Medicare Beneficiaries Win Right to Challenge Certain Outpatient Observation Placement Orders

II.  Background

Medicare “has made available to nearly every American 65 years of age and older a broad program of health insurance designed to assist the nation’s elderly to meet hospital, medical, and other health costs.”²  As relevant to this case, “[t]he program includes two related health insurance programs – hospital insurance (HI) (Part A) and supplementary medical insurance (SMI) (Part B).”³  Part A covers inpatient hospital services, skilled nursing facility (SNF) care,  home health and hospice care.⁴  Part B covers medical and other health services that are not covered by Part A, including outpatient observation services.⁵  Most people do not pay a premium for the Part A benefit because the beneficiary or spouse already paid for it via payroll taxes.⁶  On the other hand, an eligible individual⁷ must enroll and pay the required premiums in order to obtain Part B benefits.⁸

A.    Inpatient Hospital Services and Admissions

The Social Security Act, implementing regulations and CMS sub-regulatory guidance broadly define the term “inpatient hospital services” to encompass those services furnished to hospital inpatients.⁹  Other than services designated as “inpatient only,”¹⁰ services provided as inpatient hospital services also may be provided to hospital outpatients.  Statutory, regulatory and sub-regulatory guidance instructs hospitals not to differentiate between the “level of care” of services rendered to inpatients and outpatients.¹¹

Regarding Part A coverage for inpatient hospital admissions, 42 C.F.R. § 412.3 sets forth the following criteria:

        (a) For purposes of payment under Medicare Part A, an individual is considered an inpatient of a hospital, including a critical access hospital, if formally admitted as an inpatient pursuant to an order for inpatient admission by a physician or other qualified practitioner in accordance with this section and §§482.24(c), 482.12(c), and 485.638(a)(4)(iii) of this chapter for a critical access hospital. In addition, inpatient rehabilitation facilities also must adhere to the admission requirements specified in §412.622.

        (b) The order must be furnished by a qualified and licensed practitioner who has admitting privileges at the hospital as permitted by State law, and who is knowledgeable about the patient's hospital course, medical plan of care, and current condition. The practitioner may not delegate the decision (order) to another individual who is not authorized by the State to admit patients, or has not been granted admitting privileges applicable to that patient by the hospital's medical staff.

        (c) The physician order must be furnished at or before the time of the inpatient admission

        (d)(1) Except as specified in paragraphs (d)(2) and (3) of this section, an inpatient admission is generally appropriate for payment under Medicare Part A when the admitting physician expects the patient to require hospital care that crosses two midnights.

        (i) The expectation of the physician should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. The factors that lead to a particular clinical expectation must be documented in the medical record in order to be granted consideration.

        (ii) If an unforeseen circumstance, such as a beneficiary's death or transfer, results in a shorter beneficiary stay than the physician's expectation of at least 2 midnights, the patient may be considered to be appropriately treated on an inpatient basis, and payment for an inpatient hospital stay may be made under Medicare Part A.

        (2) An inpatient admission for a surgical procedure specified by Medicare as inpatient only under §419.22(n) of this chapter is generally appropriate for payment under Medicare Part A, regardless of the expected duration of care.

        (3) Where the admitting physician expects a patient to require hospital care for only a limited period of time that does not cross 2 midnights, an inpatient admission may be appropriate for payment under Medicare Part A based on the clinical judgment of the admitting physician and medical record support for that determination. The physician's decision should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. In these cases, the factors that lead to the decision to admit the patient as an inpatient must be supported by the medical record in order to be granted consideration.

