September 2013 Volume 10 Number 1

CMS’s Final Rule Regarding the Payment of Part B Inpatient Services and the Revised Standard for Hospital Inpatient Admissions

By Andrew B. Wachler and Jesse A. Markos, Wachler & Associates, P.C., Royal Oak, MI

AuthorAuthorOn August 2, 2013, the Centers for Medicare & Medicaid Services (“CMS”) released the annual Hospital Inpatient Prospective Payment System Final Rule for FY 2014 (the “Final Rule”), effective for discharges occurring on or after October 1, 2013.1 The Final Rule revises CMS’s Part A to Part B rebilling policy and clarifies the inpatient admission guidelines. CMS adopted these policy changes to address longstanding concerns from hospitals that they need more guidance on when a Medicare beneficiary is appropriately admitted to a hospital as an inpatient and what is required for Medicare Part A payment of hospital inpatient services. Inpatient services and outpatient observation services are often the same, with the only difference being the billing category selected. To further complicate matters, Recovery Auditors (formerly known as Recovery Audit Contractors, or “RACs”) that have denied inpatient hospital claims found to be in the wrong setting have failed to credit payment for the medically necessary services at the outpatient rate. As a result, hospitals are not receiving any reimbursement for services RACs determine to be medically necessary but billed under the wrong category. Although CMS’s Final Rule provides some clarity on how a medically necessary inpatient admission would be defined by a Medicare review contractor, it introduces two-midnight rules related to inpatient admissions that raise a number of other questions and leaves hospitals at risk to receive more denials of inpatient admissions. The Final Rule also adopts a Part A to Part B rebilling policy that significantly limits a hospital’s ability to recoup partial reimbursement for denied payments.

1. Payment of Medicare Part B Inpatient Services

CMS has maintained a long-standing policy of allowing payment for only a very limited set of Part B inpatient services when a Part A inpatient admission is denied as not reasonable and necessary.2 Pursuant to this policy, if a hospital’s claim under Part A for an inpatient admission was denied for lack of medical necessity, hospitals were unable to bill for observation services, emergency room visits, and scheduled outpatient surgeries that were provided to the beneficiary. CMS also took the position that claims for Part B services submitted after the denial of an inpatient claim were properly rejected if they were not submitted within the statutory timely filing deadline, under which claims must be filed within 12 months of the date of service. As a result of the policy, RACs recovered 100 percent of the reimbursement for the Part A claim, and hospitals would receive no reimbursement for medically necessary services.

On March, 13, 2013 CMS proposed a revised Part A to Part B rebilling policy permitting providers to bill for an expanded set of Part B services after Part A payment is denied.3 Coinciding with this proposed rule, CMS released an interim ruling authorizing Part A to Part B rebilling effective immediately and lasting until the implementation date of the Final Rule.4 Under this ruling, claims are not denied if filed later than one calendar year from the date of service, as long as the original Part A inpatient claim was filed in a timely fashion.

Pursuant to the Final Rule, if a Part A claim with dates of service after October 1, 2013 is found to not be reasonable and necessary after discharge, hospitals will have an opportunity to submit a Part B inpatient claim and receive reimbursement for Part B services, except those services that specifically require outpatient status.5 Notably, this excludes outpatient visits, emergency department visits, observation services, and outpatient diabetes self-management training (“DSMT”) from payment as Part B inpatient services.6 However, hospitals are authorized to bill for outpatient services furnished during the three-day payment window prior to the inpatient admission, including observation services. These must be billed separately under Part B, as services that specifically require outpatient status cannot be included on a Part B inpatient claim.7

A. Timely Filing Provisions

Despite strong opposition, the Final Rule applies the timely filing restriction to the billing of Part B inpatient services, pursuant to which claims must be filed within one year from the date of service.8 Importantly, most if not all denied Part A claims will be ineligible for rebilling as RACs have the ability to audit claims up to three years from the date of service and the timely filing period will have likely expired by the time an audit is completed. In fact, a recent AHA RacTrac survey found that more than 65 percent of hospitals reported that over two-thirds of their RAC medical records requests were received after the timely filing window had elapsed.9

The one-year timely filing restriction applies to all Part A denials with admission dates on or after October 1, 2013.10 However, CMS will permit hospitals to bill pursuant to the timeframes in the Interim Ruling after October 1, 2013, provided (1) the Part A claim denial was one to which the Interim Ruling originally applied; or (2) the Part A claim has a date of admission before October 1, 2013 and is denied after September 30, 2013 on the grounds that although hospital outpatient services would have been reasonable and necessary, the inpatient admission was not. For these claims, the hospital will have 180 days from (a) the date of receipt of the dismissal notice (if withdrawing the appeal), (b) the date of receipt of the final or binding decision (if the provider has not withdrawn the appeal), or (c) the issuance of the initial or revised determination on the Part A inpatient claim (if there is no pending appeal and the denial is not subsequently appealed).11

