Stephanie Mackowiak, RN, ESQ

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Medicare patients are increasingly hospitalized as outpatients under observation. From 2006 to 2012, outpatient services grew nationally by 28.5%, whereas inpatient discharges decreased by 12.6% per Medicare beneficiary.[1] This increased use of observation stays for hospitalized Medicare beneficiaries and the recent Centers for Medicare & Medicaid Services (CMS) 2‐Midnight rule for determination of visit status are increasing areas of concern for hospitals, policymakers, and the public,[2] as patients hospitalized under observation are not covered by Medicare Part A hospital insurance, are subject to uncapped out‐of‐pocket charges under Medicare Part B, and may be billed by the hospital for certain medications. Additionally, Medicare beneficiaries hospitalized in outpatient status, which includes all hospitalizations under observation, do not qualify for skilled nursing facility care benefits after discharge, which requires a stay that spans at least 3 consecutive midnights as an inpatient.[3]

In contrast, the federal Recovery Audit program, previously called and still commonly referred to as the Recovery Audit Contractor (RAC) program, responsible for postpayment review of inpatient claims, has received relatively little attention. Established in 2006, and fully operationalized in federal fiscal year (FY) 2010,[4] RACs are private government contractors granted the authority to audit hospital charts for appropriate medical necessity, which can consider whether the care delivered was indicated and whether it was delivered in the appropriate Medicare visit status, outpatient or inpatient. Criteria for hospitalization status (inpatient vs outpatient) as defined in the Medicare Conditions of Participation, often allow for subjectivity (medical judgment) in determining which status is appropriate.[5] Hospitals may contest RAC decisions and payment denials through a preappeals discussion period, then through a 5‐level appeals process. Although early appeals occur between the hospital and private contractors, appeals reaching level 3 are heard by the Department of Health and Human Services (HHS) Office of Medicare Hearings and Appeals (OMHA) Administrative Law Judges (ALJ). Levels 4 (Medicare Appeals Council) and 5 (United States District Court) appeals are also handled by the federal government.[6]

Medicare fraud and abuse should not be tolerated, and systematic surveillance needs to be an integral part of the Medicare program.[4] However, there are increasing concerns that the RAC program has resulted in overaggressive denials.[7, 8] Unlike other Medicare contractors, RAC auditors are paid a contingency fee based on the percentage of hospital payment recouped for cases they audit and deny for improper payment.[4] RACs are not subject to any financial penalty for cases they deny but are overturned in the discussion period or in the appeals process. This may create an incentive system that financially encourages RACs to assert improper payment, and the current system lacks both transparency and clear performance metrics for auditors. Of particular concern are Medicare Part A complex reviews, the most fiscally impactful area of RAC activity. According to CMS FY 2013 data, 41.1% of all claims with collections were complex reviews, yet these claims accounted for almost all (95.2%) of total dollars recovered by the RACs, with almost all (96%) dollars recovered being from Part A claims.[9] Complex reviews involve an auditor retrospectively and manually reviewing a medical record and then using his or her clinical and related professional judgment to decide whether the care was medically necessary. This is compared to automated coding or billing reviews, which are based solely on claims data.

Increased RAC activity and the willingness of hospitals to challenge RAC findings of improper payment has led to an increase in appeals volume that has overloaded the appeals process. On March 13, 2013, CMS offered hospitals the ability to rebill Medicare Part B as an appeals alternative.[10] This did not temper level 3 appeals requests received by the OMHA, which increased from 1250 per week in January 2012 to over 15,000 per week by November 2013.[11] Citing an overwhelmingly increased rate of appeal submissions and the resultant backlog, the OMHA decided to freeze new hospital appeals assignments in December 2013.[11] In another attempt to clear the backlog, on August 29, 2014, CMS offered a settlement that would pay hospitals 68% of the net allowable amount of the original Part A claim (minus any beneficiary deductibles) if a hospital agreed to concede all of its eligible appeals.[12] Notably, cases settled under this agreement would remain officially categorized as denied for improper payment.

The HHS Office of Inspector General (OIG)[4] and the CMS[9, 13, 14] have produced recent reports of RAC auditing and appeals activity that contain variable numbers that conflict with hospital accounts of auditing and appeals activity.[15, 16] In addition to these conflicting reports, little is known about RAC auditing of individual programs over time, the length of time cases spend in appeals, and staff required to navigate the audit and appeals processes. Given these questions, and the importance of RAC auditing pressure in the growth of hospital observation care, we conducted a retrospective descriptive study of all RAC activity for complex Medicare Part A alleged overpayment determinations at the Johns Hopkins Hospital, the University of Utah, and University of Wisconsin Hospital and Clinics for calendar years 2010 to 2013.

METHODS

The University of Wisconsin‐Madison Health Sciences institutional review board (IRB) and the Johns Hopkins Hospital IRB did not require review of this study. The University of Utah received an exemption. All 3 hospitals are tertiary care academic medical centers. The University of Wisconsin Hospital and Clinics (UWHC) is a 592‐bed hospital located in Madison, Wisconsin,[17] the Johns Hopkins Hospital (JHH) is a 1145‐bed medical center located in Baltimore, Maryland,[18] and the University of Utah Hospital (UU) is a 770‐bed facility in Salt Lake City, Utah (information available upon request). Each hospital is under a different RAC, representing 3 of the 4 RAC regions, and each is under a different Medicare Administrative Contractor, contractors responsible for level 1 appeals. The 3 hospitals have the same Qualified Independent Contractor responsible for level 2 appeals.

For the purposes of this study, any chart or medical record requested for review by an RAC was considered a medical necessity chart request or an audit. The terms overpayment determinations and denials were used interchangeably to describe audits the RACs alleged did not meet medical necessity for Medicare Part A billing. As previously described, the term medical necessity specifically considered not only whether actual medical services were appropriate, but also whether the services were delivered in the appropriate status, outpatient or inpatient. Appeals and/or request for discussion were cases where the overpayment determination was disputed and challenged by the hospital.

