March 2013 Volume 9 Number 7

CMS Acquiesces to Hospital Pressure, Allows Part B Billing of Hospital Services Following Part A Denial of Inpatient Hospital Claims for Medical Necessity: Is It Enough?

By Jessica L. Gustafson and Abby Pendleton, The Health Law Partners, P.C., Southfield, MI

AuthorAuthorOn March 13, 2013, the Centers for Medicare & Medicaid Services (“CMS”) concurrently issued Ruling CMS-1455-R (the “Ruling”)1 and a proposed rule (the “Proposed Rule”)2 to revise Medicare Part B billing policies in the event of Part A inpatient claim denials based on medical necessity. While the Ruling and Proposed Rule purport to provide hospitals with a mechanism to receive reimbursement for services rendered in the event of a Medicare Part A inpatient claim denial, both the Ruling and Proposed Rule are limited, offering no viable long term solution for hospitals.


In the Part A and Part B Recovery Audit Contractor (“RAC”) program, the top issue audited by each RAC nationwide is whether hospitals have provided services in the correct “setting” (i.e., the RACs have alleged hospitals should not have treated certain patients as inpatients, but instead should have treated them as outpatients).3 Significantly, the RACs have not alleged that care provided was medically unnecessary; rather, the RACs disapproved of the “setting” in which services were provided. Despite the fact that the RAC Statement of Work specifically mandates RACs to render partial adjustments in these situations (i.e., in the cases of “inpatient stays that should have been billed as outpatient”),4 the RACs have failed to do so. Rather, the RACs have fully denied Part A claims for inpatient hospital services, and have not granted Part B reimbursement for the services rendered as if the claims originally were billed as outpatient claims.

Similarly, on appeal of Part A claims for inpatient hospital services, Medicare Administrative Contractors at the first stage of appeal and Qualified Independent Contractors (“QICs”) at the second stage of appeal5 have failed to issue “partially favorable” determinations.6 From the conclusion of the RAC demonstration program until the publication of the Ruling, CMS and its contractors have adopted a policy of full payment denial when a Part A claim for inpatient hospital services is denied as medically unnecessary. In particular, CMS has allowed hospitals to bill Part B only for “ancillary services” – not emergency department services, observation services or surgical procedures – and only if timely filing regulations were satisfied. In practice, CMS’ policy has denied hospitals any reimbursement whatsoever for services rendered – particularly troubling, given that in many cases the RACs (and Medicare Administrative Contractors and QICs) acknowledge that the care rendered was appropriate.

On the other hand, citing to federal regulations and multiple Medicare Internet-Only Manual provisions addressing this issue,7 numerous Administrative Law Judges (“ALJs”) have found, and the Medicare Appeals Council (“MAC”) has consistently ordered, that hospitals are entitled to Part B reimbursement for all of the medically necessary services (including services beyond ancillary services, such as outpatient observation and surgical procedures) as an offset against findings of Part A overpayment.8

CMS has publicly and vehemently disagreed with these ALJs’ and the MAC’s interpretations of the regulations and published Medicare guidance.9 However, recognizing that its contractors must effectuate ALJ and MAC decisions, on July 13, 2012, CMS issued a memorandum to its Medicare Administrative Contractors instructing them how to carry out partially favorable ALJ and MAC decisions.10

Within this environment, in order to receive reimbursement for services rendered, hospitals have had no option other than to pursue relief through the Medicare appeals process, resulting in an overburdening of the appeals system and appeals processing delays.

Following pressure exerted by the hospital community, including a lawsuit filed November 1, 2012 by the American Hospital Association (“AHA”) and five health systems related to this issue,11 on March 13, 2013, CMS issued its Ruling contemporaneously with a Proposed Rule setting forth a new Part B billing policy when a Part A claim for an inpatient hospital services is denied as medically unnecessary. The Ruling and Proposed Rule are an important first step providing (limited) relief to hospitals; however, under the Ruling and Proposed Rule, there is no guarantee that appropriate payment will be made for medically necessary care provided and therefore does not create a viable long term solution for hospitals.

CMS Ruling 1455-R

The Ruling was published on March 13, 2013. The Ruling serves as interim guidance effective until CMS finalizes its Proposed Rule. The Ruling is applicable to denials made (1) while the Ruling is in effect; (2) prior to the effective date of the Ruling where appeal rights have not expired; and (3) prior to the effective date of the Ruling for which an appeal is currently pending.

Summary of Billable Services under the Ruling

The Ruling reiterates CMS’ position that the ALJ and MAC decisions allowing Part B reimbursement for services rendered as an offset against a Part A overpayment are contrary to CMS policy. However, the Ruling acknowledges that CMS is “acquiescing” to such ALJ and MAC decisions.12 Under the Ruling, when a Part A claim for inpatient hospital services is denied as medically unnecessary, the hospital may rebill under Medicare Part B as follows:

  • The hospital may submit a Part B inpatient claim for services that would have been payable had the patient originally been treated as an outpatient rather than admitted as an inpatient. While permissible billing extends beyond “ancillary services,” under the Ruling the hospital may not bill for services deemed to require an outpatient status (e.g., emergency department (“ED”) visits and outpatient observation services).13 Excluding services “requiring an outpatient status,” such as outpatient observation services, from permissible Part B rebilling marks a significant departure from services permitted to be rebilled by many ALJs and the MAC in the current appeals environment.14
  • The hospital may submit a Part B outpatient claim for medically necessary services furnished during the three-day payment window prior to the original inpatient admission, including ED visits and outpatient observation services.15

Under the Ruling, Part B billing is not available in situations of self-audit or utilization review determinations.

