Shepherd University

Analysis of the Medicare three day inpatient hospital stay rule for determining eligibility for post-hospital care in skilled nursing facilities

Considerations of the impact of increased utilization of observation status classification

Philip McCarley7-10-2015

Problem Statement

In order to improve access to care, establish greater consistency and fairness in administration of benefits, and provide financial protection to Medicare beneficiaries, should the Medicare three day inpatient hospital stay rule for determining eligibility for post-hospital care in skilled nursing facilities be modified or abolished? If so, should this change be achieved through action of the Secretary of Health & Human Services (HHS) revising rules administered by the Center for Medicare & Medicaid Services (CMS) or through statutory action by Congress amending Title XVIII of the Social Security Act?

Background

The creation of the original Medicare program providing healthcare insurance for the elderly was mandated through P.L. 89-97, the Social Security Act Amendments of 1965. Through the addition of Title XVIII to the Social Security Act, Parts A and B of the Medicare Program were established:

Medicare Part A provides coverage for hospitalization and for care provided in skilled nursing facilities following hospitalization when certain criteria are met. The criteria for coverage eligibility for services in skilled nursing facilities include the three day inpatient hospitalization requirement, commonly referred to as the Medicare three day rule. (42 U.S.C. §1395x (i).  See also 42 C.F.R. §409.30(a) (1)).

Medicare Part B provides insurance coverage for specific other medical services and supplies not covered under Part A including doctor’s visits, outpatient tests and procedures, and some medical equipment and supplies.

Over the past fifty years the Medicare program has been amended to expand eligibility to individuals under age 65 who meet specific criteria of long-term disability. Also, the Medicare program expanded to include additional coverage and benefit options under Part C (Medicare Advantage supplemental health insurance coverage plans) and Part D (prescription medication insurance plans).

The cost of healthcare in general and the expense of operating the Medicare Program in particular has grown dramatically over the past 50 years. Since the 1980’s there have been numerous attempts by Congress and by the Centers for Medicare and Medicaid Services (CMS) to implement programs and rules to detect fraud, misuse, and abuse of Medicare programs and expenditures. A pertinent example of these attempts that has subsequently influenced changes in the utilization of outpatient status classification is Recovery Audit Contractor (RAC) program. The RAC program was initially mandated as a 3 year demonstration project through a provision of the Medicare Modernization Act of 2003 for the purpose of detecting and correcting improper Medicare payments to providers. During the 2005 to 2008 demonstration period the RAC

program returned over $900 million to the Medicare Trust Fund as a result of what was determined to be overpayment to providers (http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/recovery-audit-program/downloads/RACEvaluationReport.pdf ). Following the initial reports of the effectiveness of the RAC demonstration program, Congress mandated the creation of a permanent national Recovery Audit program on or before January 1, 2010 through a provision in P.L. 109-432 (the Tax Relief and Health Care Act of 2006). The RAC program has resulted in frustration and confusion for hospitals regarding the proper classification and filing of claims for reimbursement for care provided to Medicare patients. Since its beginning through 2014 this program recovered approximately $8.9 billion for the Medicare Trust Fund. Under this program, hospitals are at risk of penalty and revenue loss when they are determined to have improperly classified patients as inpatients instead of outpatients.

These statutorily mandated programs and administratively implemented rule changes unintentionally produced vagaries in the way hospitals classify patient stays as either observation status or inpatient status. In response to the threat of aggressive audits and possible financial penalties, hospitals altered the way they classified patients as observation vs. inpatient status. Changes in hospital’s procedures for classifying patients during the past ten years increasingly have exposed Medicare beneficiaries to significant financial risks and expense, especially for those needing post-hospital care in skilled nursing facilities. The national implementation of the RAC program intersecting with the confusion regarding proper classification of patients has created the current problem of thousands of Medicare beneficiaries each year being deemed ineligible to receive Medicare coverage for post-hospital extended care services in skilled nursing facilities. From analysis of Medicare claims data and from the rising number of complaints from Medicare beneficiaries and their families, there is no doubt that the numbers of people impacted by this problem have grown rapidly during the past decade.

