June 2013 Volume 9 Number 10

CMS Proposes Revised Standard for Hospital Inpatient Admissions

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

AuthorAuthorThe Centers for Medicare & Medicaid Services (“CMS”) has proposed a revision to its definition of an appropriate inpatient admission as part of its proposed inpatient prospective payment systems (“IPPS”) rule for FY 2014.1 This proposed revision is intended to address longstanding concerns from hospitals that they need more guidance as to 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. A recent American Hospital Association (“AHA”) quarterly RACTrac survey confirms that this is a central issue for many hospitals and health systems, as medical necessity denials continue to be the top reason Recovery Audit Contractors (“RACs”) have denied claims.2 In fact, 68 percent of the denials issued to the survey’s respondents during the last quarter of 2012 were for one-day stays where the care was found to have been provided in the wrong setting, not because the care was medically unnecessary.3 Although CMS’ proposed rule provides some clarity on how a medically necessary inpatient admission would be defined by a Medicare review contractor, it uses a somewhat arbitrary time-based presumption that raises a number of other questions.


Inpatient services and outpatient observation services are often the same, with the only difference being the billing category selected. To complicate matters, CMS policy regarding hospital admission and observation care has failed to provide meaningful guidance to allow physicians or hospital administrators to determine whether a patient should be properly admitted as an inpatient.

Currently, the Medicare Benefit Policy Manual (“MBPM”), Chapter 1, Section 10 inpatient hospitalization provisions are to be applied to decide coverage of inpatient hospital admissions.4 Pursuant to these provisions, although inpatient admissions “are not covered or non-covered solely on the basis of the length of time the patient actually spends in the hospital,” the admitting physician should use a 24-hour period as an inpatient admission benchmark and order admission for patients who are expected to need hospital care for 24 hours or more.5 This decision is a complex medical judgment which can be made only after the physician has considered a number of factors, including the patient’s medical history and current medical needs, the severity of the signs and symptoms exhibited by the patient, and the medical predictability of something adverse happening to the patient.6

To further complicate matters, Medicare contractors have used language from Chapter 6, Section 6.5.2 of the Medicare Program Integrity Manual (“MPIM”) stating that “inpatient care rather than outpatient care is required only if the beneficiary’s medical condition, safety, or health would be significantly and directly threatened if care was provided in a less intensive setting,” as a specific standard of review.7 However, this language should more properly be considered an instruction to reviewing contractors that without any related medical conditions or the potential for adverse effects on the patient’s health, factors that would only cause the patient or family inconvenience in terms of time and money do not justify an inpatient admission. The Medicare Appeals Council agreed with this position in In the case of Spokane Wash. Hosp. Co., and In the case of King’s Daughters Med. Ctr., both decided in June 2012. In these cases, the Administrative Law Judge (“ALJ”) decisions provided a review of the medical facts within the context of the guidelines in MBPM, Chapter 1, Section 10 and concluded that the inpatient hospital services were reasonable and necessary.8 On appeal, CMS argued that the ALJs erred by “fail[ing] to cite, reference, or consider” the MPIM. The Council disagreed with CMS’ argument and recognized that “the Council has long held that the MBPM, Chapter 1, Section 10 inpatient hospitalization provisions are to be applied to decide coverage of inpatient hospital admissions.”9 The Council held that these ALJ decisions were “well-reasoned and complete” as the ALJs properly considered the factors in section 10, Chapter 1, of the MBPM in determining Medicare coverage and reference to the provisions in Chapter 6, Section 6.5.2(A), of the MPIM was unnecessary as it is “of secondary importance, and [its] contents, to the extent they bear on the instant case, overlap with the provisions in Section 10, Chapter 1, of the MBPM.”10

The definition of an inpatient admission is often a point of contention during the administrative appeals process when Medicare review contractors apply hindsight to determine the medical necessity of the inpatient admission. However, pursuant to the MBPM the decision to admit a patient is a complex medical judgment made by the admitting physician at the time of admission looking forward based on the medical evidence available at that time, except in cases where considering the post-admission information would support a finding that an admission was medically necessary.11