        The above-cited regulation is often referred to as the “Two Midnight Rule.”¹²

        In deciding whether to formally admit a beneficiary as an inpatient, the court found that physicians generally apply the Two-Midnight Rule, i.e., they order inpatient admission for those beneficiaries for whom they expect to require hospital care that crosses two midnights.¹³

B.  Outpatient Observation Services

CMS defines outpatient observation services as “a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital… In the majority of cases, the decision whether to discharge a patient from the hospital following resolution of the reasons for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours.  In only rare and unusual cases do reasonable and necessary outpatient observation services span more than 48 hours… When a physician orders that a patient receive observation care, the patient’s status is that of an outpatient.”¹⁴

Certainly, many Medicare beneficiaries would argue that outpatient observation services are anything but “well-defined.”  Indeed, Alexander v. Azar was initiated by a nationwide class of patients that had received hospital care as outpatients receiving observation services, many of whom had received such services for many days, and some of whom may have been unaware of their status as outpatients.  As of 2016, if a patient receives outpatient observation services for more than 24 hours, the hospital is required to notify the patient of his or her status as a hospital outpatient receiving observation services.¹⁵  Prior to this, there was no requirement to notify a patient of his or her status as an outpatient.     

In determining whether to order observation services for a patient, the court found that when a patient presents to an emergency department, oftentimes the decision to order observation services, as opposed to inpatient admission, is made based on observation care protocols developed by hospital physicians, rather than the Two-Midnight Rule or any other government-specified criteria.¹⁶

C.    Utilization Review and Converting Hospital Inpatients to Outpatients

Hospital Conditions of Participation (CoPs) require hospitals to have a utilization review plan to review inpatient admissions and the duration of hospital stays for medical necessity.¹⁷  After a physician orders an inpatient admission, the decision next goes through a review process known as utilization review.  A hospital’s utilization review committee (URC) is comprised of at least two physicians (who may not be involved in the care rendered to the patient whose admission is subject to review) in addition to hospital case managers.¹⁸

Testimony presented during the trial established the following URC review process for inpatient admissions:  After an inpatient admission order is entered, a case manager or another URC member reviews the admission for compliance with Medicare regulations and policy.  The first level of review typically is performed by a nurse case manager using a commercial screening tool, such as InterQual or MCG.  If the criteria are satisfied, the review is complete.  If not, a physician member of the utilization review committee performs a second level review.  If the physician believes that an inpatient admission was not medically necessary, then the treating physician is contacted to enter an order for outpatient observation services.  The court was persuaded from the testimony presented that a URC’s determination as to the proper status of a patient (i.e., inpatient versus outpatient) is, at a minimum, highly persuasive to admitting physicians.¹⁹  The process for a URC to convert a hospital inpatient to an outpatient while that patient remains hospitalized is generally referred to as Condition Code 44.²⁰

III.  Implications of Status Determinations on Patients

The repercussions of a patient’s designation as a hospital outpatient receiving observation services, rather than as a hospital inpatient, can be significant.  These consequences can include denial of coverage of necessary skilled nursing facility (SNF) care following a hospitalization, and even responsibility for the costs of the hospital stay itself for those patients lacking Part B or private insurance coverage. 

A.  Responsibility for SNF Costs

Pursuant to 42 C.F.R. § 409.30, in order to receive Part A coverage for post-hospital SNF care, a beneficiary must:

• Have been hospitalized for medically necessary inpatient hospital care for at least three consecutive calendar days, not counting the date of discharge;²¹
• Need post-hospital SNF care;
• Be admitted to the SNF; and
• Receive needed care within 30 calendar days from the date of discharge.

If a beneficiary is hospitalized for three consecutive calendar days but is not designated as an inpatient for three consecutive calendar days (i.e., if the individual is designated as an outpatient receiving observation services), then that beneficiary is not eligible for Part A coverage of SNF care.  Such patients either will be required to cover their own costs of the SNF admission (which the court found could average $10,000), or may even choose to forego SNF care.²²

B.  Responsibility for Hospital Costs

As noted above, not all individuals eligible to elect Part B benefits choose to obtain them.  In order to obtain Part B benefits, an eligible individual²³ must enroll during an enrollment period and pay the required premiums.²⁴  If a patient has not elected to enroll in Medicare Part B, and the patient is not formally admitted to the hospital as an inpatient (or his or her status was changed from inpatient to outpatient with observation services), then the patient may be responsible for the entire cost of the hospital stay, a significant financial burden.   