All complex review Medicare Part A RAC medical record requests by date of RAC request from the official start of the RAC program, January 1, 2010,[4] to December 31, 2013, were included in this study. Medical record requests for automated reviews that related to coding and billing clarifications were not included in this study, nor were complex Medicare Part B reviews, complex reviews for inpatient rehabilitation facilities, or psychiatric day hospitalizations. Notably, JHH is a Periodic Interim Payment (PIP) Medicare hospital, which is a reimbursement mechanism where biweekly payments [are] made to a Provider enrolled in the PIP program, and are based on the hospital's estimate of applicable Medicare reimbursement for the current cost report period.[19] Because PIP payments are made collectively to the hospital based on historical data, adjustments for individual inpatients could not be easily adjudicated and processed. Due to the increased complexity of this reimbursement mechanism, RAC audits did not begin at JHH until 2012. In addition, in contrast to the other 2 institutions, all of the RAC complex review audits at JHH in 2013 were for Part B cases, such as disputing need for intensity‐modulated radiation therapy versus conventional radiation therapy, or contesting the medical necessity of blepharoplasty. As a result, JHH had complex Part A review audits only for 2012 during the study time period. All data were deidentified prior to review by investigators.

As RACs can audit charts for up to 3 years after the bill is submitted,[13] a chart request in 2013 may represent a 2010 hospitalization, but for purposes of this study, was logged as a 2013 case. There currently is no standard methodology to calculate time spent in appeals. The UWHC and JHH calculate time in discussion or appeals from the day the discussion or appeal was initiated by the hospital, and the UU calculates the time in appeals from the date of the findings letter from the RAC, which makes comparable recorded time in appeals longer at UU (estimated 510 days for 20112013 cases, up to 120 days for 2010 cases).Time in appeals includes all cases that remain in the discussion or appeals process as of June 30, 2014.

The RAC process is as follows (Tables 1 and 2):

1. The RAC requests hospital claims (RAC Medical Necessity Chart Requests [Audits]).
2. The RAC either concludes the hospital claim was compliant as filed/paid and the process ends or the RAC asserts improper payment and requests repayment (RAC Overpayment Determinations of Requested Charts [Denials]).
3. The hospital makes an initial decision to not contest the RAC decision (and repay), or to dispute the decision (Hospital Disputes Overpayment Determination [Appeal/Discussion]). Prior to filing an appeal, the hospital may request a discussion of the case with an RAC medical director, during which the RAC medical director can overturn the original determination. If the RAC declines to overturn the decision in discussion, the hospital may proceed with a formal appeal. Although CMS does not calculate the discussion period as part of the appeals process,[12] overpayment determinations contested by the hospital in either discussion or appeal represent the sum total of RAC denials disputed by the hospital.

4. Contested cases have 1 of 4 outcomes:

   • Contested overpayment determinations can be decided in favor of the hospital (Discussion or Appeal Decided in Favor of Hospital or RAC Withdrew)

   • Contested overpayment determinations can be decided in favor of the RAC during the appeal process, and either the hospital exhausts the appeal process or elects not to take the appeal to the next level. Although the appeals process has 5 levels, no cases at our 3 hospitals have reached level 4 or 5, so cases without a decision to date remain in appeals at 1 of the first 3 levels (Case Still in Discussion or Appeals).[4]
   • Hospital may miss an appeal deadline (Hospital Missed Appeal Deadline at Any Level) and the case is automatically decided in favor of the RAC.
   • As of March 13, 2013,[10] for appeals that meet certain criteria and involve dispute over the billing of hospital services under Part A, CMS allowed hospitals to withdraw an appeal and rebill Medicare Part B. Prior to this time, hospitals could rebill for a very limited list of ancillary Part B Only services, and only within the 1‐year timely filing period.[13] Due to the lengthy appeals process and associated legal and administrative costs, hospitals may not agree with the RAC determination but make a business decision to recoup some payment under this mechanism (Hospital Chose to Rebill as Part B During Discussion or Appeals Process).

The administration at each hospital provided labor estimates for workforce dedicated to the review process generated by the RACs based on hourly accounting of one‐quarter of work during 2012, updated to FY 2014 accounting (Table 3). Concurrent case management status determination work was not included in these numbers due to the difficulty in solely attributing concurrent review workforce numbers to the RACs, as concurrent case management is a CMS Condition of Participation irrespective of the RAC program.

RESULTS

CONCLUSIONS

In this study of 3 academic medical centers, there was a more than 2‐fold increase in RAC audits and a nearly 3‐fold rise in overpayment determinations over the last 2 calendar years of the study, resulting in a more than 3‐fold increase in appeals or requests for discussion in 2012 to 2013 compared to 2010 to 2011. In addition, although CMS manually reviews less than 0.3% of submitted claims each year through programs such as the Recovery Audit Program,[9] at the study hospitals, complex Part A RAC audits occurred at a rate more than 25 times that (8.0%), suggesting that these types of claims are a disproportionate focus of auditing activity. The high overall complex Part A audit rate, accompanied by acceleration of RAC activity and the hospitals' increased willingness to dispute RAC overpayment determinations each year, if representative of similar institutions, would explain the appeals backlog, most notably at the ALJ (level 3) level. Importantly, none of these Part A complex review denials contested a need for the medical care delivered, demonstrating that much of the RAC process at the hospitals focused exclusively on the nuances of medical necessity and variation in interpretation of CMS guidelines that related to whether hospital care should be provided under inpatient or outpatient status.