B. Hospital Determination after Discharge

The Final Rule also permits Part A to Part B rebilling when a hospital determines, through a self-audit, that an inpatient admission was not reasonable and necessary, so long as the Part B claim is submitted within the one-year timely filing restriction.12 Moreover, the self-audit process has to conform to the utilization review rules in the Hospital Conditions of Participation (“CoPs”).13 Notably, this includes physician involvement and concurrence in hospital decisions regarding patient status and the medical necessity of hospital inpatient admissions and beneficiary notification.14

2. Two-Midnight Rules for Inpatient Admissions

The Final Rule also clarifies CMS’s inpatient admission guidelines. Under previous guidance, admitting physicians were instructed to use a 24-hour period as a benchmark and order admission for beneficiaries expected to need hospital care for 24 hours or more.15 For admissions with dates of service on or after October 1, 2013, CMS is instructing physicians to use a 2-midnight benchmark and order admission for beneficiaries expected to require hospital care crossing at least two midnights.16 The Final Rule also introduces a 2-midnight presumption to the medical necessity review of inpatient admissions.17 An exception to this time-based criteria are the inpatient only procedures.18 These procedures are always appropriately inpatient, regardless of the actual time expected at the hospital so long as the procedure is medically necessary and performed pursuant to a physician order and formal admission.

A. Two-Midnight Presumption

Pursuant to the 2-midnight presumption, CMS medical review contractors will presume that an inpatient hospital admission is reasonable and necessary (and therefore payable under Part A) if it crosses two midnights after the formal admission order.19 These admissions will not be the focus of medical review efforts absent evidence of systematic gaming, abuse or delays in the provision of care in an attempt to qualify for the 2-midnight presumption.20

B. Two-Midnight Benchmark

Pursuant to the 2-midnight benchmark, if a physician expects a beneficiary’s surgical procedure, diagnostic test or other treatment to require a stay in the hospital lasting at least two midnights, and admits the beneficiary to the hospital based on that expectation, Medicare Part A payment is “generally appropriate.”21 The physician’s expectation that a beneficiary’s length of stay will be longer than two midnights must be based on medical factors documented in the medical record. These factors include the patient history and co-morbidities, the severity of signs and symptoms, the current medical needs of the beneficiary, and the risk of an adverse event happening during the time period for which hospitalization is being considered.22

The benchmark is based upon a reasonable and supportable expectation, not the actual length of care, in defining when hospital care is appropriate for inpatient payment.23 Therefore, if unforeseen circumstances result in a shorter stay than the physician’s expectation at the time the inpatient order was written, the inpatient admission may still be considered appropriate. Such circumstances may include the beneficiary being transferred to another hospital, beneficiary death, or the beneficiary leaving against medical advice.24

If the physician does not expect that a beneficiary will need medical services beyond two midnights, then the beneficiary should be placed in observation as an outpatient. Under the Final Rule, the admitting physician is instructed to take into account all of the time a beneficiary is in the hospital, including any initial outpatient services, when deciding whether two midnights of hospital care will be required and therefore an inpatient admission is generally appropriate. This includes observation services, treatment in the emergency department and procedures performed in the operating room or other treatment area.25 As a result, if the patient has already passed one midnight as an outpatient, admission would be considered appropriate if the physician expects the patient to require at least one additional midnight in the hospital.26 In fact, after one midnight has passed, “the decision to admit becomes easier as the time approaches the second midnight, and beneficiaries in medically necessary hospitalizations should not pass a second midnight prior to the admission order being written.”27

If the physician admits the beneficiary as an inpatient but the beneficiary is in the hospital for less than two midnights after the order is written, CMS and its medical review contractors will not presume that the inpatient hospital status was reasonable and necessary, but may instead evaluate the claim pursuant to the 2-midnight benchmark.28 Medical review contractors will evaluate (a) the physician order for inpatient admission to the hospital, along with the other required elements of the physician certification, (b) the medical documentation supporting the expectation that care would span at least two midnights, and (c) the medical documentation supporting a decision that it was reasonable and necessary to keep the patient at the hospital to receive such care, in order to determine whether payment under Part A is appropriate. Medical review contractors will review these claims under the same guidance CMS has given to providers, and the outpatient time will be counted when determining whether the 2-midnight benchmark was met and therefore payment is generally appropriate under Part A.29 Contractors will also consider complex medical factors that support a reasonable expectation of the needed duration of the stay relative to the 2-midnight benchmark.