IV.  Analysis

“To state a due process claim, a plaintiff must show that (1) state action (2) deprived him or her of liberty or property (3) without due process of law.”²⁵  In this case, the court ruled that for those beneficiaries that were initially admitted to the hospital as inpatients, but whose statuses were later changed from inpatient to outpatient, via state action (i.e., exercising coercive action over hospitals to control costs via URC determinations), HHS violated the beneficiaries’ due process rights by depriving them of their property interest in Part A coverage for the hospital services rendered to them without procedural safeguards in place.

A.  Deprivation of Property

In order to establish a property interest in a governmental benefit, a plaintiff must demonstrate that state or federal law confers a “legitimate claim of entitlement” to the benefit.²⁶  A mere expectation of receiving a benefit is insufficient to meet this standard.²⁷  A “legitimate claim of entitlement” is conferred when statutes and regulations governing the distribution of benefits “meaningfully channel official discretion by mandating a defined administrative outcome.”²⁸  In determining whether the meaningful channeling requirement is satisfied, a court considers whether the relevant criteria are sufficiently fixed or are subjective.²⁹  The court in Alexander v. Azar concluded that the plaintiffs did not have a property interest in inpatient admission, but had a property interest in Part A coverage for hospital stays satisfying inpatient admission criteria.³⁰

1.      No Property Interest in Inpatient Admission

The court analyzed the Two-Midnight Rule, CMS sub-regulatory guidance, and CMS enforcement practices,³¹ and concluded that CMS does not require treating physicians to order inpatient admission when a patient satisfies the criteria for same.  42 C.F.R. § 412.3 (d) (1) states that, “an inpatient admission is generally appropriate for payment under Medicare Part A” if the Two-Midnight Rule’s requirements are satisfied.³²  More directly, CMS sub-regulatory guidance states the following:

        Q.  4.10:  Is the physician required to admit the beneficiary as an inpatient once he or she develops the expectation that the beneficiary will require 2 or more midnights of medically necessary hospital care?

        A. 4.10:  … CMS does not require the treating physician to admit the beneficiary as an inpatient in these or other circumstances.³³

Finally, the court also noted that no evidence had been presented that CMS had ever taken action against physicians for failing to admit patients if the Two-Midnight Rule was satisfied.  In summary, the court concluded, “[s]imply put, the Two Midnight Rule does not create a property interest in inpatient admission because it does not require physicians to order such admission when its criteria are satisfied, and thus does not ‘mandat[e] a defined administrative outcome.’”³⁴

2.      Property Interest in Part A Hospital Coverage

On the other hand, the court found that “[t]he decision to provide Part A payment, and thus coverage, is governed by mandatory criteria that meaningfully channel official discretion; thus, while beneficiaries do not have a property interest in inpatient admission, they do have a protected property interest in Part A coverage for a hospital stay that satisfies inpatient admission criteria.”³⁵  In making this finding, the court considered the Two-Midnight Rule, CMS sub-regulatory guidance, and CMS enforcement practices.

As noted above, 42 C.F.R. § 412.3 (d) (1) states that, “an inpatient admission is generally appropriate for payment under Medicare Part A when the physician expects the patient to require hospital care that crosses two midnights.”³⁶  The court acknowledged the ambiguity of this language, i.e., the regulatory language could be read either to require or authorize Part A payment.³⁷  However, the court found that considering the regulation together with CMS sub-regulatory guidance and CMS enforcement practices removed this ambiguity.  The court noted that CMS sub-regulatory guidance directly requires contractors³⁸ to approve claims that satisfy the Two-Midnight Rule:

        B.   General Rule for Expected 2 or More Midnight Stays

When a patient enters a hospital for a surgical procedure, a diagnostic test, or any other treatment and the physician expects the beneficiary will require medically necessary hospital services for 2 or more midnights (including inpatient and pre-admission outpatient time), and orders admission based upon that expectation, the services are generally appropriate for inpatient payment under Medicare Part A. QIOs will approve these cases so long as other requirements are met.³⁹