These data also show continued aggressive RAC audit activity despite an increasing overturn rate in favor of the hospitals in discussion or on appeal each year (from 36.0% in 2010 to 68.0% in 2013). The majority of the hospitals' successful decisions occurred in the discussion period, when the hospital had the opportunity to review the denial with the RAC medical director, a physician, prior to beginning the official appeals process. The 33% overturn rate found in the discussion period represents an error rate by the initial RAC auditors that was internally verified by the RAC medical director. The RAC internal error rate was replicated at 3 different RACs, highlighting internal process problems across the RAC system. This is concerning, because the discussion period is not considered part of the formal appeals process, so these cases are not appearing in CMS or OIG reports of RAC activity, leading to an underestimation of the true successful overturned denial rates at the 3 study hospitals, and likely many other hospitals.

The study hospitals are also being denied timely due process and payments for services delivered. The hospitals currently face an appeals process that, on average, far exceeds 500 days. In almost half of the contested overpayment determinations, the hospitals withdrew a case or rebilled Part B, not due to agreement with a RAC determination, but to avoid the lengthy, cumbersome, and expensive appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. This is concerning, as cases withdrawn in the appeals process are considered improper payments in federal reports, despite a large number of these cases being withdrawn simply to avoid an inefficient appeals process. Notably, Medicare is not adhering to its own rules, which require appeals to be heard in a timely manner, specifically 60 days for level 1 or 2 appeals, and 90 days for a level 3 appeal,[6, 20] even though the hospitals lost the ability to appeal cases when they missed a deadline. Even if hospitals agreed to the recent 68% settlement offer[12] from CMS, appeals may reaccumulate without auditing reform. As noted earlier, this recent settlement offer came more than a year after the enhanced ability to rebill denied Part A claims for Part B, yet the backlog remains.

This study also showed that a large hospital workforce is required to manage the lengthy audit and appeals process generated by RACs. These staff are paid with funds that could be used to provide direct patient care or internal process improvement. The federal government also directly pays for unchecked RAC activity through the complex appeals process. Any report of dollars that RACs recoup for the federal government should be considered in light of their administrative costs to hospitals and government contractors, and direct costs at the federal level.

This study also showed that RACs audited the 3 institutions differently, despite similar willingness of the hospitals to dispute overpayment determinations and similar hospital success rates in appeals or discussion, suggesting that hospital compliance with Medicare policy was not the driver of variable RAC activity. This variation may be due to factors not apparent in this study, such as variable RAC interpretation of federal policy, a decision of a particular RAC to focus on complex Medicare Part B or automated reviews instead of complex Part A reviews, or RAC workforce differences that are not specific to the hospitals. Regardless, the variation in audit activity suggests that greater transparency and accountability in RAC activity is merited.

Perhaps most importantly, this study highlights factors that may help explain differing auditing and appeals numbers reported by the OIG,[4] CMS,[9, 13, 14] and hospitals.[15, 16] Given the marked increase in RAC activity over the last 4 years, the 2010 and 2011 data included in a recent OIG report[4] likely do not represent current auditing and appeals practice. With regard to the CMS reports,[9, 13, 14] although CMS included FY 2013[9] activity in its most recent report, it did not account for denials overturned in the discussion period, as these are not technically appeals, even though these are contested cases decided in favor of the hospital. This most recent CMS report[9] uses overpayment determinations from FY 2013, yet counts appeals and decisions that occurred in 2013, with the comment that these decisions may be for overpayment determinations prior to 2013. The CMS reports also variably combine automated, semiautomated, complex Part A, and complex Part B claims in its reports, making interpretation challenging. Finally, although CMS reported an increase in improper payments recovered from FY 2011[14] ($939 million) to FY 2012[13] ($2.4 billion) to FY 2013[9] ($3.75 billion), this is at least partly a reflection of increased RAC activity as demonstrated in this study, and may reflect the fact that many hospitals do not have the resources to continually appeal or choose not to contest these cases based on a financial business decision. Importantly, these numbers now far exceed recoupment in other quality programs, such as the Readmissions Reduction Program (estimated $428 million next FY),[21] indicating the increased fiscal impact of the RAC program on hospital reimbursement.

To increase accuracy, future federal reports of auditing and appeals should detail and include cases overturned in the discussion period, and carefully describe the denominator of total audits and appeals given the likelihood that many appeals in a given year will not have a decision in that year. Percent of total Medicare claims subject to complex Part A audit should be stated. Reports should also identify and consider an alternative classification for complex Part A cases the hospital elects to rebill under Medicare Part B, and also detail on what grounds medical necessity is being contested (eg, whether the actual care delivered was not necessary or if it is an outpatient versus inpatient billing issue). Time spent in the appeals process must also be reported. Complex Part A, complex Part B, semiautomated, and automated reviews should also be considered separately, and dates of reported audits and appeals must be as current as possible in this rapidly changing environment.

In this study, RACs conducted complex Part A audits at a rate 25 times the CMS‐reported overall audit rate, confirming complex Part A audits are a particular focus of RAC activity. There was a more than doubling of RAC audits at the study hospitals from the years 2010 ‐ 2011 to 2012 ‐ 2013 and a nearly 3‐fold increase in overpayment determinations. Concomitantly, the more than 3‐fold increase in appeals and discussion volume over this same time period was consistent with the development of the current national appeals backlog. The 3 study hospitals won a greater percentage of contested cases each year, from approximately one‐third of cases in 2010 to two‐thirds of cases with decisions in 2013, but there was no appreciable decrease in RAC overpayment determinations over that time period. The majority of successfully challenged cases were won in discussion, favorable decisions for hospitals not appearing in federal appeals reports. Time in appeals exceeded 550 days, causing the hospitals to withdraw some cases to avoid the lengthy appeals process and/or to minimize the risk of losing the amount of the entire Part A claim. The hospitals also lost a small number of appeals by missing a filing deadline, yet there was no reciprocal case concession when the appeals system missed a deadline. RACs found no cases of care at the 3 hospitals that should not have been delivered, but rather challenged the status determination (inpatient vs outpatient) to dispute medical necessity of care delivered. Finally, an average of approximately 5 FTEs at each institution were employed in the audits and appeals process. These data support a need for systematic improvements in the RAC system so that fair, constructive, and cost‐efficient surveillance of the Medicare program can be realized.

