On July 29, 2013, the Department of Health and Human Services Office of Inspector General released a memorandum report titled Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries. The report was conducted in response to CMS and others who have raised concerns about hospitals’ use of observation stays and short inpatient stays.
CMS’ concerns included:
• Beneficiaries spending long periods of time in observation stays without being admitted as inpatients. Beneficiaries pay more as outpatients than if they were admitted as inpatients.
• Beneficiaries who are not admitted as inpatients may not qualify under Medicare for coverage of skilled nursing facility (SNF) services following discharge from the hospital. Although beneficiaries who do not qualify for SNF can choose to receive them, they will be responsible for the SNF charges.
• A significant portion of payments for stays that lasted less than 2 nights were improper because the services should have been provided in the outpatient setting. CMS contractors seek to recoup these improper payments.
NPRM Proposed Changes
On April 13, 2013, CMS proposed policy changes through a Notice of Proposed Rulemaking (NPRM). The changes are expected to reduce the number of observation stays lasting longer than 2 nights or longer and reduce the number of short inpatient stays. Proposed changes to the payment policies for inpatient and outpatient stays as outlined in the NPRM include:
• CMS contractors would presume that inpatient stays lasting 2 nights or longer were reasonable and necessary and would qualify for payment as inpatient stays.
• CMS contractors would presume that stays lasting less than 2 nights would be paid for as outpatient stays.
• Time spent in any outpatient area of the hospital would not count towards the 2 night presumption.
The OIG’s report was conducted to determine the impact of CMS’ proposed NPRM on hospital bills for inpatient and observation stays. The results of the report were based on paid claims for beneficiaries who received hospital services in 2012. The results from the study can be summarized as follows:
• Medicare beneficiaries had 1.5 million observation stays in 2012 and these beneficiaries commonly spent 1 night or more in the hospital • Beneficiaries had an additional 1.4 million long outpatient stays, some of which may have been observation stays • Beneficiaries had 1.1 million short inpatient stays in 2012, which were often for the same reasons as observation stays • On average, Medicare paid nearly three times more for a short inpatient stay than an observation stay and beneficiaries paid almost two times more for a short inpatient stay than an observation stay • Some hospitals were more likely to use short inpatient stays while others were more likely to use observation or long outpatient stays • Beneficiaries had over 600,000 hospital stays that lasted 3 nights or more but did not qualify them for SNF services. For 4% of these stays, beneficiaries received SNF services for which they did not qualify and Medicare inappropriately paid $225 million for these services.
Implications of the Report
The results indicate that under the proposed policies in the NPRM, the number of short inpatient stays would be significantly reduced, but the number of observation and long outpatient stays may not be reduced if outpatient nights are not counted towards the 2-night presumption. Of note, these findings contradict with CMS’ estimates as set forth in the Proposed Rule. Additionally, the results suggest that under the proposed policies, some hospitals would likely follow the provisions and continue to bill these as outpatient stays while other hospitals – given strong financial incentives and few barriers – would admit beneficiaries as inpatients as soon as possible to meet the 2-night presumption. Finally, the report shows that CMS should consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to cost-sharing for SNF services. The OIG suggests that allowing nights spent as an outpatient to count toward the 3 nights needed to qualify for SNF services may require additional statutory authority.