In addition, the court noted that there “was no evidence that CMS has ever denied a claim satisfying the Two Midnight Rule on the basis of residual discretion, nor any evidence indicating that CMS believed itself to have such authority.”⁴⁰  Therefore, the court concluded that, “the Two Midnight Rule is mandatory, in that it guarantees Part A coverage when its requirements are satisfied, and sufficiently fixed and objective to ‘meaningfully channel official discretion,’ beneficiaries have a property interest in Part A hospital coverage.⁴¹

B.  State Action

1.      Changing Patients’ Status from Inpatient to Outpatient with Observation

Noting that “the United States Constitution regulates only the Government, not private parties,” to succeed, the plaintiffs were required to establish that the challenged conduct (i.e., deprivation of the beneficiaries’ property interest in Part A coverage) constituted state action.  In order to do so, the plaintiffs needed to show a “sufficiently close nexus between the State and the challenged action…”⁴²  A sufficiently close nexus may be shown if a state exercises “coercive power” by providing “significant encouragement,” such that the action can be deemed that of the state.⁴³

In Alexander v. Azar, citing Second Circuit precedent, the court found that URCs’ patient status determinations are both “‘influenced’ by the government’s desire to reduce overpayments and control costs… [and] are largely a consequence of these efforts.”⁴⁴  In summary, the court found that:

[T]o prevent overpayments and reduce costs, rather than review every inpatient admission for compliance with coverage criteria, CMS imposes pressure on hospitals to prevent improper claims for inpatient admissions from being submitted in the first place by ensuring that statutorily mandated URCs review inpatient admissions for compliance with CMS criteria and change the status of patients believed to be ineligible for Part A payment.  UR personnel apply CMS criteria in reviewing inpatient admissions, and CMS directly educates UR personnel on their application.[⁴⁵] CMS thus not only causes URCs to engage in the practice of changing patient statuses from inpatient to observation in order to deny coverage for admissions thought to be ineligible, but also largely determines the outcome of decisions in particular cases by establishing the relevant criteria and educating URCs on their application.  Thus, when a hospital URC causes a patient’s status to be changed to observation, CMS has provided “such significant encouragement” that the URC’s conduct is “fairly attributable to the state” and therefore constitutes “state action.”⁴⁶

2.      Initial Patient Designations as Outpatient with Observation

The court also found that where a beneficiary presented to a hospital, and a physician ordered outpatient observation services (with no prior inpatient admission order), there was no state action.⁴⁷  Evidence presented did not demonstrate that a hospital’s URC was universally, or even typically, involved in such decisions.⁴⁸

C.  Due Process

Once it was determined that a state action (i.e., URC determination to change beneficiaries’ status from inpatient to outpatient with observation services) deprived beneficiaries of a property interest (i.e., Part A coverage for services meeting inpatient criteria), the court next considered whether such deprivation was made without due process of law.  The Supreme Court has held that a three-factor test applies to such considerations:

First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.⁴⁹

The court noted that plaintiffs’ private interest was “weighty.”⁵⁰  As noted above, if beneficiaries are deprived of Part A coverage for hospital services meeting inpatient admission criteria, they also could lose Part A coverage for a subsequent SNF admission or, if not enrolled in Part B, be held responsible for the entire cost of their hospital stays.

Further, the court noted that there was significant risk of error in URCs’ decisions to change beneficiaries’ status from inpatient to outpatient receiving observation services.  The court reiterated that URCs’ determinations often mirror those of Medicare contractors.  Hospitals, who are permitted to appeal determinations made by Medicare contractors, enjoy a significant overturn rate in the Medicare appeals process – reflecting that the determinations made by the Medicare contractors are frequently erroneous.  Since URCs’ decisions are made using the same process as employed by Medicare contractors, it follows that URCs’ decisions are likewise frequently erroneous.⁵¹

Given this high risk of erroneous deprivation of property interest, the court found that additional procedural safeguards would be valuable.  The court weighed these considerations against the fiscal and administrative burdens of adopting additional safeguards, such as promulgation of new regulatory and sub-regulatory guidance, drafting or modifying contracts, developing training materials, drafting a new notice to beneficiaries and seeking and securing additional funding from Congress.  The court was not persuaded that such tasks would constitute an onerous burden, as there already is an appeals process available to providers based on the same underlying regulations and sub-regulatory guidance.⁵²