Status determinations (outpatient versus inpatient) for hospitalized patients have become a routine part of patient care in the United States. Under the guidance provided by the Medicare Benefits Policy Manual, hospitalized Medicare beneficiaries are assigned 1 of these 2 statuses. The status assignment does not affect the care a patient can receive, but rather how the hospital services provided are billed to Medicare. Hospital services provided under inpatient status are billed under Medicare Part A. Hospital services provided under outpatient status, which includes all patients receiving observation services (commonly referred to as under observation), are billed under Medicare Part B. Whether hospital services are billed under Part A or Part B is important to hospitals and Medicare beneficiaries, as both the hospital reimbursement and beneficiary liability can vary greatly depending on whether services are billed under Part A versus Part B. Hospitals are generally reimbursed at a higher rate for services provided as an inpatient (Part A). The Office of the Inspector General (OIG) recently found that Medicare paid nearly three times more for a short inpatient stay than an [outpatient] stay for the same condition.[1] Medicare beneficiary liability also varies based on status. First, beneficiaries hospitalized as inpatients are subject to a deductible under Part A ($1,216 in 2014) for hospital services associated with that hospitalization and any future inpatient hospitalization beyond 60 days of discharge.[2] Beneficiaries hospitalized as outpatients are subject to the Medicare Part B deductible ($147 in 2014), and then a 20% copay on each individual outpatient hospital service, with no cumulative limit.[2, 3] In addition, hospital pharmacy charges for Medicare beneficiaries hospitalized as inpatients are covered under Medicare A. However, for Medicare patients hospitalized as outpatients, many medications are not covered by Medicare Part B benefits. Finally, time spent hospitalized as an outpatient does not count toward the Medicare 3‐day medically necessary inpatient stay requirement to qualify for the skilled nursing facility care benefit following discharge.

HISTORY AND INTENT OF INPATIENT AND OUTPATIENT STATUS DETERMINATIONS

Prior to October 1, 2013, the Centers for Medicare & Medicaid Services (CMS) stated that physician judgment and an expectation of at least an overnight hospitalization should determine inpatient status of hospitalized Medicare beneficiaries. Guidance as to when inpatient services were covered was found in the Medicare Benefits Policy Manual (MBPM)[4]:

For a subset of patients who are hospitalized under outpatient status, billing for observation services is allowed. CMS defines observation as a well defined set of services, that should last less than 24 hours and in only rare and exceptional casesspan more than 48 hours.[5] Many providers recognize the utility of a few additional hours of hospital care and/or testing in a hospital setting to determine whether a patient can go home or needs additional evaluation, monitoring, and/or treatment that can only be provided in a hospital, consistent with the CMS definition of observation.[6] It is important to note that although observation and outpatient are frequently used interchangeably, only outpatient is technically a CMS status. Patients in observation or under observation are, in fact, a subset of patients who are hospitalized under an outpatient status.

Outpatient status may also be appropriate for patients who require hospitalization for routine and expected overnight monitoring following a procedure. These patients are often not eligible for billing of observation services or as an inpatient because alternative methods of billing for the recovery time following the procedure exist. When determining the appropriate status of a Medicare beneficiary for a hospitalization following a procedure, physicians need to be aware of whether a specific procedure appears on the Medicare inpatient‐only procedures list.[7] Per CMS, procedures designated as inpatient only are reimbursed only when the patient is admitted as an inpatient at the time the procedure is performed.[8] Conversely, outpatient status for an overnight hospitalization associated with a procedure not on the inpatient‐only list is generally appropriate. Therefore, patients hospitalized for a procedure that appears on this list should always be hospitalized under inpatient status, regardless of the amount of time that the patient is expected to be hospitalized following the procedure, including those cases for which the hospitalization is expected to be only overnight.[7, 8] Only a limited number of Current Procedural Technology (CPT) codes, mostly surgical, automatically qualify for inpatient status and do not have outpatient prospective payment system eligibility. Although most procedures on the inpatient‐only list are associated with a hospitalization that commonly span at least 2 midnights, such as coronary artery bypass grafting, some potentially overnight stay cases, such as cholecystectomy (CPT 47600) appear on the 2014 inpatient‐only list.[9]

As noted above, prior to October 1, 2013, the Medicare definitions governing outpatient versus inpatient status included a 24‐hour benchmark. However, the MBPM also notes that: Admissions of particular patients are not covered or non‐covered solely on the basis of the length of time the patient actually spends in the hospital.[10]

In practice, status determination was ultimately dependent on physician or other practitioner's complex medical judgment as specified by CMS. To validate this judgment, CMS recommended that reviewers use a screening tool as part of their medical review. This screening tool could include practice guidelines that are well accepted by the medical community but did not require or identify a specific criteria set.[11] Not surprisingly, there was and continues to be great variability in the application of outpatient versus inpatient status across hospitals in actual practice.[1, 12, 13] The ambiguity in the definition of a hospitalized patient's status helped spawn commercial clinical decision tools, such as InterQual (McKesson Corporation, San Francisco, CA) and MCG (formally known as Milliman Care Guidelines; MCG Health, LLC, Seattle, WA), to help define inpatients versus outpatients.[14, 15] However, these guidelines are complex, can be difficult to interpret and apply, and have been criticized for poor predictive value and attempting to replace physician judgment.[16, 17, 18] Furthermore, CMS has never formally endorsed any specific decision tool.