In addition to these changes, in October 2012 the Hospital Readmissions Reduction Program instituted reduction of Medicare payments to hospitals with excess readmissions for specified patient populations as a part of implementing the Patient Protection and Affordable Care Act of 2010. While the intention of this program was to increase quality of patient outcomes and reduce cost of care, an unintended result was to give hospitals another incentive to classify more patients for longer periods of time as observation status patients to lessen risk of penalties for excess readmissions.

The impact of the use of observation status classification on Medicare beneficiaries has prompted litigation against HHS to contest denial of Medicare benefits. A 2008 ruling by the U.S. Court of Appeals in Estate of Landers v. Leavitt determined that the plaintiffs were not entitled to Medicare coverage for care received in a skilled nursing facility following hospitalization because the duration of the plaintiff’s hospitalization did not meet the statutory requirement of the three day rule. A subsequent class action suit, Bagnell v. Sebelius, was dismissed by a district court in 2013; however, on January 22, 2015 the U.S. Court of Appeals for the Second Circuit determined that the district court had erred in its dismissal ruling and remanded the case, now known as Barrows v. Burwell, to be reviewed.

Individuals, advocacy groups, associations of health care professionals, as well as groups representing healthcare provider organizations have called for action to be taken by CMS and/or by Congress to address the issues and problems related to observation status and the fairness of rules regarding determination of a patient’s inpatient status. Former CMS chief Donald Berwick and groups such as the American Medical Association have called for the three day rule to be scrapped altogether. Given the fact that medical advances have significantly shorten the typical length of hospitalizations, the three day timeframe established in 1965 does not serve as a proper indicator for determining a patient’s need for care in a skilled nursing facility following discharge from a hospital. During the previous several sessions of Congress bills addressing Medicare’s three day rule and observation status classification have been introduced. Despite bi-partisan support and efforts, these bill routinely fail to make it out of committee. The Improving Access to Medicare Coverage Act of 2015 was reintroduced on March 24, 2015 as H.R. 1571 and S. 843. These identical bills simply seek to amend Title XVIII of the Social Security Act to mandate that periods of time Medicare beneficiaries receive outpatient observation status care in a hospital be counted toward satisfying the three day inpatient requirement for Medicare Part A coverage of skilled nursing facility services. These bills have been referred to committees for consideration. Also, the NOTICE Act (S. 1349 and H.R. 876), companion bills entitled Notice of Observation Treatment and Implication for Care Eligibility Act of 2015, was passed in the House of Representatives and was reintroduced in the Senate in May. The NOTICE Act seeks to amend Title XVIII to mandate that Medicare beneficiaries receiving care in hospitals be notified of observation treatment classification and be provided clear and understandable information explaining implications of observation status for Medicare benefit eligibility.

Landscape

Stakeholders with interest in how hospitals classify a patient’s status and the consequences of that determination for Medicare eligibility, billing, and payment for care provided in hospitals and skilled nursing facilities include the following groups:

Medicare beneficiaries, their families, and numerous patient and senior citizen advocacy organizations such as the Center for Medicare Advocacy, the National Senior Law Center, and AARP;

Hospitals. skilled nursing facilities, physicians, and other medical care professionals; The Secretary of HHS, administrators of CMS, companies related to the RAC program,

Congress, and the federal court system; The Medicare Payment Advisory Commission, the Medicare Trust Fund, and the

taxpayer.

Medicare beneficiaries are directly impacted by the rules of CMS and by determinations that hospitals make regarding their classification, and sometimes even their post facto reclassification, as observation status instead of inpatient status. This classification directly determines how services received in the hospital are coded and billed under Medicare Parts A or

