Improve and Expand Medicare: End the Use of Outpatient Observation Status - A Billing Issue that Restricts Needed Care

Recently, the Center for Medicare Advocacy laid out our Medicare Platform for the New Congress. One of the core considerations to improve Medicare for all beneficiaries, now and in the future, is the need to end ongoing barriers to care. One of the most common barriers about which the Center receives inquiries is the continued overuse of “observation status” in hospitals. “Observation” or “outpatient” status is a billing code which prevents beneficiaries from accessing post-hospital skilled nursing facility care. In fact, as detailed below, a recent Inspector General report highlights payments to skilled nursing facilities for patients who were not billed as hospital “inpatients,” even though they might actually have been in the hospital for multiple days.

Inspector General Report: Medicare Overpaid Skilled Nursing Facilities When Patients Did Not Have Qualifying Inpatient Hospital Stays
In a new audit, CMS Improperly Paid Millions of Dollars for Skilled Nursing Facility Services When the Medicare 3-Day Inpatient Hospital Stay Requirement Was Not Met, the HHS Office of Inspector General (OIG) reports that Medicare inappropriately pays skilled nursing facilities (SNFs) for Part A stays for residents who did not have qualifying three-day inpatient stays in the hospital.[1] The report ignores the fact that many of these Medicare beneficiaries are hospitalized for three or more days and receiving the same care as inpatients but are called outpatients.[2] The 2019 report returns the OIG’s attention solely to billing.
Between September 2000 and January 2005, the HHS Office of Inspector General (OIG) issued 27 audit reports finding that Medicare overpaid SNFs for Part A stays when beneficiaries had not been hospitalized as inpatients for at least three consecutive days.[3] In fact, most of the residents had been hospitalized for three or more days, but some or all of the time was called outpatient or observation status.
As the Center for Medicare Advocacy (the Center) has discussed over the years,[4] observation status  results in patients’ not qualifying for Part A coverage of their subsequent SNF stays, even though the care these patients received in the hospital is exactly the same as that received by inpatients. A recent call to the Center, for example, involved a 91-year old woman who was hospitalized for six midnights (four in observation, followed by two considered inpatient) but whose SNF stay was not covered because of her failure to have a 3-day “inpatient” stay.
In December 2016, OIG issued a report evaluating Medicare’s new time-based policy for determining patients’ inpatient or outpatient status.[5] Looking at data from Fiscal Years 2013 and 2014, OIG found that hospitals increased their use of outpatient/observation status, contrary to the expectation that the two-midnight rule would reduce the number of long outpatient hospital stays. OIG expressed concern that “beneficiaries with similar post-hospital care needs have different access to and cost sharing for SNF services depending on whether they were hospital outpatients or inpatients.”[6] OIG suggested that the Centers for Medicare & Medicaid Services (CMS) “analyze the potential impacts of counting time spent as an outpatient toward the 3-midnight requirement to qualify for SNF services, which would provide equitable access to SNF services for Medicare beneficiaries regardless of whether they are inpatients or outpatients.”[7] No change in federal policy occurred.
Now, in its February 2019 report, OIG has returned to its sole focus on overpayments to SNFs for beneficiaries not having a qualifying hospital inpatient stay. OIG reviewed a stratified random sample of 100 claims for SNF care in Calendar Years 2013 through 2015 totaling $779,419 for beneficiaries who, according to the Medicare National Claims History file, did not have a 3-day inpatient hospital stay. OIG found that CMS improperly paid 65 of 99 claims (one claim was excluded) totaling $481,034. From the sample, it estimates that CMS improperly paid $84,202,593 for SNF stays during the three year period. One of the report’s two examples of overpayment is a patient hospitalized for four midnights, two as observation and two as inpatient. The OIG audit does not discuss the impact of observation status on beneficiaries who need post-hospital care in a SNF (and who were in a hospital for three days or more).
In the 2019 audit, OIG calls on CMS to ensure that the Common Working File (CWF) Edit “is enabled and operating properly to identify SNF claims ineligible for Medicare reimbursement.”[8] CMS agrees with the recommendation and writes that it enabled the CWF, effective April 2018.[9] (The CWF is “the Medicare Part A and Part B beneficiary benefits coordination and pre-payment claims validation system.”[10] Based on geographic location, each Medicare beneficiary is assigned to one of nine CWF Hosts, which “uses the CWF software and determines the beneficiary's eligibility and entitlement status and uses that information to decide what action should be taken on the claim.”[11])
However, CMS did not concur with the OIG recommendation (among others) to require a coordinated notification process among hospitals, SNFs, and beneficiaries, including a requirement that hospitals provide written notification to beneficiaries who go to a SNF stating whether they had a qualifying inpatient stay.[12] CMS cited the Medicare Outpatient Observation Notice (MOON) as sufficient hospital notice of a patient’s status and the Skilled Nursing Facility Advanced Beneficiary Notice of Noncoverage (SNFABN) for optional use for technical denials of Medicare coverage.
One positive point for beneficiaries in the OIG report is the implication that patients in observation status may be eligible for discharge planning by the hospital, as required by 42 C.F.R. §482.43. CMS states, “Discharge planning requirements are set out in the hospital Conditions of Participation, which generally do not differentiate between patients based on source of payment.”[13]The Center for Medicare Advocacy recognizes that observation status is a Medicare billing issue, which determines whether the hospital will bill Part A (for inpatient care) or Part B (for outpatient/observation care) for a patient’s stay. As the OIG recognized in 2016, observation status does not affect the care that Medicare beneficiaries receive in the hospital or beneficiaries’ need for post-hospital care in a SNF.
Bipartisan legislation will soon be reintroduced in Congress to count all time in the hospital, whether called inpatient or outpatient, for purposes of satisfying the qualifying hospital stay requirement. Legislation such as this is long overdue to reduce the harm observation status inflicts on vulnerable older and disabled Medicare beneficiaries.
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[1] Office of Inspector General, CMS Improperly Paid Millions of Dollars for Skilled Nursing Facility Services When the Medicare 3-Day Inpatient Hospital Stay Requirement Was Not Met, Appendix B, A-05-16-00043 (Feb. 2019), https://www.oig.hhs.gov/oas/reports/region5/51600043.pdf.
[2]See the Center’s writings on observation at https://www.medicareadvocacy.org/?s=observation&op.x=0&op.y=0.
[3] Office of Inspector General, CMS Improperly Paid Millions of Dollars for Skilled Nursing Facility Services When the Medicare 3-Day Inpatient Hospital Stay Requirement Was Not Met, Appendix B, A-05-16-00043 (Feb. 2019), https://www.oig.hhs.gov/oas/reports/region5/51600043.pdf.
[4] See the Center’s writings on observation at https://www.medicareadvocacy.org/?s=observation&op.x=0&op.y=0.
[5] OIG, Vulnerabilities Remain under Medicare’s 2-Midnight Hospital Policy, OEI-02-15-00020 (Dec. 2016), https://oig.hhs.gov/oei/reports/oei-02-15-00020.pdf.
[6] Id. 17.
[7] Id.
[8] Id. 10.
[9] Id. 11, 24 (Appendix F, CMS Comments).
[10] CMS, Medicare Claims Processing Manual, Chapter 27, §10, https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/clm104c27.pdf.
[11] Id.
[12] Id. 11, 24.
[13] Id. 24.