INPATIENT AND OUTPATIENT PAYMENTS AND THE RECOVERY AUDIT CONTRACTOR PROGRAM

In 2000, CMS started using Ambulatory Payment Classifications for hospital services, which made inpatient care more financially favorable for hospitals. In response to concerns that hospitals would be incentivized to overuse inpatient status, CMS made a number of changes to their payment system, including the creation of the Recovery Audit Program in 2003. This program was originally called the Recovery Audit Contractor (RAC) Program and continues to be most commonly referred to as the RAC program. The RAC program, tasked with finding and correcting improper claims to the Medicare program, began as a demonstration required in the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), and subsequently became a nationwide audit program under the Tax Relief and Health Care Act of 2006. Under this program, private contractors review hospital and billing records of Medicare patients and are paid on a contingency fee (8%12.5%) for all underpayments and overpayments that are identified and corrected.[19] Importantly, the RACs are not subject to any financial penalties for cases improperly denied.

RACs initially targeted many overnight inpatient stays for recoupment. These cases were attractive audit targets because the RACs could argue that the inpatient hospital services were delivered in the improper status based solely on the length of stay, without having to consider in their audit the complexity of decision making or medical necessity of the services provided. However, it is worth noting that with improvement in efficiency and advancements in medical technology, hospitals and physicians have been increasingly able to safely evaluate and treat medically complex and severely ill patients quickly, sometimes with just an overnight stay. As perspective, in 1965, the average length of stay for a Medicare patient was 13 days; in 2010, it was 5.4 days, with over one‐third of hospitalizations lasting <3 days.[20]

Concurrent with the increased RAC denials for services provided in an inpatient status, the use of observation services changed significantly from 2007 to 2012. The average length of stay for Medicare patients under outpatient status with observation services exceeded 24 hours in 2007, was 28.2 hours by 2009,[21] and grew to 29 hours by 2012.[22] Between July 2010 and December 2011, at the University of Wisconsin Hospital, 1 in 6 observation stays lasted longer than 48 hours, suggesting that long observation stays were no longer rare and exceptional as stated in CMS' own definition.[23] This same University of Wisconsin study also found that observation services were not well defined, with 1141 distinct diagnosis codes used for these services.[23]

Additionally, a Medicare Payment Advisory Commission (MedPAC; described on their website, www.medpac.gov, as a nonpartisan legislative branch agency that provides the US Congress with analysis and policy advice on the Medicare program) 2014 Report to Congress showed that from 2006 to 2012, outpatient services increased 28.5% whereas inpatient discharges decreased 12.6% over the same time period.[22]

Hospitals have also expressed concern that the RAC contingency fee payment model and a lack of penalty for improper denials promotes overzealous auditing.[24, 25] RAC recoupment has increased from approximately $939 million in 2011, to $2.4 billion in 2012, to $3.8 billion in 2013.[26, 27, 28] Given the money now at stake, it is not surprising that hospitals have become very active in appealing RAC denials. Self‐reported data submitted to the American Hospital Association (AHA) for the months January 2014 to March of 2014 show that hospitals now appeal 50% of RAC denials and win 66% of these appeals.[29] The AHA data also show that 69% of self‐reporting hospitals spent over $10,000 to manage their audit and appeals process over this same 3‐month time period, with 11% spending more than $100,000.

This appeals process is not only costly to hospitals, it is also lengthy. As of January 2014, the average wait time for an appeal hearing with an administrative law judge (level 3 appeal) exceeded 16 months.[30] In fact, the appeals process has become so backlogged that hospitals' rights to assignment of level 3 (administrative law judge) appeals have been temporarily suspended.[30] In August 2014, CMS offered a $0.68 on the dollar partial payment for hospitals willing to settle all eligible outstanding appeals in an attempt to relieve the appeals backlog.[31] In addition, the AHA currently has a suit against the US Department of Health & Human Services over the RAC appeals backlog.[32]

Increased use of outpatient status may be driven by pressures from the RAC program and, potentially, by improvements in the efficiency of care. Because hospitals are paid less for care provided under outpatient status than they are for the identical care provided under inpatient status, hospitals faced both potential financial penalty for improvements in efficiency and the threat of RAC audits.

THE 2‐MIDNIGHT RULE: A FIX?

Given the challenges in defining inpatient versus outpatient hospitalization, the increasing use of outpatient status and the increasing length of stay of outpatient hospitalizations with observation services, in 2013, CMS responded with new policies to define the visit status for hospitalized patients. On August 2, 2013, CMS announced the fiscal year 2014 hospital Inpatient Prospective Payment System final rule (IPPS‐2014) to become effective October 1, 2013. This document was formally issued as part of the Federal Register on August 19, 2013.[33] Central to the CMS IPPS‐2014 was a 2‐midnight benchmark that offered a major change in how physicians were to determine the status (inpatient vs outpatient) of hospitalized patients. With this 2‐midnight benchmark, now informally known as the 2‐midnight rule, CMS finalized its proposal to generally consider patients that are expected by a practitioner (with knowledge of the case and with admitting privileges) to need hospitalization that will span 2 or more midnights as inpatient. The IPPS‐2014 also finalized the converse of this: hospitalizations expected to span <2 midnights are to be regarded as outpatient with 2 exceptions:

1. If the hospitalization is associated with a procedure appearing on the previously described Medicare inpatient‐only procedures list, or
2. A rare and unusual circumstance in which an inpatient admission would be reasonable regardless of length of stay. Currently, unanticipated mechanical ventilation initiated during the hospitalization visit is the only rare and unusual circumstance that qualifies as such an exception.[7]

CMS' stated goals and expectations for the 2‐midnight benchmark were:

1. Reduce the growing number of prolonged hospitalizations (>48 hours) for Medicare beneficiaries under outpatient status.
2. Decrease billing disputes between hospitals and Medicare auditors, especially RACs, by establishing more clearly defined, time‐based status criteria.
3. Reduce the number of outpatient encounters overall. Because CMS expected the rule to convert a net increase of cases from outpatient to inpatient, resulting in higher payments to hospitals, CMS included a 0.2% payment cut in hospital reimbursement in the IPPS‐2014 as an offset.[33, 34]

