules, CMS issued a Ruling, CMS-1455-R, effective March 18, that authorizes hospitals to bill Part B after a Part A claim is denied, even when the hospital services were provided more than one year earlier.  78 Fed. Reg. 16,614 (March 18, 2013).[3]  CMS is "adopting," but not endorsing, the decisions of ALJs and the Medicare Appeals Council that allow these otherwise late payments.  CMS reports that thousands of pending appeals are subject to this Ruling.  78 Fed. Reg., at 16,616.  Noting that hospitals cannot change a patient’s status after the patient is discharged from the hospital, CMS reports that under the Ruling, “The beneficiary is considered an outpatient for services billed on the Part B outpatient claim, and is considered an inpatient for services billed on the Part B inpatient claim.”  78 Fed. Reg., at 16,617.

The Part A to Part B Rebilling Demonstration is being terminated.

Concerns for Beneficiaries

The proposed rules continue uncertainty for Medicare hospital patients about their status.  A patient may be classified as a hospital inpatient and go to a SNF for rehabilitation, all payable under Part A.  Then, months later (but within one year from the date of service in the hospital), a Medicare contractor may reject the Part A claim or the hospital, using self-audit, may decide to withdraw its Part A claim for reimbursement and submit a Part B inpatient claim instead.  At that point, the proposed rules say, the patient receives a refund of the Part A inpatient deductible and must pay the Part B co-payments and medication charges.  78 Fed. Reg., at 16,638.  CMS acknowledges, “some beneficiaries who are entitled to coverage under both Part A and Part B may have a greater financial liability for hospital services compared to current policy, as they would be liable for additional Part B services billed when the inpatient admission is determined not reasonable and necessary.”  78 Fed. Reg., at 16,639.  CMS does not discuss what happens to the Part A-covered SNF claim when the hospital withdraws the qualifying three-day inpatient stay.

Comments Due May 17, 2013

Comments on the proposed regulations, CMS-1445-P, are due May 17, 2013.  They may be submitted electronically, by regular mail, by express or overnight mail, and by hand or courier.

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