CMS believes that the new 2-midnight rules will enable RACs and other review contractors to focus on reviewing inpatient stays of one day or less. During the August 6, 2013 open door forum on the Final Rule, George Mills, Director of the CMS Provider Compliance Group, said “If the patient is in the hospital for two midnights, RACs wouldn’t be looking at that issue at all. That is­sue has been taken off the table for RACs….In the future, reviews of inpatient claims should be substantially re­duced because of this new rule, and they will be moving on to other areas.” Notwithstanding this optimism, hospitals are still at significant risk. Previously, RACs denied admissions based on complex medical factors, notwithstanding that the claims met the 24-hour benchmark. Accordingly, it is reasonable to expect that RACs will continue to deny admissions after the implementation date of the Final Rule that meet the 2-midnight benchmark but not the 2-midnight presumption.

3. Compliance with the Final Rule

Prior to the effective date of October 1, 2013, hospitals should ensure that their medical staffs are aware of the new admission guidelines and receive training on documentation requirements. Although physician documentation of medical necessity has always been important in medical reviews, under the 2-midnight rules hospital payment at the inpatient level will depend on whether the physician adequately documented the expectation that care would span at least two midnights. In addition, hospitals must develop defined processes to successfully recoup partial reimbursement pursuant to the new Part A to Part B rebilling policy.


178 Fed. Reg. 50495, 50906-954 (Aug. 19, 2013).
2See Medicare Benefit Policy Manual (MBPM), CMS Pub. 100-02, ch. 6, § 10.
378 Fed. Reg. 16614, 16632 (March 18, 2013).
478 Fed. Reg. 16632 (March 18, 2013).
578 Fed. Reg. at 50912.
6Id.
7Id.
878 Fed. Reg. at 50924.
9The American Hospital Association's (“AHA”) RACTrac survey collects data from hospitals on a quarterly basis to assess the impact the Medicare Recovery Audit Contractor (“RAC”) program on hospitals nationwide. The results of the AHA RACTrac Survey, 2 nd Quarter 2013 can be found at:   http://www.aha.org/content/13/13q2ractracresults.pdf .
10Id.
11Id.
12Id. at 1674-1675.
13CMS develops Conditions of Participation (“CoPs”) that healthcare organizations must meet in order to begin and continue participating in the Medicare and Medicaid programs. The Medicare Conditions of Participation for hospitals are found at 42 CFR Part 482.
1478 Fed. Reg. at 50913. CMS designed this Part B inpatient billing process to promote timely self-auditing and increase Part B billing closer to the date of service. Hospitals conduct internal reviews other than utilization reviews, and a number of commentators asked CMS if an inpatient stay could be rebilled if the error is discovered as part of those internal reviews. In response, CMS stated that “we did not propose and are not finalizing a policy that would allow hospitals to bill Part B following an inpatient reasonable and necessary self-audit determination that does not conform to the requirements for utilization review under the CoPs.” Instead, “hospitals must follow [CMS’s] policies requiring physician involvement and concurrence in hospital decisions regarding patient status and the medical necessity of hospital inpatient admissions under the Condition Code 44 rules and the CoPs.”
15See Medicare Benefit Policy Manual, CMS Pub. 100-02, ch. 1, § 10.
1642 C.F.R.  § 412.3(e)(1).
17No presumption of coverage was tied to meeting the previous 24-hour benchmark.
18Id.
1978 Fed. Reg., 50949.
20Id. However, CMS also noted that review contractors will still assess claims where the beneficiary plan of care after admission crosses two midnights: (1) to ensure the services provided were medically necessary; (2) to ensure that the stay at the hospital was medically necessary; (3) to validate provider coding and documentation as reflective of the medical evidence; (4) when the CERT Contractor is directed to do so under the Improper Payments Elimination and Recovery Improvement Act of 2012; or (5) if directed by CMS or another authoritative governmental entity (including but not limited to the HHS Office of Inspector General and Government Accountability Office).
2178 Fed. Reg., 50950.
2278 Fed. Reg., 50944.
23Id.
24Id.
2578 Fed. Reg., 50950. While the physician may take into account the time the beneficiary spent as an outpatient for the purpose of the 2-midnight benchmark, this will not turn into inpatient time once the order is written. The order will still begin the inpatient admission, and the time preceding the order will remain outpatient time. This means that outpatient time does not count as inpatient time for purposes of qualifying for skilled nursing facility coverage and rather this time may only be considered for the limited purpose for determining if the expectation of a stay less than at least two midnights in the hospital is reasonable.
2678 Fed. Reg., 50946.
27Id.
2878 Fed. Reg., 50949.
2978 Fed. Reg., 50950.

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