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From Health Law Daily, July 30, 2013

OIG studies hospitals’ billing practices for observation, outpatient and inpatient stays

By Michelle L. Oxman, JD, LLM

The Office of Inspector General (OIG) has found that Medicare patients commonly spend at least one night in the hospital in observation status, which can cost both the beneficiaries and the Medicare program considerably more than the same services furnished during in inpatient stay (OIG Report, No. OEI-02-12-00040, July 29, 2013). Hospitals’ practices vary considerably, and there is a great deal of overlap among the most common diagnoses for short inpatient stays, long outpatient stays, and outpatient stays specifically billed as observation services. Recent changes in payment policy and additional changes outlined in two Proposed rules would significantly affect hospitals’ billing practices.

Defining observation services. Observation services are a type of outpatient services comprising assessments and treatments that hospital staff perform in order to determine whether a patient should be admitted as an inpatient. Patients in observation status most often present at the emergency room; occasionally they may require additional services after an operation, testing, or an appointment in a clinic.

Reasons for observation services. In 2012, Medicare beneficiaries had 1.5 million observation stays. Most often these beneficiaries came to the hospital because of chest pain, followed by digestive disorders, fainting, and “signs and symptoms” such as general pain and malaise. Short inpatient stays involved similar diagnoses. Ninety-two percent of beneficiaries receiving observation services spent at least one night in the hospital; 55 percent spent one night, 26 percent spent two nights, and 11 percent spent three nights in the hospital under observation. An unknown number of the 1.4 million long outpatient stays were for observation services because observation services are not always separately reimbursable.

Competing concerns. The Medicare payment rules have led to competing concerns and posed a financial risk to hospitals. Until a March 2013 CMS Ruling, if a hospital admitted a patient and a Medicare contractor determined that the admission was unnecessary, the hospital would not be paid even for medically necessary services that could have been covered as outpatient services. But Medicare beneficiaries who spend three nights in the hospital will not qualify for Medicare coverage of skilled nursing services unless all three nights were spent as admitted inpatients.

At the same time, many outpatient observation services are billed as fee-for-service; in a long-term outpatient stay, the same services may cost Medicare and the beneficiary much more than they would have cost as inpatient services, but an inpatient stay of fewer than two nights also is more expensive than outpatient services.

Policy changes. The CMS Ruling allows hospitals whose claims for inpatient services are denied as not medically necessary to submit a bill for medically necessary services that would have been covered as outpatient services. The Proposed rule issued the same day describes the same policy. When finalized, the rule would replace the ruling. The OIG also stated that the inpatient prospective payment system (IPPS) Proposed rule, if adopted, would establish a presumption that a hospital stay of two nights or more was medically necessary, while a shorter inpatient stay would not. The effect of this proposed rule may depend on the treatment of any nights spent in observation status.

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