No Duplicate Claims

A hospital must withdraw any pending Part A appeal or await a final appeal decision before billing Part B. After a claim for Part B reimbursement is submitted, a hospital may no longer pursue an appeal for the Part A claim initially filed.16

Timeframe for Billing Part B

While the Ruling is in effect, a hospital has 180 days from the date of Part A appeals determination or dismissal to bill under Part B.17

Treatment of ALJ Remands / Issues before the ALJ

As noted herein, many ALJs recently have remanded cases to the QIC stage of appeal with orders for the QIC to consider whether hospitals are entitled to reimbursement under Part B in cases where a Part A inpatient hospital claim is denied as medically unnecessary. Under the Ruling, these cases will be returned to the ALJ and adjudicated according to the new scope of review defined by the Ruling.18

In particular, pursuant to the Ruling, an ALJ may no longer order reimbursement under Part B as an offset against a finding of overpayment under Part A. The ALJ may only decide if the Part A claim was medically necessary.19 This portion of the Ruling is particularly problematic, raising questions as to whether CMS has authority via a ruling to strip an ALJ of jurisdiction to consider the issues before it. Hospitals seeking reimbursement for additional services beyond those permitted to be billed under the Ruling (e.g., hospitals seeking reimbursement for observation services in the alternative to Part A reimbursement) may wish to consider continuing to raise these arguments during the appeals process, in order to preserve the argument for potential federal court action.

Patient Status

Because a patient’s status (inpatient or outpatient) cannot be changed after discharge, under the Ruling a patient will be considered an inpatient for Part B inpatient services billed and an outpatient for Part B outpatient services billed.20

Part A/B Rebilling Demonstration Terminated

The Ruling also announced the termination of the demonstration program for Part A to Part B rebilling.21


On March 13, 2013, CMS also released its Proposed Rule, which would supersede the Ruling once finalized. The Proposed Rule retains many provisions of the Ruling, including the right for hospitals to bill for services rendered under Part B if a Part A claim for inpatient hospital services is denied as medically unnecessary. However, under the Proposed Rule, the circumstances for billing under Part B would be significantly narrowed. CMS acknowledges that provisions of the Proposed Rule would “greatly limit the capacity in which a hospital could rebill.”22 Limitations introduced in the Proposed Rule are described below.

One Year from Service Timely Filing Limitation

Most significantly, under the Proposed Rule Part B claims may only be filed within one year from the date of service, irrespective of any subsequent audit determination or appeal pursued.23 If an audit determination is not made within one year from the date of service (which will be the circumstance in most audit determinations outside of pre-payment review), a hospital will not be able to avail itself of Part B billing if a Part A claim is denied as medically unnecessary. CMS would treat the billing as an original claim, not as an adjustment24 (contrary to the analyses included as part of many of the MAC decisions cited herein).

Notably, in the RAC program, the RACs are authorized to review claims within three years from the claims’ initial payment date.25 RACs are compensated on a contingency fee basis, based on the principal amount of overpayment collection (not the amount identified).26 Accordingly, the RACs will be financially incentivized to review claims beyond one year from the date(s) of service, prohibiting hospitals from billing under Part B, maximizing the amount of collection and therefore the amount of contingency fee.

Hospitals May “Self-Audit” and Rebill

The Proposed Rule would allow hospitals that discover inpatient hospital admissions to be medically unnecessary in the course of utilization reviews to rebill these claims under Part B. CMS anticipates that hospitals will increase “self-audits” and rebill under Part B, saving the Medicare program money by reducing the number of Part A claims. CMS also anticipates lower appeal volumes.27

Patient Appeals

Notably, a patient’s right to appeal a Part A inpatient claim denial is not extinguished by a hospital’s submission of a Part B claim. If a patient has a pending Part A claim, the hospital may not file a concurrent Part B claim.28


Most significantly, the one-year claims filing limitation included in the Proposed Rule, coupled with provisions of the Ruling and Proposed Rule taking away an ALJ’s authority to consider whether Part B payment would be appropriate, puts hospitals in a difficult situation. Hospitals that have provided clinically appropriate, medically necessary care will be forced to decide (1) whether to accept reduced payment for services rendered (provided that timely filing requirements are satisfied); or (2) whether to pursue Part A reimbursement through the Medicare appeals process, possibly losing all reimbursement for services rendered.

