Medicare Billing for Hospital Stays: Inpatient? Outpatient? Observation?

August 13, 2013

The Boston
recently published an article about Beth Israel Deaconess Medical
Center agreeing to pay $5.3 million to settle claims that it overbilled the
Medicare program by admitting patients as inpatients who should have been
treated as outpatients or observation stays. But just one day before news of
that settlement was published, the Office of the Inspector General (OIG) issued
a Memorandum Report titled, "Hospitals’ Use of Observation Stays and Short
Inpatient Stays for Medicare Beneficiaries," OEI-02-12-00040.

The Report states that the Centers for Medicare and
Medicaid Services (CMS), members of Congress, and others are concerned about
Medicare beneficiaries spending long periods of time in observation stays
without being admitted as inpatients – the opposite of the concern expressed
toward Beth Israel Deaconess Medical Center. On one hand, CMS is concerned that
beneficiaries may pay more as outpatients than inpatients, and that beneficiaries
who are not admitted as inpatients may not qualify under Medicare for payment
for skilled nursing facility services following hospital discharge, because
they do not have the requisite three-day inpatient hospital stay. On the other
hand, CMS is also concerned that hospitals are improperly billing Medicare for
short inpatient stays lasting fewer than two nights (which on average cost
Medicare more than outpatient stays) when the beneficiaries should have been
treated as outpatients.

Three days after the OIG issued its Memorandum Report,
CMS released a copy of its final FY 2014 inpatient payment rule, to be
published in the federal register on August 19, 2013. In the final rule, CMS
adopted changes affecting how hospitals bill for observation stays and short
inpatient stays. If a physician believes that a beneficiary’s surgical
procedure, diagnostic test, or other treatment requires a hospital stay of at
least two midnights, and admits the beneficiary to that hospital, CMS
contractors will presume that the inpatient stay is reasonable and necessary
and will qualify for payment as such, provided the physician orders the
inpatient admission.

To determine whether the length of stay includes at least
two midnights, the physician may consider the total amount of time the patient
has spent in the hospital as an outpatient receiving observation services,
emergency department services, and procedures in the operating room, or in
another treatment area. As a result of this change, CMS expects Inpatient Prospective
Payment System (IPPS) expenditures to increase by approximately $220 million.
In order to offset this expected increase, CMS is imposing a 0.2 percent
reduction to both the national capital federal rate and the standardized amount.

Billing Medicare Part B When an
Inpatient Stay is Denied on Medical Necessity Grounds

In the final FY 2014 inpatient payment rule, CMS also
adopted its proposal to permit hospitals to rebill under Medicare Part B, when
a Medicare Part A claim is denied as not reasonable and necessary, and if the
beneficiary is enrolled in Medicare Part B. An exception to this rule is for
services that specifically require an outpatient status, such as outpatient
visits, emergency department visits, and observation services. In addition,
Part B claims must be filed within one year from the date of service. This
policy is effective for admissions with dates of service on or after October 1,
2013, and applies to all types of hospitals, including inpatient rehabilitation
facilities, long-term care hospitals, critical access hospitals, psychiatric
hospitals, and Maryland waiver hospitals.

As an interim measure, when CMS issued the proposed FY
inpatient payment rule on March 18, 2013, CMS also issued an Administrative
Ruling allowing a hospital to rebill under Medicare Part B if a Medicare Part A
claim for an inpatient admission to a hospital is denied by a Medicare review
contractor as not reasonable and necessary, with the exception of services that
specifically require an outpatient status. Hospitals will be allowed to follow
the Part B billing time frames in the Administrative Ruling if the denied Part
A inpatient claim applies to an admission prior to October 1, 2013 that is
denied after September 30, 2013.

Hospitals are required to withdraw a pending appeal of a
Part A claim or await a final decision on an appeal of a Part A claim before
billing Part B. After submitting a claim for Part B, a hospital is precluded
from pursuing an appeal that it filed under Part A.

If you have questions about observation stays or rebilling
under Medicare Part B when a Medicare Part A claim is denied, or need
assistance in responding to medical necessity reviews, please contact Rochelle H. Zapol, a partner in Prince Lobel’s Health Care Practice Group and author of this Alert. You can
reach Rochelle at 617 456 8036 or

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