OIG Reports on Observation Stays and Short Inpatient Stays for Medicare Beneficiaries

by King & Spalding

The Office of Inspector General (OIG) recently published the results of a study regarding hospitals’ use of observation stays and short inpatient stays for Medicare beneficiaries, citing CMS concerns as one of the reasons for the study.  CMS’s concerns, as noted by the OIG, included beneficiaries spending long periods of time in observation stays without inpatient admission; beneficiaries potentially paying more as outpatients than if admitted as inpatients; beneficiaries who are not admitted as inpatients not qualifying under Medicare for skilled nursing facility (SNF) services following discharge from the hospital; and short inpatient stays (i.e., stays lasting fewer than two nights). 

The OIG’s study reviewed (1) paid Medicare Part A and Part B hospital claims from the National Claims History file with dates of service in 2012; and (2) SNF Part A claims for beneficiaries who received hospital services in 2012.  Hospitals not paid under both the OPPS and the IPPS, such as long-term care hospitals, critical access hospitals, and hospitals in Maryland that are paid under different systems, were excluded from the study.  The OIG found that:

  • Hospitals provided observation services to Medicare beneficiaries in approximately 1.5 million stays, during which hospitals determined after short term treatment and assessment that the individuals did not need to be admitted as inpatients.  For another approximately 600,000 stays, observation services led to inpatient admissions.
  • Beneficiaries in observation stays were most often treated for chest pain, with the second most common reason for treatment being digestive disorders.
  • In 55 percent of observation stays, beneficiaries spent one night in the hospital; in 26 percent of stays, beneficiaries spent two nights; and in 11 percent of stays, beneficiaries spent at least three nights.
  • Medicare beneficiaries had almost 1.4 million outpatient stays that lasted at least one night, but were not coded as observation stays, with most of the stays resulting in one night in the hospital.
  • In 2012, Medicare beneficiaries had more than 1.1 million short inpatient stays, which are stays lasting fewer than two nights.  For 90 percent of these stays, beneficiaries spent one night in the hospital, while beneficiaries spent less than one night in the hospital for the remaining 10 percent of stays.  Like beneficiaries in observation stays, those in most short inpatient stays were first treated in the emergency department and often had the same reasons for admission as those in observation status, such as chest pain.
  • Medicare paid $5.9 billion for short inpatient stays, an average of $5,142 per stay, but paid $2.6 billion for observation stays, an average of $1,741 per stay.  Beneficiaries also paid more for short inpatient stays than for observation stays.
  • Beneficiaries had 617,702 hospital stays that lasted at least three nights, but did not include three inpatient nights; these beneficiaries did not qualify for SNF services under Medicare.

As noted in the OIG study, CMS had earlier proposed policy changes via a Notice of Proposed Rulemaking (NPRM) that would substantially affect how hospitals bill for these stays.  78 Fed. Reg. 27485, 27644-50 (May 10, 2013).  In the NPRM, CMS proposed that contractors would presume hospital stays lasting two nights  (i.e., encounters crossing two midnights) or more were reasonable and necessary and therefore qualified for payment as inpatient admissions.  For stays shorter than two nights, contractors would presume the stay should be paid as an outpatient stay, rather than as an inpatient admission, unless there was clear physician documentation in the medical record supporting the physician’s order and expectation that the beneficiary required care spanning at least two midnights even though that did not ultimately occur.

In general, CMS adopted the above proposals as final in the FY 2014 Hospital IPPS Final Rule.  CMS clarified that the time the beneficiary spent as an outpatient before the inpatient admission order is written will not be considered inpatient time, but may be considered during the medical review process for the limited purpose of determining whether the two-midnight benchmark was met.  However, CMS noted that such time may not be retroactively included as inpatient care for skilled nursing care eligibility or other benefit purposes.  CMS also stated that its actuaries continue to estimate that there will be approximately $220 million in additional expenditures resulting from the “two midnights” policy due to some patient encounters spanning more than two midnights moving to the IPPS from the OPPS and some encounters spanning fewer than two midnights moving from the IPPS to the OPPS.

The OIG report may be read here.  A more detailed discussion on the two midnights policy may be read in the summary of the FY 2014 Hospital IPPS Final Rule in this edition of Health Headlines.

Reporter, Christina A. Gonzalez, Houston, +1 713 276 7340, cagonzalez@kslaw.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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