B. The classification of inpatient status is also used by CMS to determine when or if the patient is eligible for coverage under Medicare to receive care at a skilled nursing facility following discharge from the hospital. The potential and realized financial impact on Medicare beneficiaries has resulted in calls for CMS to modify administrative rules, in litigation seeking redress for the impact of these rules and policies on beneficiaries, and in political pressure for Congress to take statutory action to address the problems caused by the observation status classification. The financial impact on Medicare beneficiaries has grown steadily during the past several years and is exacerbated by the lack of notification, insufficiency of explanation, and absence of a clear and fair appeal process to challenge outpatient observation classification decisions by hospitals and to appeal denial of eligibility by Medicare. Often these decisions are not explained in a timely or an effective manner. Patients and families are usually surprised to hear that they had not been classified as an inpatient, not having been informed. There are many documented instances in which the patient had been classified as an inpatient at one point in time, but that the status was reviewed and retroactively changed to observation status later in their hospitalization or after their discharge. The failure of notify the patient and their family of their status, of changes to their status, of the meaning and financial implications of those changes, and of the effect of those changes on Medicare eligibility creates a tremendous sense of unfairness, confusion, and powerlessness. Medicare care beneficiaries experiencing the effects of these observation status decisions and of unsuccessful appeals processes have sought guidance and support from advocacy groups such as the Center for Medicare Advocacy and the National Senior Law Center.

Attempts to persuade the Secretary of HHS and CMS to modify rules pertaining to how observation status impacts Medicare billing and benefit eligibility have not been successful. The prospect of CMS revising rules related to the definition of inpatient status and the reinterpretation of the three day requirement are not promising. As previously noted, Medicare beneficiaries have taken legal action attempting to seek damages, to cause reforms in definition and utilization of observation status by CMS, and to establish protections for beneficiaries and their families. The process of litigation is lengthy and costly. Because of the way the three day rule is written in the U.S. Code in Amendment XVIII of the Social Security Act it is unclear if there can be a judicial fix to this problem without action by Congress to amend the statute. Finally, attempts to lobby Congress to take legislative action to address this problem have resulted in introduction of bills that have thus far not been able be passed into law.

Hospitals are impacted by changes in CMS rules regarding coding and filing of Medicare claims. Threatened by financial penalties secondary to recovery audits, and by changes in reimbursement policies relating to readmission rates, hospitals are striving to protect revenue reimbursement stream needed for continuing operations, to adapt to the rapidly changing landscape of healthcare reforms, to lobby for simpler and more predictable CMS rules, and to comply with rules and regulations. Hospitals feel enormous pressure to comply with CMS rules regarding proper filing of claims. Unless they comply in a way that satisfies potential auditors, they face significant potential financial loss. The tension of these pressures spreads to the

physicians and the medical professionals who are required to determine the status of patients and make decisions that financially impact their organization and their patients. Case managers, social workers, and other staff who have to try to explain these decisions and their implications to patients are also caught in the middle of this predicament. The revenue cycle of skilled nursing facilities are also impacted by the trend increased utilization of observation status by hospitals and the resulting of denial of eligibility of patients needing their services. The impact of overuse of observation status classification has a ripple effect on the care of the patient throughout the care continuum. Skilled nursing facilities are either losing potential admissions or dealing with the stress and frustration of patients and their families as they realize the financial costs they and their loved ones are incurring for what seems to them to be illogical and unfair bureaucratic technicalities.

The Secretary of HHS and the administrators of CMS have the responsibility to administer Medicare programs in accordance to the statues of the U.S. code and to fulfill the mission of the Medicare program to provide access to healthcare services for the elderly and long-term disabled. They are accountable to statutory law, to the President, to Congressional oversight and budget appropriations, to the Medicare Trust Fund interests, to Medicare beneficiaries, to health care provider organizations and practitioners, and to the tax payer. The full range of often countervailing legal, political, economic, business and public service factors place the Secretary of HSS and CMS in the crosshairs of competing agendas, ideologies, and interests. Their primary concern is administering the Medicare program in a way that serves the purpose of providing healthcare coverage for Medicare beneficiaries. While fulfilling this purpose, they are accountable as financial stewards of the Medicare Trust Fund against fraud, misuse, and abuse of funds. They must be responsive to both executive priorities and congressional oversight. They must provide guidance to healthcare provider organizations and practitioners that serve Medicare beneficiaries. They must receive and consider feedback from all sources, including beneficiaries, advocacy groups, and healthcare providers. They also required to defend CMS policies in court. They have an interest and a duty in assuring that the coding of claims are done in a consistent and fair way that protects the funds of the Medicare Trust Fund while also providing payments and benefits in a fair and effective manner. The Medicare Payment Advisory Commission (MEDPAC) is uniquely positioned to offer recommendations for legislative and administrative action. In fact MEDPAC in June issued recommendations for changes to the interpretation of the three day rule in relation to observation status patients and for RAC programs reforms.

