Observation Status: Physicians Challenge the Inspector General

A group of physicians has challenged a recent audit report from the Inspector General for the Department of Health & Human Services[1] that concluded that between 2013 and 2015 Medicare incorrectly paid $84.2 million for skilled nursing facility (SNF) stays for beneficiaries who had not had a prior three-day qualifying inpatient hospital stay.[2] Like the Centers for Medicare & Medicaid Services (CMS), the physicians reject the Inspector General’s recommendations to impose new requirements on hospitals and SNFs to provide additional notices to patients of their outpatient observation status. They base their objections on multiple grounds.
First, the three physicians describe the changes in hospitalization and medical care since Medicare was enacted more than 50 years ago. In 1965, when observation status did not exist, the average hospital length of stay for people over age 65 was 14.2 days; today, the average length of stay is 5.1 days, reduced in large part, they contend, because of changes in medical treatment.
Second, the physicians describe the confusion between the three-day inpatient stay required for Medicare coverage of post-hospital SNF care, and the “two-midnight rule,” established by CMS in 2013 to determine patient status in the hospital.[3] They point to the large percentage of hospital outpatients who are eventually admitted to inpatient status as well as to the Inspector General’s earlier finding that, in 2014, more than 600,000 hospital stays were three nights or longer, but did not include three inpatient days.
The physicians describe the “significant resources” used by hospitals to make decisions about inpatient/outpatient status. More than 40% of job postings for hospital case manager positions are related to patient status. An earlier study found that three hospitals employed an average of 5.1 full-time staff per hospital “just to manage the audit and appeals process related to billing status.”
Adding more paperwork, as the Inspector General proposes, would increase costs but not improve health care.
The physicians recommend synchronizing the two- and three-midnight rules and supporting the Improving Access to Medicare Coverage Act of 2019[4] – federal legislation that would count all midnights in the hospital toward meeting the statutory inpatient requirement.
The Center for Medicare Advocacy agrees with their analysis and with their recommendation to enact federal legislation.
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[1] HHS 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, A-05-16-00043 (Feb. 2019), https://oig.hhs.gov/oas/reports/region5/51600043.asp.  The report was discussed at CMS, “Inspector General Report: Medicare Overpaid Skilled Nursing Facilities When Patients Did Not Have Qualifying Inpatient Hospital Stays” (CMA Alert, Feb. 28, 2019), https://www.medicareadvocacy.org/improve-and-expand-medicare-end-the-use-of-outpatient-observation-status-a-billing-issue-that-restricts-needed-care/.
2] Ann M. Sheehy, Charles F.S. Locke, Bradley Flansbaum, “What The Inspector General Gets Wrong About Reforming Observation Hospital Care,” HealthAffairs blog (Mar. 25, 2019), https://www.healthaffairs.org/do/10.1377/hblog20190320.244258/full/.
3] 42 C.F.R. §412.3; CMA, “Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries” (CMA Alert, Aug. 29, 2013),  https://www.medicareadvocacy.org/observation-status-new-final-rules-from-cms-do-not-help-medicare-beneficiaries/.
[4] H.R. 1682, S. 753.