Although unrelated to the goals and expectations above, the IPPS‐2014 also included a requirement that:

CMS allowed for an authentication (generally regarded as a cosignature that is timed and dated) of the inpatient admission order by an attending physician with admitting privileges, done prior to discharge, in cases where the inpatient order had been placed by a practitioner (such as a resident, fellow, or physician assistant) without admitting privileges. Attending physician authentication of the inpatient admission order must be done prior to discharge [a]s a condition of payment for hospital inpatient services under Medicare Part A.[35]

From the August 2, 2013 announcement until the effective date of October 1, 2013, hospitals had just 2 months to interpret and comply with the IPPS‐2014, a complex 546‐page document that required hospitals to make extensive changes to admission procedures, workflows, and electronic health records (EHRs). In addition, extensive physician, provider, and administrator education was needed. During these 2 months, hospitals continued to request additional information and clarification from CMS regarding many aspects of the IPPS‐2014, including basic questions that included (1) how to apply the 2‐midnight benchmark to patients who were transferred from 1 hospital to another and (2) when the clock started for hospital services in determining a patient's expected length of hospitalization.

Despite concerns voiced by Congress and medical organizations, the new policy went into effect as scheduled.[36, 37] However, just days prior to October 1, 2013, CMS issued a 3‐month limited suspension of auditing and enforcement of the 2‐midnight rule by the RACs that was subsequently extended by CMS 2 more times, first through March 31, 2014 and then again through September 30, 2014. Other audits to be performed by RACs and all other government audits, including those performed by Medicare Administrative Contractors (MACs) were allowed to continue.[38] In particular, the MACs were instructed to conduct patient status reviews using a probe and educate strategy, which, via educational outreach efforts, would instruct hospitals how to adapt to the new rule. On April 1, 2014, the Protecting Access to Medicare Act of 2014 was signed into law, which, under section 111 of this law, permitted CMS to continue medical review activities under the MAC probe and educate process through March of 2015, and prohibited CMS from allowing RACs to conduct inpatient hospital status reviews on claims with these same dates of admission, October 1, 2013 through March 31, 2015.

The MACs were created by the MMA of 2003, which mandated that the Secretary of Health & Human Services replace Part A Fiscal Intermediaries and Part B carriers with Medicare Administrative Contractors (MACs).[39] As established by CMS, MACs are multi‐state, regional contractors responsible for administering both Medicare Part A and Medicare Part B claims and serve as the primary operational contact between the Medicare Fee‐For‐Service program, and approximately 1.5 million health care providers enrolled in the program.[39]

THE IPPS‐2014 AND CMS' STATED GOALS AND EXPECTATIONS

In the analysis that accompanied the IPPS‐2014, Medicare expected the use of outpatient services to decrease overall, as the new rules would effectively eliminate almost all outpatient hospitalizations >48 hours. Although no official data are yet available from CMS, our early experience under the 2‐midnight rule has suggested that long observation stays have declined in frequency, a favorable outcome of the new policy. However, as designed, the new 2‐midnight IPPS rule most predominately affects 1‐day stays, or more accurately, 1‐midnight stays. This is because many hospitalizations that previously met inpatient criteria (as defined by commercially available products such as MCG or InterQual), but spanned <2 midnights would have been classified as inpatient prior to October 1, 2013. However, since October 1, 2013, these same hospitalizations are now classified as outpatient. An example of such a case is a patient who presents to an emergency department with symptoms of a transient ischemic attack and has a high ABCD (age 60 years, blood pressure 140/90 mm Hg at initial evaluation, clinical features, duration of symptoms, diabetes score).[40] Prior to the 2‐midnight rule, this patient, based on the severity of the signs and symptoms upon presentation, could have been appropriately hospitalized as an inpatient.

Now, under the current IPPS and the ability of many hospitals to efficiently evaluate and treat such patient in <2 midnights, the patient should be categorized as an outpatient, at least initially, despite the severity and high risk of his/her presentation. In fiscal year 2013, The Johns Hopkins Hospital had 1791, 1‐day inpatient stays for Medicare beneficiaries, representing 15.2% of all Medicare admissions. Similarly, in the 12 months just prior to the 2‐midnight rule (October 1, 2012 to September 30, 2013), 10.4% (1280) of all Medicare encounters at the University of Wisconsin were 1‐day inpatient stays under previous criteria. Because of implementation of the 2‐midnight rule in October 2013, Medicare outpatient hospitalization for 1‐day stays at The Johns Hopkins Hospital increased by 49%, from an average of 117 patients/month to 174 patients/month. Nationally, it is possible that a reduction in long observation stays could be offset by an increase in 1‐day‐stay outpatient hospitalization encounters.

A second key expectation and goal of IPPS‐2014 was, by shifting to a more concrete, time‐based definition of inpatient, to decrease the disagreement between hospitals and auditors regarding patient status (inpatient vs outpatient). As noted earlier, many disputes with auditors for hospitalizations prior to October 2013 did not involve the need or type of hospital services provided, but rather the status under which the care was provided. However, the new time‐based criterion hinges not on actual length of hospitalization, but the expected length of hospitalization as determined by a practitioner with admitting privileges and knowledge of the patient. Accurately and consistently predicting the length of hospitalization has proven to be challenging, even for the most experienced practitioners. Since October 2013, for patients hospitalized at The Johns Hopkins Hospital through its emergency department, the admitting physicians' expectation of whether a patient would require 1 versus 2 or more midnights of necessary hospitalization was correct only half of the time. Given past experience, the RACs may challenge the medical judgment that lead practitioners to expect a hospitalization of 2 or more midnights without having to challenge whether the care provided was medically necessary.