Concern regarding the financial sustainability of the Medicare Program has prompted programs and directives by Congress (such as mandating the creation of the RAC program) that has created an adversarial dynamic in the relationships of payers, providers, and beneficiaries. CMS does have a great deal of the flexibility in establishing rules; however, the fact that the Medicare three day inpatient rule is contained in the U.S. Code makes it difficult, if not legally impossible, for the Secretary of HHS and CMS to change or discard this requirement without Congressional action to amend this provision.

Confusion regarding proper patient status designation, frequent failure to notify patients of outpatient observation status, and negligence in consistently providing information to patients about the financial implications of their observation status creates problems for Medicare beneficiaries and their families that need immediate attention.

Options

Option 1: Maintain status quo with no statutory changes or amendments to Title XVIII of the Social Security Act related to the three-day inpatient requirement or other issues related to observation status classification with regard to Medicare program.

This option makes no statutory changes, leaving the three inpatient day requirement in place for determining eligibility for post-hospital care in a skilled nursing facility. This option defers to the regulatory authority and leadership of the Secretary of Health and Human Services, to the normal process of issuing and modifying rules within the CMS to address the concerns and grievances of Medicare beneficiaries and other stakeholders who are impacted by these rules. Option 1 also looks to the courts to make judgment regarding current class action litigation pertaining to the implementation of the three day rule and the rights of Medicare beneficiaries in reference to complaints arising from changes in classification of patient status. This option gives deference to the role and the authority of the Secretary of HHS and to CMS the task of simplifying and standardizing criteria used by hospitals for patient classification and reforming the current rules of RAC programs in conducting audits and determining penalties. Finally, option 1 leaves in place the dynamics that hold hospitals accountable and has resulted in recovery of large amounts of money for the Medicare Trust Fund. Despite the legitimate concerns of beneficiaries that can be addressed in other ways by the CMS, the Medicare Trust Fund is in a much stronger financial position because of the changes in practices of patient classification and processes in coding and billing for Medicare Part A for health services.

Option 2: Passage of H.R. 1571 and S. 843 titled Improving Access to Medicare Coverage Act of 2015 as proposed. This legislative statutory action will amend Title XVIII of the Social Security Act to mandate that outpatient services “observation status” days in a hospital be credited as inpatient days for the purpose of satisfying the three-day inpatient hospital requirement for determination of eligibility of Medicare beneficiaries for post-hospital care in a skilled nursing facility.

This option addresses in a simple, clear and equitable way the problem currently faced by tens of thousands of Medicare beneficiaries who need post-hospital care in a skilled nursing facility, but find their care not covered by Medicare due to a bureaucratic definition of patient status. This option provides immediate statutory protection for Medicare beneficiaries and constituents who have legitimate medical need for post-hospital care in a skilled nursing facility

and who face significant financial impact because of arbitrary, ill-defined, often non-transparent decisions by hospitals related to observation status classification. The technical definition and guidelines for using observation status classification is left for the Secretary of HHS and CMS to determine, but it clearly mandates that observation status days be counted toward satisfying the Medicare three day rule. This option provides immediate financial protection for Medicare beneficiaries and restores the intent of the law and the Medicare program as originally conceived.

This option leaves open other outstanding questions and debates about the classification of all patients, including Medicare patients, as observation status or inpatient status to be determined through litigation of court cases and through clarification and modification of rules issued and implemented by CMS. The challenge will be to establish an equitable and consistent process for determining patient status. The classification impacts how patients are charged for services, how charges are processed with payers, and how hospitals are reimbursed for the care they provide.

Option 2 does not make statutory changes to the RAC program and defers to CMS to modify practices and policies of the RAC program considering concerns of hospitals and healthcare providers and administering the RAC program within the mandates of statutory law and in the interest of The Medicare Trust Fund. The impact on the total recovery of funds by the RAC program would be small in relation to the benefit and appropriate service provided to Medicare beneficiaries needing post-hospital care in skilled nursing facilities.

Option 3: Amend Title XVIII of the Social Security Act to remove completely the three-day hospital requirement as a part of determining eligibility of Medicare beneficiaries for post-hospital care in a skilled nursing facility.

