Hospitalizations with observation services and the Medicare Part A complex appeals process at three academic medical centers

Hospitalists and other inpatient providers are familiar with hospitalizations classified observation. The Centers for Medicare & Medicaid Services (CMS) uses the “2-midnight rule” to distinguish between outpatient services (which include all observation stays) and inpatient services for most hospitalizations. The rule states that “inpatient admissions will generally be payable … if the admitting practitioner expected the patient to require a hospital stay that crossed two midnights and the medical record supports that reasonable expectation.”¹

Hospitalization under inpatient versus outpatient status is a billing distinction that can have significant financial consequences for patients, providers, and hospitals. The inpatient or outpatient observation orders written by hospitalists and other hospital-based providers direct billing based on CMS and other third-party regulation. However, providers may have variable expertise writing such orders. To audit the correct use of the visit-status orders by hospital providers, CMS uses recovery auditors (RAs), also referred to as recovery audit contractors.^2,3

Historically, RAs had up to 3 years from date of service (DOS) to perform an audit, which involves asking a hospital for a medical record for a particular stay. The audit timeline includes 45 days for hospitals to produce such documentation, and 60 days for the RA either to agree with the hospital’s billing or to make an “overpayment determination” that the hospital should have billed Medicare Part B (outpatient) instead of Part A (inpatient).^3,4 The hospital may either accept the RA decision, or contest it by using the pre-appeals discussion period or by directly entering the 5-level Medicare administrative appeals process.^3,4 Level 1 and Level 2 appeals are heard by a government contractor, Level 3 by an administrative law judge (ALJ), Level 4 by a Medicare appeals council, and Level 5 by a federal district court. These different appeal types have different deadlines (Appendix 1). The deadlines for hospitals and government responses beyond Level 1 are set by Congress and enforced by CMS,^3,4 and CMS sets discussion period timelines. Hospitals that miss an appeals deadline automatically default their appeals request, but there are no penalties for missed government deadlines.

Recently, there has been increased scrutiny of the audit-and-appeals process of outpatient and inpatient status determinations.⁵ Despite the 2-midnight rule, the Medicare Benefit Policy Manual (MBPM) retains the passage: “Physicians should use a 24-hour period as a benchmark, i.e., they 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.”⁶ Auditors often cite “medical necessity” in their decisions, which is not well defined in the MBPM and can be open to different interpretation. This lack of clarity likely contributed to the large number of status determination discrepancies between providers and RAs, thereby creating a federal appeals backlog that caused the Office of Medicare Hearings and Appeals to halt hospital appeals assignments⁷ and prompted an ongoing lawsuit against CMS regarding the lengthy appeals process.⁴ To address these problems and clear the appeals backlog, CMS proposed a “$0.68 settlement offer.”⁴ The settlement “offered an administrative agreement to any hospital willing to withdraw their pending appeals in exchange for timely partial payment (68% of the net allowable amount)”⁸ and paid out almost $1.5 billion to the third of eligible hospitals that accepted the offer.⁹ CMS also made programmatic improvements to the RA program.¹⁰

Despite these efforts, problems remain. On June 9, 2016, the U.S. Government Accountability Office (GAO) published Medicare Fee-for-Service: Opportunities Remain to Improve Appeals Process, citing an approximate 2000% increase in hospital inpatient appeals during the period 2010–2014 and the concern that appeals requests will continue to exceed adjudication capabilities.¹¹ On July 5, 2016, CMS issued its proposed rule for appeals reform that allows the Medicare Appeals Council (Level 4) to set precedents which would be binding at lower levels and allows senior attorneys to handle some cases and effectively increase manpower at the Level 3 (ALJ). In addition, CMS proposes to revise the method for calculating dollars at risk needed to schedule an ALJ hearing, and develop methods to better adjudicate similar claims, and other process improvements aimed at decreasing the more than 750,000 current claims awaiting ALJ decisions.¹²

We conducted a study to better understand the Medicare appeals process in the context of the proposed CMS reforms by investigating all appeals reaching Level 3 at Johns Hopkins Hospital (JHH), University of Wisconsin Hospitals and Clinics (UWHC), and University of Utah Hospital (UU). Because relatively few cases nationally are appealed beyond Level 3, the study focused on most-relevant data.³ We examined time spent at each appeal Level and whether it met federally mandated deadlines, as well as the percentage accountable to hospitals versus government contractors or ALJs. We also recorded the overturn rate at Level 3 and evaluated standardized text in de-identified decision letters to determine criteria cited by contractors in their decisions to deny hospital appeal requests.