Further, the IPPS‐2014 has not been accompanied by any significant changes to the payment scheme for auditors. RACs continue to be paid a percentage of any monies they determine to have been improperly paid by CMS, but with no penalty for cases that are overturned on appeal. Historically, the vast majority of RAC recovery fees have been due to determination of overpayments by CMS.[41, 42] Despite the 2‐midnight rule, RACs will continue to have a financial incentive to allege overpayment. In the initial probe and educate audits by MACs under the new 2014‐IPPS, despite inpatient admission orders being authenticated and certified by an attending physician, claims are being denied because the documentation does not support an expectation for a 2‐midnight hospitalization. Namely, auditors are continuing to challenge not the medical necessity of the services that hospitals provide, but rather the status in which those services were provided. Thus far, the IPPS‐2014 does not appear to fully remedy the auditing conflict that existed prior to October 2013.

As noted above, the IPPS‐2014 also requires, as of October 1, 2013, as a condition of payment for hospital services under Part A, that the inpatient admission order must be either entered by a practitioner with admitting privileges or authenticated prior to discharge by an attending physician involved in the care of the patient in cases in which the inpatient admission order was entered by a practitioner without admitting privileges (eg, resident, physician assistant, or fellow).[43] The requirement of an attending physician's cosignature has involved major changes to physician workflow and the electronic heath record (EHR) framework at The Johns Hopkins and the University of Wisconsin Hospitals, and does not keep up with modern healthcare systems in which patients are admitted 24 hours a day by a variety of providers (eg, residents, nurse practitioners) who otherwise may write stand‐alone orders. These changes have proven to be time‐consuming, costly, and have not, to our knowledge, improved patient care or utilization of resources.

The new visit status rules have also led to confusion among clinicians. A recent large survey of hospitalists conducted by the Society of Hospital Medicine demonstrated that more than half of respondents disagreed that the 2‐midnight rule improved hospitalist workflow compared to prior observation policy.[44] In addition, only 40% of hospitalists reported confidence in how to apply the rule.[44] Thus, the intent to clarify visit status policy with the IPPS‐2014 has not translated to clear and useful rules for frontline clinicians.

FUTURE DIRECTIONS

After over a year under the 2‐midnight rule, although long observation stays may be reduced, it seems unlikely these new regulations will achieve 2 of CMS' stated goals: (1) decreasing the use of outpatient status for hospitalizations and (2) resolving status disputes between auditors and hospitals. In addition, attempts at compliance with the new rules and regulations have diverted large amounts of physician time and hospital resources away from patient care. There is a clear need to reform both the hospitalization status policy and the RAC programs that enforce these rules.

One path Congress and CMS could consider is to reform the current Medicare reimbursement paradigm for hospital services to eliminate the need to distinguish inpatient from outpatient status. For example, H.R. 1179Improving Access to Medicare Coverage Act of 2013,[45] of the 113th Congress, if reintroduced, would decouple the link between the qualification for skilled nursing facility benefits from visit status by allowing time spent hospitalized as an outpatient to count toward the 3‐day benchmark. The overarching goals of any visit status policy reform should be to: (1) simplify or eliminate the 2‐track status process for hospitalized patients, (2) stop or minimize the threat of audits based on status, and (3) maintain budget neutrality. Two additional options for consideration would be to: (1) create a low‐acuity modifier for use with patients anticipated to have short stays and low resource use and (2) preselect specific Diagnosis Related Groups based on historical data and create designations for those diagnoses of lesser intensity. Accountable care organizations contracts, a new model for healthcare payment, could potentially be structured to eliminate or simplify payment based on visit status for hospitalized patients. With bundled payments on the horizon and the possible phase‐out of fee‐for‐service reimbursement, the issue may become less paramount in the coming years. No solution will be perfect and must balance costs, ease of administration, and beneficiary protection.

There are reasons to be optimistic that change may soon be realized. CMS is currently considering significant hospitalization status policy reform. In the proposed IPPS‐2015, CMS asked for input on payment for short‐stay hospitalizations and, in the final IPPS‐2015 released August 4, 2014, CMS indicated its willingness to continue to work with stakeholders in revising these policies.[46] Additionally, CMS has responded to hospitals on 3 separate occasions by delaying RAC audits pertaining to the 2‐midnight rule. Further, the current MAC probe and educate audits focus on education with respect to 2‐midnight rule implementation rather than threatening hospitals with major financial penalties.[47] Congress has also been responsive in this area. In addition to the 3 delays announced by CMS, Congress passed legislation that mandated an additional delay to RAC audits that pertain to the 2‐midnight rule. Moreover, the Subcommittee on Health of the House Ways and Means Committee held hearings that included the 2‐midnight rule and RAC reform in May 2014, and the Senate Special Committee on Aging held hearings on the impact of visit status on Medicare beneficiaries in July 2014.[48, 49] Additionally, the House Ways and Means Health Subcommittee recently issued a draft bill to address Medicare hospital issues.[50] The OIG has also been responsive to hospital concerns regarding the current RAC program with a recent report recommending that CMS develop additional performance evaluation metrics to improve RAC performance and ensure that RACs are evaluated on all contract requirements.[51] Additionally, MedPAC has been considering several short‐stay payment reform options, modifying the need for a 3‐day inpatient hospitalization to qualify for postdischarge skilled nursing facility benefits and adjusting RAC contingency fees based on overturn rates.[52, 53] These actions by CMS, Congress, and the OIG, as well as the options under consideration by MedPAC, demonstrate a degree of regulatory and legislative responsiveness to hospital and provider concerns in the area of visit status determination.

The Medicare program is vital to tens of millions of disabled and elderly Americans. Fraud and abuse of the Medicare program should not be tolerated. Yet, the current system of assigning, monitoring, and auditing outpatient versus inpatient hospital care is in need of reform. It will be up to CMS and Congress to continue to work with hospitals and physicians to find an improved way to appropriately and fairly compensate hospitals for hospital services in a way that that does not depend on a poorly defined and contentious status of a patient. Such reform must include the RAC program. It is our hope that both CMS and Congress will prioritize status determination and payment reform so that Medicare beneficiaries, physicians, and hospitals all have a sustainable, fair, and transparent process.