This action would eliminate inpatient classification status and length of inpatient status during a hospitalization as a factor in determining the eligibility of beneficiaries under Medicare Part A to receive care in a skilled nursing or rehabilitation facility. The three-day requirement, established in 1965 no longer serves as a reasonable determinant of clinical need for care in a skilled nursing facility. With the advances in surgical procedures, the significant lessening of the average length of stay of hospitalizations over the past 50 years, and the unfairness of Medicare recipients being denied coverage for needed and clinically indicated care in skilled nursing facilities, the time has come to remove the three-day inpatient requirement completely and to rely on other clinical criteria for determining coverage eligibility for skilled nursing care and care provided in skilled nursing facilities. This option would not address or resolve the confusion regarding the appropriate classification of patients as observation status and the time parameters restricting how long a patient may continue to be classified as observation status. Furthermore, this option does not address through statutory action the financial effect of classifying a Medicare beneficiary as observation status on billing of services under Part A or Part B. This option leaves resolution of these contentious issues to court judgments and to further clarification and modification of rules through the rule-making process of CMS.

Like options 1 and 2, option 3 leaves in place the RAC program and defers to CMS to modify practices and policies of the RAC program considering concerns of hospitals and healthcare providers and administering the RAC program within the mandates of statutory law. Option 3 would result in a slightly higher potential cost to the Medicare Trust Fund and would have the effect of making more Medicare beneficiaries eligible for post-hospital care in skilled nursing facilities. Although precise estimates of this financial impact are not available, it is reasonable to monitor the trend in utilization of skilled nursing care benefit by these beneficiaries that are made eligible if the three day rule had remained in place. Regardless, these beneficiaries will still have to meet the other criteria to determine the clinical need of each patient for skilled nursing facility care.

Option 4: In addition to Amending Title XVIII of the Social Security Act either to redefine (Option 2) or to remove entirely (Option 3) the three-day hospital requirement as a part of determining eligibility of Medicare beneficiaries for post-hospital care in a skilled nursing facility, also take additional legislative action to address other specific issues related to observation status.

This option would address the issue of the three day rule by amending Title XVIII of the Social Security Act in either of the ways discussed in option 2 and option 3 respectively AND would include additional legislative actions. By providing a statutory update and clarification of the original Medicare three day rule, this option would immediately and directly address the grievances and concerns of Medicare beneficiaries regarding the effect of observation status classification in determining eligibility for post-hospital care in skilled nursing facilities.

Congress may pass the additional legislative amendments to Title XVIII included in option 4 in conjunction with or independent of legislative action modifying or abolishing the three day rule. Specifically, option 4 advocates passage and enactment of the NOTICE Act (S. 1349 and H.R. 876) and the Medicare Audit Improvement Act of 2015 (H.R. 2156). The purpose of the Notice Act is to establish in statute the rights of Medicare beneficiaries to be informed of their status as observation care patients in a timely manner and for this notification to include information on the financial implications of their status as it relates to their eligibility for Part A benefits for services provided by the hospital and for subsequent post-hospital care that may be provided by a skilled nursing facility. The Medicare Audit Improvement Act reforms the operation of the RAC program particularly prohibiting RAC incentive payments and the role recovery auditors have in determination of the proper classification of patients as observation or inpatient status.

While Medicare beneficiaries and patient advocates would welcome passage of The Notice Act, the bill would create additional administrative costs and new compliance requirements for CMS and hospitals. The benefit and principle of protecting rights of patients to be informed in an accurate, timely, and transparent way is important and just. Despite the added cost and time needed to comply, this is a just, reasonable and reassuring protection to provide for