Based on all of the above, the court concluded the following class members were entitled to appeal the denial of their Part A coverage:

All Medicare beneficiaries who, on or after January 1, 2009:  (1) have been or will have been formally admitted as a hospital inpatient, (2) have been or will have been subsequently reclassified as an outpatient receiving “observation services”; (3) have received or will have received an initial determination or Medicare Outpatient Observation Notice (MOON) indicating that the observation services are not covered under Medicare Part A; and (4) either (a) were not enrolled in Part B coverage at the time of their hospitalization; or (b) stayed at the hospital for three or more consecutive days but were designated as inpatients for fewer than three days, unless more than 30 days has passed after the hospital stay without the beneficiary’s having been admitted to a skilled nursing facility…. ⁵³

V.  Conclusion

HHS may choose to appeal this decision.⁵⁴ Given the flexibility inherent in the two-midnight rule, HHS will likely challenge the court’s finding that the Two-Midnight Rule is “sufficiently fixed and objective” to create a property interest in Part A coverage.  However, for now, the Alexander v. Azar decision provides relief to certain Medicare beneficiaries initially admitted as hospital inpatients only to have their statuses later changed to outpatient during the course of their hospital stays, and who have suffered adverse consequences as a result.  The decision requires HHS to provide eligible class members with appeal rights once these are developed and available.  

1. See Alexander v. Azar, 2020 WL 1430089 (D. Ct. 2020). This case was originally filed on November 3, 2011.  The procedural history is described in Section II of the Memorandum of Decision and can also be reviewed at the University of Michigan Civil Rights Litigation Clearinghouse, available at https://www.clearinghouse.net/detail.php?id=17164. 
2. See Medicare General Information, Eligibility, and Entitlement Manual (CMS Internet-Only Manual 100-01) (MGIEE), Chapter 1, Section 10, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf.
3. Id. See also Sections 1831 and 1832 of the Social Security Act, 42 U.S.C. § 1395j and 42 U.S.C. § 1395k. 
   
   The Medicare program also includes two additional programs:
   
   Medicare Part C:  “A Medicare Advantage Plan (like an HMO or PPO) is another Medicare health plan choice you may have as part of Medicare.  Medicare Advantage Plans, sometimes called “Part C” or “MA Plans,” are offered by private companies approved by Medicare.”  https://www.hhs.gov/answers/medicare-and-medicaid/what-is-medicare-part-c/index.html.“
   
   Medicare Part D is Prescription Drug Coverage.  Since January 1, 2006, everyone with Medicare, regardless of income, health status, or prescription drug usage has had access to prescription drug coverage.”  https://www.hhs.gov/answers/medicare-and-medicaid/what-is-medicare-part-d/index.html.
4. See MGIEE, Chapter 1, Section 10.1, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf.
5. See MGIEE, Chapter 1, Section 10.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf, which provides a brief description of Medicare Part B and lists the services covered under Part B.
6. https://www.cms.gov/Medicare/Medicare-General-Information/MedicareGenInfo.
7. “An individual is eligible to enroll if they are 65 years of age and a citizen or resident alien who meets certain residence requirements.  See MGIEE, Chapter 1, Section 10.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf, which provides a brief description of Medicare Part B and lists the services covered under Part B.
8. See MGIEE, Chapter 1, Section 10.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf, which provides a brief description of Medicare Part B and lists the services covered under Part B.
9. See 42 U.S.C. § 1395x (b), 42 C.F.R. § 409.10 and Medicare Benefit Policy Manual (CMS Internet-Only Manual 100-02) (MBPM), Chapter 1 Section 1.
10. As summarized by the Medicare Claims Processing Manual (CMS Internet-Only Manual 100-04), Chapter 4, Section 180.7, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c04.pdf: 
    
    Section 1833(t)(1)(B)(i) of the Act allows CMS to define the services for which payment under the OPPS is appropriate and the Secretary has determined that the services designated to be “inpatient only” services are not appropriate to be furnished in a hospital outpatient department. “Inpatient only” services are generally, but not always, surgical services that require inpatient care because of the nature of the procedure, the typical underlying physical condition of patients who require the service, or the need for at least 24 hours of postoperative recovery time or monitoring before the patient can be safely discharged. An example of an “inpatient only” service is CPT code 33513, “Coronary artery bypass, vein only; four coronary venous grafts.” The designation of services to be “inpatient-only” is open to public comment each year as part of the annual rulemaking process. Procedures removed from the “inpatient only” list may be appropriately furnished in either the inpatient or outpatient settings and such procedures continue to be payable when furnished in the inpatient setting.
    