Hospitals trying to avoid audits and having their admission decisions overturned by RACs have been keeping Medicare beneficiaries in observation status longer, even though CMS suggests that hospitals admit or discharge them within 24 to 48 hours. To address these concerns, CMS solicited ideas for how to define an inpatient admission in the 2013 outpatient prospective payment systems (“OPPS”) proposed and final rules.12 In the FY 2014 IPPS proposed rule, CMS suggested a significant revision to the definition of inpatient in an attempt to clarify its longstanding policy on how Medicare contractors review inpatient admissions for payment purposes.13

Proposed Inpatient Prospective Payment System (“IPPS”) Rule for FY 2014

In its FY 2014 IPPS proposed rule published in the May 10, 2013 Federal Register, CMS proposes the use of a time-based presumption of medical necessity for hospital inpatient services based on the beneficiary's length of stay.14 This time-based presumption is intended to clarify when CMS believes hospital inpatient admissions are reasonable and necessary, based on how long beneficiaries have spent or are reasonably expected to spend in the hospital. However, in making time the determining factor in whether the services are provided on an inpatient or observation basis, other factors, such as the severity of the signs and symptoms exhibited by the patient and the medical predictability of something adverse happening to the patient, become less relevant.

Time-Based Presumption of Medical Necessity

CMS proposes to tie the definition of a medically necessary and reasonable inpatient admission to the amount of time the patient stays, or is reasonably expected to stay, in the hospital. More specifically, hospital inpatient admissions lasting at least more than one Medicare utilization day will presumptively qualify as appropriate for payment under Medicare Part A. More than one Medicare utilization day is defined as an encounter “crossing two midnights” in the hospital. However, if a hospital is found to be abusing this rule (as by deliberately delaying care so that the stay will cross two midnights), the external review contractor will be instructed to presume the reverse: that the service should have been provided on an outpatient basis.15

Conversely, hospital inpatient admissions spanning less than one Medicare utilization day (that is, less than two midnights) will presumptively be inappropriate for payment under Medicare Part A. Instead, a stay of fewer than two midnights would be covered by Medicare Part B.

However, there are some discrepancies in the text of the proposed rule with regard to how Medicare review contractors will treat inpatient admissions that span less than two midnights. In the proposed rule, CMS states that Medicare contractors will presume that hospital services spanning less than two midnights should have been provided on an outpatient basis unless 1) there is clear documentation in the record supporting the physician’s order and the expectation that the beneficiary would require care for more than two midnights or 2) the beneficiary underwent a procedure on the inpatient-only list. This reinforces the importance of a medical record that includes comprehensive documentation of the complex factors that supports the medical necessity of the inpatient admission. In accordance with this language, Medicare contractors will be instructed to employ the factors similar to those currently included in the MBPM to determine the medical necessity of an inpatient admission that does not reach the two-midnight threshold. These factors include, for example, the severity of the signs and symptoms exhibited by the patient and the medical predictability of something adverse happening to the patient.

Later in the proposed rule, however, CMS indicates that it will codify the general two-midnight threshold rule at 42 CFR 412.3(c)(1) and that 42 CFR 412.3(c)(2) would include an exception stating that “…if an unforeseen circumstance, such as beneficiary death or transfer, results in a shorter beneficiary stay than the physician’s expectation of at least two midnights, the patient may be considered to be appropriately treated on an inpatient basis, and the hospital inpatient payment may be made under Medicare Part A.”16 This language tends to suggest that a Medicare contractor’s review of an inpatient admission pending less than two-midnights will focus less on the clinical factors listed above, and more on “unforeseen circumstances.” Clarification on CMS’s meaning will likely be sought during the open comment period.