patients. Hospitals, healthcare providers, and physicians would generally welcome passage and enactment of the Medicare Audit Improvement Act. Passage of this bill would create an opportunity for a positive shift in the relationship between CMS and hospitals regarding the audit process and program. The RAC program has been extremely successful in recovery of funds for the Medicare Trust Fund, but specific aspects of the program make it difficult for physicians to know in real time the proper classification of a patient and sometimes makes it impossible for hospitals to refile claims under Medicare Part B when auditors discover in a retrospective audit they were misfiled under Part A. This bill, if passed and enacted, reforms substantially the RAC by eliminating the contingency fee payment system, eliminating the one-year timely filing limit for hospitals to rebill Part B claims when auditors determine cases had been inadvertently misfiled under part A, and basing the determination of the proper status of a patient solely on information available to the admitting physician at the time of the decision rather than on information available retrospectively. While hospitals and physicians would welcome these changes, a noticeable decrease in the amounts of money recovered for the Medicare Trust Fund by the RAC program may result. CMS and the RAC program would face the challenge of continuing to identify fraud, misuse and abuse of Medicare filings while establishing an alternate reasonable and effective audit process. This reform would also negatively impact the potential revenue of RAC contracting organizations. Finally, this reform would likely have a deflationary effect on the recent and growing trend of overutilization of observation status by hospitals to protect against potential revenue loss from current RAC program policies.

Recommendation

Recommendation is made to adopt option 4 to advocate for Congress to amend Title XVIII of the Social Security Act with priority and the preference to eliminate the Medicare three day eligibility rule. Preceding or absent statutory action for elimination of this Medicare rule, recommendation is made to advocate for statutory action to clearly mandate that time classified as observation status be counted toward satisfying the requirement of the three day eligibility rule for coverage of care provided to Medicare beneficiaries in skilled nursing facilities. Furthermore as presented and discussed in option 4, recommendation is made to advocate for further statutory action by Congress to amend Title XVIII to mandate that Medicare beneficiaries receiving care in hospitals be notified of observation treatment classification and be provided clear and understandable information explaining implications of observation status for Medicare benefit eligibility. The Congressional Budget Office determined that the NOTICE Act (H.R. 876) “would not have significant budgetary effects over the 2015-2016 period”

(https://www.cbo.gov/publication/50010). Recognizing the complexity and the confusion surrounding observation status classification, Congress also needs to take statutory action to reform the RAC program, particularly eliminating the current contingency fee payment system.

Although many of these recommended actions are possible through the introduction and modification of CMS rules, the Medicare three day rule is codified into statute. Questions

regarding the legal authority or legality action of the Secretary of HHS to arbitrarily change what is clearly specified in statutory law would result in reference to the three day rule. This fact alone presents a clear and urgent need for Congress to amend Title XVIII to clarify the rule and define it in a manner that will improve the access of Medicare coverage so that beneficiaries can receive appropriate and needed care in skilled nursing facilities. The current state of inconsistent and confusing system classification of observation versus inpatient status inadvertently can result in arbitrary, inequitable, and unfair benefit eligibility status for thousands of beneficiaries each year. Eliminating the three day rule and relying on updated clinical criteria for determining need and eligibility for coverage of care in skilled nursing facilities makes sense, provides great relief and benefit to Medicare beneficiaries, and arguably will not significantly increase inappropriate use of skilled nursing care facilities. The passage of the NOTICE Act (H.R. 876 and S. 1349) would be a straightforward and reasonable complementary action to define and protect rights of Medicare beneficiaries.

The need to address administration and function of the RAC program, although seemingly tangential to the core of the problem faced by Medicare beneficiaries, is related due to the fact that the problems the utilization of observation status creates for Medicare beneficiaries are arguably directly correlated, if not caused, by the policies and rules implemented by CMS through the RAC program. The reforms mandated by H.R. 2156, the Medicare Audit Improvement Act, would also serve to alleviate the source what is indirectly causing beneficiaries to be wrongly denied access to post-hospital care at skilled nursing facilities and other benefit coverage under Part A of the Medicare program. Ironically, these RAC program reforms will both decrease the amount of money recovered from hospitals for the Medicare Trust Fund - money that would help fund coverage for future Medicare beneficiaries, and simultaneously improve access to care, establish greater consistency and fairness in administration of benefits, and provide financial protection to current Medicare beneficiaries.

Despite the barriers to passing bills in the current legislative climate, recommendation is to pursue the multi-dimensional approach of option 4. Since the Medicare three day rule fix arguably requires Congressional action, it is reasonable to attempt to take advantage of this window of opportunity to also address these other specific issues related to and caused by the significant increase in utilization of observation status classification by hospitals.