    A list of “inpatient only” procedures is available as Addendum E to the annual Outpatient Prospective Payment System (OPPS) Final Rule.  The CY 2020 OPPS Final Rule is available at https://www.cms.gov/apps/ama/license.asp?file=/Medicare/Medicare-Fee-for-Service-Payment/HospitalOutpatientPPS/Downloads/CMS-1717-FC-2020-OPPS-Addenda.zip.
    
11. 78 Fed. Reg 50496 at 50945 (August 19, 2013).
12. Prior to implementation of the Two Midnight Rule in 2013, CMS defined the term “inpatient” via sub-regulatory guidance set forth in Chapter 1 Section 10 of the MBPM.  CMS’s prior policy established a 24-hour benchmark for inpatient admissions (i.e., “Physicians… should order admission for patients who are expected to need hospital care for 24 hours or more and treat other patients on an outpatient basis”).  The court cited commentary to the Two Midnight Rule, noting “CMS did not view the Two Midnight Rule as a significant departure from its previous policy establishing a 24-hour benchmark for inpatient admissions.  In its notice of final rulemaking accompanying the Two Midnight Rule, it explained that the Two Midnight Rule ‘simply modifies our previous guidance to specify that the relevant 24 hours are those encompassed by 2 midnights.’”  Alexander at p. 8.
    
    The court broke down its decision into the pre-Two Midnight Rule time period and then the Two Midnight Rule time period.  However, because the court found that both eras relied on a time-based admission criterion, there was no meaningful difference between the two criteria.  Therefore, this article will focus on the Two-Midnight Rule time period.
    
    For an in-depth analysis of CMS’s criteria for inpatient admissions, see “Billing for and Appealing Denials of Inpatient Hospital Services:  Where have we been?  Where are we now?  What does the future hold?”  by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., ABA Health Lawyer Vol. 26 No. 2, December 2013.
13. Alexander at p. 17.
14. MBPM, Chapter 6, Section 20.6, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c06.pdf.
15. If a patient receives outpatient observation services for more than 24 hours, hospital Conditions of Participation (CoPs) require that the hospital provide written notice and an oral explanation to the patient, which includes the following: (1) the status of the patient as an outpatient receiving observation services and the reasons for such status determination; (2) the implications of such status; and (with respect to the written notice) (3) the signature of the patient or a person acting on the patient’s behalf.  The written notice is known as the Medicare Outpatient Observation Notice, or MOON. See  https://www.cms.gov/Medicare/Medicare-General-Information/BNI/MOON.
    
    For more information regarding the required notice, see “Be on NOTICE:  CMS’s Proposed Rule on the NOTICE Act Has Been Published,” by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., ABA Health eSource, Vol. 12, No. 10, June 2016.
16. Alexander at p. 16.
17. 42 U.S.C. § 1395x (k) (1) and 42 C.F.R. § 482.30.
    
    Medicare CoPs set forth conditions that hospitals “must meet in order to begin and continue participating in the Medicare and Medicaid programs.”  See https://www.cms.gov/Regulations-and-Guidance/Legislation/CFCsAndCoPs.
    