Calculating a Medicare Utilization Day

For purposes of calculating two midnights, CMS states that “t he starting point for this time-based instruction would be when the beneficiary is moved from any outpatient area to a bed in the hospital in which the additional hospital services will be provided.” However, many hospitals do not have designated outpatient observation areas and instead provide observation and inpatient services in the same hospital bed. Although one would assume under these circumstances that the clock starts at the time of the admission order, there will need to be confirmation from CMS about when the clock starts for purposes of calculating the “two midnights.”

Clarification of Inpatient Admission Order Requirements

Also of note, as part of defining an inpatient admission, CMS clarified that an inpatient admission would require an order from a licensed individual with admitting privileges at the hospital who is responsible for the care of the patient and that this responsibility cannot be delegated to someone who does not satisfy these criteria. Therefore, although the Medicare Conditions of Participation (“CoPs”) do not specifically prohibit the delegation of an inpatient admission order to a non-physician practitioner, for payment purposes the authority to admit cannot be delegated to an individual who lacks that authority in his or her own right.17

Impact of Proposed Revised Standard for Hospital Inpatient Admissions

The proposed admission changes are part of a 1,400-page annual hospital payment update. If adopted, the new admission rules would apply to more than 3,400 acute care hospitals and CMS estimates that it will ultimately shift care for many patients to the inpatient side. More specifically, CMS projects that it will result in 40,000 more inpatient hospital stays at an additional cost to the Medicare program of $220 million. In order to offset this projected increased cost, CMS is proposing to reduce hospital inpatient rates by 0.2 percent. However, this increase in inpatient hospital stays may not actually occur. Instead, by using a two-midnight presumption when reviewing the medical necessity of an inpatient claim, the likely result will be that the vast majority of cases challenged by RACs will be those with care spanning less than two midnights. Together with the proposed changes to hospital billing policy in Proposed Rule CMS-1455-P, which allows hospitals to self-audit inpatient cases and rebill under Part B, the proposed revision to the admission rules will most likely result in more outpatient hospital stays, as most stays less than two midnights will be billed as outpatient either initially or because of after-the-fact self-auditing.

CMS will accept comments on the proposed rule until 5:00 p.m. EST on June 25, 2013, and will respond to comments in a final rule to be issued by August 1, 2013.


78 Fed. Reg. 27486, 27644-650 (May 10, 2013).


The AHA RACTrac Survey, 4 th Quarter 2012 can be found at:   http://www.aha.org/advocacy-issues/rac/ractrac.shtml.




Chapter 1, Section 10 of the Medicare Benefit Policy Manual is at http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/bp102c01.pdf on the CMS website.


See Id.




Chapter 6 of the Medicare Program Integrity Manual, Section 6.5 is available at http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/pim83c06.pdf on the CMS website.


See In the case of Spokane Wash. Hosp. Co., (decided June 19, 2012) and In the case of King’s Daughters Med. Ctr., (decided June 26, 2012) , available at http://www.hhs.gov/dab/divisions/medicareoperations/macdecisions/mac_decisions.html
(last accessed May 29, 2013).




In determining whether an inpatient admission is medically necessary, the exclusion of information that became available after the patient’s admission for purposes of denying the claim is reinforced in the MBPM’s description of the standard of review for Quality Improvement Organizations (“QIOs”). Chapter 1, Section 10 of the MBPM provides in relevant part:

Under original Medicare, the Quality Improvement Organization (QIO), for each hospital is responsible for deciding, during review of inpatient admissions on a case-by-case basis, whether the admission was medically necessary. Medicare law authorizes the QIO to make these judgments, and the judgments are binding for purposes of Medicare coverage. In making these judgments, however, QIOs consider only the medical evidence which was available to the physician at the time an admission decision had to be made. They do not take into account other information (e.g., test results) which became available only after admission, except in cases where considering the post-admission information would support a finding that an admission was medically necessary. (Emphasis added).

1277 Fed. Reg. 45061 (July 30, 2012).
1378 Fed. Reg. 27486, 27644-650 (May 10, 2013).
1478 Fed. Reg. 27486, 27644-650 (May 10, 2013).
17CMS’s hospital Conditions of Participation define specific quality standards that hospitals must meet to participate in the Medicare program.

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