While the Proposed Rule offers some relief (provided that timely filing requirements are satisfied), many in the hospital community find this relief insufficient, failing to ensure accurate reimbursement is made to hospitals for the medically necessary care provided. In fact, following publication of the Ruling and Proposed Rule, AHA issued a statement articulating its intent to continue its lawsuit against CMS29 in an effort to obtain a federal court ruling in favor of hospitals ordering full reimbursement for medically necessary care rendered. Given the hospital community’s dissatisfaction with CMS’ proposed long-term solution, whether the Proposed Rule will be finalized as proposed is uncertain. Comments to the Proposed Rule may be submitted until 5:00 p.m. on May 17, 2013.

178 Fed. Reg. 16614 (March 18, 2013).

78 Fed. Reg. 16632 (March 18, 2013).


Medicare Fee for Service National Recovery Audit Program (October 01, 2012 – December 31, 2012), Quarterly Newsletter, available at (last accessed March 15, 2013).


Statement of Work for the Recovery Audit Program dated September 1, 2011 at page 36, available at (last accessed March 15, 2013).


Recently, many ALJs have remanded cases back to the QIC stage of appeal, ordering that the QICs consider hospitals’ alternative request for relief under Medicare Part B. Despite the Remand Orders, in many cases the QICs have been reissuing the exact same decisions made in the first instance, failing to comply with the ALJ’s orders and refusing to address the Part B reimbursement issue.


After receiving an unfavorable claim determination (i.e., a denial) from a Medicare contractor, hospitals may appeal through the five-stage Medicare appeals process, set forth at 42 C.F.R. Part 405 Subpart I:

  • The first stage of appeal is called “Redetermination.” A Request for Redetermination is filed with the Medicare Administrative Contractor.
  • The second stage of appeal is called “Reconsideration.” A Request for Reconsideration is filed with a QIC.
  • The third stage of appeal is an Administrative Law Judge (“ALJ”) hearing.
  • The fourth stage of appeal is MAC Review.
  • The fifth and final stage of appeal is federal district court.

See Medicare Benefit Policy Manual (CMS Pub. 100-02), Ch. 1, § 10 and Medicare Financial Management Manual (CMS Pub. 100-06), Ch. 3, § 170.1.


See UMDNJ – University Hospital v. Riverbend GBA (decided March 14, 2005), In the case of O’Connor Hospital (decided February 1, 2010), In the case of Montefiore Medical Center (decided May 10, 2011), In the case of Indiana University Health Methodist Hospital (decided May 17, 2012) and In the case of Providence Health Center (decided June 29, 2012), available at this link (last accessed March 15, 2013).


See e.g., See Memorandum to All Fiscal Intermediaries (FIs), Carriers, and Part A and Part B Medicare Administrative Contractors (A/B MACs), “Administrative Law Judge Decisions,” (dated July 13, 2012), discussing partially favorable ALJ decisions which provided reimbursement for outpatient observation services): “In this circumstance, the ALJ’s order is in conflict with Chapter 6, sections 10 and 20.6 of the Medicare Benefit Policy Manual (Publication 100-02) and Chapter 1, section 50.3 of the Medicare Claims Processing Manual (Publication 100-4).

See also, Ruling at 78 Fed. Reg. at 16615, stating CMS’ policy that “The ALJ and Medicare Appeals Council decisions providing payment for all reasonable and necessary Part B services under the circumstances previously described are contrary to CMS’ longstanding policies…”


See Memorandum to All Fiscal Intermediaries (FIs), Carriers, and Part A and Part B Medicare Administrative Contractors (A/B MACs), “Administrative Law Judge Decisions,” (dated July 13, 2012).

11The American Hospital Association et al. vs. Sebelius, Case No. 1:12-cv-1770 (D.D.C. filed Nov. 1, 2012).

78 Fed. Reg. at 16615, stating “CMS, through this Ruling, acquiesces to the approach taken in the aforementioned ALJ and Appeals Council decisions….”

1378 Fed. Reg. at 16615-16

See e.g., In the case of O’Connor Hospital (decided February 1, 2010)


78 Fed. Reg. at 16615-16.


78 Fed. Reg. at 16616.



1978 Fed. Reg. at 16617: “If a hospital submits an appeal of a determination that a Part A inpatient admission was not reasonable and necessary, the only issue before the adjudicator is the propriety of the Part A claim, not any issue regarding any potential Part B claim the provider has not yet submitted.”
2078 Fed. Reg. at 16617

See also (last accessed March 15, 2013). On January 1, 2012, CMS initiated a Part A to Part B Rebilling Demonstration, which permitted participating hospitals (limited to 380 hospitals nationwide) to rebill for 90 percent of the Part B payment when a Medicare contractor denied a Part A inpatient short stay claim as not reasonable and necessary. Participating hospitals were not permitted to appeal these claim denials. The demonstration program ended on March 14, 2013 following publication of the Ruling.

2278 Fed. Reg. at 16643.

78 Fed. Reg. at 16640.

25Statement of Work for the Recovery Audit Program dated September 1, 2011 at page 9, available at (last accessed March 15, 2013).
26Id., at p. 48.
2778 Fed. Reg. at 16644.
29American Hospital Association, “Statement on Centers for Medicare & Medicaid Services’ Interim Ruling and Proposed Rule Revising its Position on Rebilling Claims Denied by Medicare Contractors, Including Recovery Audit Contractors,” dated March 14, 2013, available at (last accessed March 22, 2013).

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