    Note that effective March 1, 2020 and through the end of the emergency declaration related to the 2019 Novel Coronavirus Disease (COVID-19), in order to assist providers contain the spread of COVID-19, CMS issued a waiver of the utilization review CoP, “so long as [the waiver is not] inconsistent with a state’s emergency preparedness or pandemic plan.”  https://www.cms.gov/files/document/summary-covid-19-emergency-declaration-waivers.pdf
18. 42 U.S.C. § 1395x (k) (1) and 42 C.F.R. § 482.30. 
19. Alexander at p. 21.
20. Requirements for Condition Code 44 are set forth in the Medicare Claims Processing Manual (CMS Internet-Only Manual 100-04) (MCPM), Chapter 1, Section 50.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c01.pdf.
21. Note that, as of March 13, 2020, the requirement for a 3-day inpatient hospital stay has been temporarily waived for beneficiaries affected by the COVID-19 health emergency.  See https://www.cms.gov/files/document/coronavirus-snf-1812f-waiver.pdf.
22. Alexander at p. 23.
23. “An individual is eligible to enroll if they are 65 years of age and a citizen or resident alien who meets certain residence requirements.  See MGIEE, Chapter 1, Section 10.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf, which provides a brief description of Medicare Part B and lists the services covered under Part B.
24. See MGIEE, Chapter 1, Section 10.3, available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/ge101c01.pdf, which provides a brief description of Medicare Part B and lists the services covered under Part B.
25. Alexander at p. 28 (internal citations omitted).
26. Id.
27. Id.
28. Id. (internal citations omitted).
29. Id.
30. Id. at pp. 30-37.
31. The court also noted that:
    
    Although property interests are most commonly created by statutes, regulations or other formal policies, they may also “be established through such diverse sources of unwritten common law and informal institutional policies and procedures.” 
    
    Id. at p. 30.  (internal citations omitted).  The court considered whether physician admission practices were sufficient to establish a property interest in inpatient admissions but found that they did not.
    
    Here, the Court heard credible testimony from several treating physicians that they order inpatient admission when they expect a patient to require hospital care spanning two midnights, as well as credible testimony from Plaintiff’s expert Dr. Sheehy that this practice is “typical” among hospitalists.  This practice falls short, however, of creating a property interest… Here… the Court heard no evidence of an informal, mutually explicit understanding between physicians and beneficiaries (let alone an implied contract) that would require treating physicians to order inpatient admission upon forming a two-midnight expectation.
    
    Id. at p. 33.
32. Emphasis added.  The decision also analyzes property interests under the pre-Two Midnight Rule inpatient hospital admissions criteria.
33. See  https://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/Medical-Review/Downloads/Questions_andAnswersRelatingtoPatientStatusReviewsforPosting_31214.pdf.
34. Alexander at p. 33 (internal citations omitted).
35. Id. at p. 35.
36. Emphasis added.
37. Alexander at p. 36.
38. Beginning on October 1, 2015, the Beneficiary and Family Centered Care (BFCC) Quality Improvement Organizations (QIOs) assumed responsibility for conducting initial patient status reviews of providers to determine the appropriateness of Part A payment for short stay inpatient hospital claims. These reviews were previously conducted by the Medicare Administrative Contractors (MACs). See  https://www.cms.gov/research-statistics-data-and-systems/monitoring-programs/medicare-ffs-compliance-programs/medical-review/inpatienthospitalreviews.  Before the MACs, the Recovery Auditors were authorized to perform the initial reviews of inpatient hospital claims to determine whether patients’ status was appropriate.  See “Billing for and Appealing Denials of Inpatient Hospital Services:  Where have we been?  Where are we now?  What does the future hold?”  by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., ABA Health Lawyer Vol. 26 No. 2, December 2013.
39. See Reviewing Short Stay Hospital Claims for Patient Status, available at https://qioprogram.org/sites/default/files/20160105-Reviewing%20Short%20Stay%20Hospital%20Claims%20for%20Patient%20Status%20Final.pdf (emphasis added).
    
    The court found that this instruction served to render the Two-Midnight Rule sufficiently fixed and objective to “meaningfully channel official discretion.”  Alexander at p. 29.  Ignored by this portion of the decision is that medical reviewers in fact have not consistently applied the Two-Midnight Rule.  On May 4, 2016, CMS temporarily paused the BFCC-QIOs’ performance of initial patient status reviews to determine the appropriateness of Part A payment.  “CMS took this action in an effort to promote consistent application of the medical review policies regarding patient status for short hospital stays and to allow time to improve standardization in the BFCC-QIOs’ review process.” See  https://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/Medical-Review/InpatientHospitalReviews.
40. Alexander at p. 36.
    
    In this very lengthy and otherwise thorough decision, the court also did not address the inherent subjectivity within the Two Midnight Rule interjected by the case-by-case physician judgment exception.  Pursuant to 42 C.F.R. § 412.3 (d) (3), permitting:  “Where the admitting physician expects a patient to require hospital care for only a limited period of time that does not cross 2 midnights, an inpatient admission may be appropriate for payment under Medicare Part A based on the clinical judgment of the admitting physician and medical record support for that determination.”   For a comprehensive examination of the case-by-case physician judgment exception, see “Implications of the 2016 OPPS Final Rule:  CMS Finalizes Revisions to its 2-Midnight Rule for Inpatient Hospital Admissions,” by Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., ABA Health eSource, Vol. 12, no. 4, December 2015. 
41. Alexander at p. 42.
42. Internal citations omitted. 
43. There are three primary tests to establish “state action”:
    
    (1) [when] the entity acts pursuant to the coercive power of the state or is controlled by the state (“the compulsion test”); (2) when the state provides significant encouragement to the entity, the entity is a willful participant in joint activity with the state, or the entity’s functions are entwined with state policies (“the joint action test” or “close nexus tests”); or (3) when the entity has been delegated a public function by the state (“the public function test”).
    
    Fabrikant v. French, 691 F.3d 193 (2^nd Cir. 2012).
44. Id. at p. 47, citing Catanzano by Catanzano v. Dowling, 60 F.3d 113 (2d Cir. 1995).
45. When a QIO denies an inpatient hospital claim as not medically necessary, the QIO provides an opportunity for an educational session with the hospital.  These educational sessions typically are attended by members of the URC.  See e.g., https://www.calhospital.org/sites/main/files/file-attachments/livanta_webinar_presentation.pdf.
46. Alexander at p. 48.
47. Id.
48. Id.
49. Id. at p. 49, citing Mathews v. Eldridge, 424 U.S. 319 (1976).
50. Id. at p. 49.
51. Id. at p. 50.
52. Id. at p. 51.  For a comprehensive review of the existing fee-for-service Medicare appeals process, see Jessica L. Gustafson, Esq. and Abby Pendleton, Esq., “What Are Medicare Appeals,” ABA Book Publishing (2014), available at  https://www.americanbar.org/products/inv/book/183794845/.  For an overview of the QIO discharge appeals process, see https://qioprogram.org/make-appeal.
53. Alexander at p. 51. 
    
54. Pursuant to Federal Rules of Appellate Procedure, Rule 4, an appeal must be filed within 60 days of a decision when one of the parties is the federal government, an agency, or U.S. officer/employee in his/her official capacity.  As the Alexander v. Azar decision was issued on March 24, 2020, the deadline is May 23, 2020 to file an appeal.

About the Authors

Jessica L. Gustafson is a founding shareholder with the healthcare law firm of The Health Law Partners, P.C. Ms. Gustafson co-leads the firm’s Recovery Audit (RAC) and Medicare appeals practice group, and specializes in a number of areas, including Medicare, Medicaid and other payor audit appeals; healthcare regulatory matters; compliance matters; reimbursement; and contracting matters. She is a member of the editorial board of the ABA Health eSource, the American Bar Association Health Law Section’s monthly online magazine. She can be reached at [email protected].

Abby Pendleton, Esq. is a founding shareholder with the healthcare law firm of The Health Law Partners, P.C. The firm represents hospitals, physicians, and other healthcare providers and suppliers with respect to their healthcare legal needs. Ms. Pendleton co-leads the firm’s Recovery Audit (“RAC”) and Medicare appeals practice group, and specializes in a number of areas, including Medicare, Medicaid and other payor audit defense and appeals; healthcare regulatory matters; compliance; HIPAA privacy and security compliance matters; overpayment refunds; reimbursement and contracting matters; and payor de-participation matters. Ms. Pendleton can be reached  at [email protected].