Status determinations (outpatient versus inpatient) for hospitalized patients have become a routine part of patient care in the United States. Under the guidance provided by the Medicare Benefits Policy Manual, hospitalized Medicare beneficiaries are assigned 1 of these 2 statuses. The status assignment does not affect the care a patient can receive, but rather how the hospital services provided are billed to Medicare. Hospital services provided under inpatient status are billed under Medicare Part A. Hospital services provided under outpatient status, which includes all patients receiving observation services (commonly referred to as under observation), are billed under Medicare Part B. Whether hospital services are billed under Part A or Part B is important to hospitals and Medicare beneficiaries, as both the hospital reimbursement and beneficiary liability can vary greatly depending on whether services are billed under Part A versus Part B. Hospitals are generally reimbursed at a higher rate for services provided as an inpatient (Part A). The Office of the Inspector General (OIG) recently found that Medicare paid nearly three times more for a short inpatient stay than an [outpatient] stay for the same condition.[1] Medicare beneficiary liability also varies based on status. First, beneficiaries hospitalized as inpatients are subject to a deductible under Part A ($1,216 in 2014) for hospital services associated with that hospitalization and any future inpatient hospitalization beyond 60 days of discharge.[2] Beneficiaries hospitalized as outpatients are subject to the Medicare Part B deductible ($147 in 2014), and then a 20% copay on each individual outpatient hospital service, with no cumulative limit.[2, 3] In addition, hospital pharmacy charges for Medicare beneficiaries hospitalized as inpatients are covered under Medicare A. However, for Medicare patients hospitalized as outpatients, many medications are not covered by Medicare Part B benefits. Finally, time spent hospitalized as an outpatient does not count toward the Medicare 3‐day medically necessary inpatient stay requirement to qualify for the skilled nursing facility care benefit following discharge.

HISTORY AND INTENT OF INPATIENT AND OUTPATIENT STATUS DETERMINATIONS

Prior to October 1, 2013, the Centers for Medicare & Medicaid Services (CMS) stated that physician judgment and an expectation of at least an overnight hospitalization should determine inpatient status of hospitalized Medicare beneficiaries. Guidance as to when inpatient services were covered was found in the Medicare Benefits Policy Manual (MBPM)[4]:

For a subset of patients who are hospitalized under outpatient status, billing for observation services is allowed. CMS defines observation as a well defined set of services, that should last less than 24 hours and in only rare and exceptional casesspan more than 48 hours.[5] Many providers recognize the utility of a few additional hours of hospital care and/or testing in a hospital setting to determine whether a patient can go home or needs additional evaluation, monitoring, and/or treatment that can only be provided in a hospital, consistent with the CMS definition of observation.[6] It is important to note that although observation and outpatient are frequently used interchangeably, only outpatient is technically a CMS status. Patients in observation or under observation are, in fact, a subset of patients who are hospitalized under an outpatient status.

Outpatient status may also be appropriate for patients who require hospitalization for routine and expected overnight monitoring following a procedure. These patients are often not eligible for billing of observation services or as an inpatient because alternative methods of billing for the recovery time following the procedure exist. When determining the appropriate status of a Medicare beneficiary for a hospitalization following a procedure, physicians need to be aware of whether a specific procedure appears on the Medicare inpatient‐only procedures list.[7] Per CMS, procedures designated as inpatient only are reimbursed only when the patient is admitted as an inpatient at the time the procedure is performed.[8] Conversely, outpatient status for an overnight hospitalization associated with a procedure not on the inpatient‐only list is generally appropriate. Therefore, patients hospitalized for a procedure that appears on this list should always be hospitalized under inpatient status, regardless of the amount of time that the patient is expected to be hospitalized following the procedure, including those cases for which the hospitalization is expected to be only overnight.[7, 8] Only a limited number of Current Procedural Technology (CPT) codes, mostly surgical, automatically qualify for inpatient status and do not have outpatient prospective payment system eligibility. Although most procedures on the inpatient‐only list are associated with a hospitalization that commonly span at least 2 midnights, such as coronary artery bypass grafting, some potentially overnight stay cases, such as cholecystectomy (CPT 47600) appear on the 2014 inpatient‐only list.[9]

As noted above, prior to October 1, 2013, the Medicare definitions governing outpatient versus inpatient status included a 24‐hour benchmark. However, the MBPM also notes that: Admissions of particular patients are not covered or non‐covered solely on the basis of the length of time the patient actually spends in the hospital.[10]

In practice, status determination was ultimately dependent on physician or other practitioner's complex medical judgment as specified by CMS. To validate this judgment, CMS recommended that reviewers use a screening tool as part of their medical review. This screening tool could include practice guidelines that are well accepted by the medical community but did not require or identify a specific criteria set.[11] Not surprisingly, there was and continues to be great variability in the application of outpatient versus inpatient status across hospitals in actual practice.[1, 12, 13] The ambiguity in the definition of a hospitalized patient's status helped spawn commercial clinical decision tools, such as InterQual (McKesson Corporation, San Francisco, CA) and MCG (formally known as Milliman Care Guidelines; MCG Health, LLC, Seattle, WA), to help define inpatients versus outpatients.[14, 15] However, these guidelines are complex, can be difficult to interpret and apply, and have been criticized for poor predictive value and attempting to replace physician judgment.[16, 17, 18] Furthermore, CMS has never formally endorsed any specific decision tool.

INPATIENT AND OUTPATIENT PAYMENTS AND THE RECOVERY AUDIT CONTRACTOR PROGRAM

In 2000, CMS started using Ambulatory Payment Classifications for hospital services, which made inpatient care more financially favorable for hospitals. In response to concerns that hospitals would be incentivized to overuse inpatient status, CMS made a number of changes to their payment system, including the creation of the Recovery Audit Program in 2003. This program was originally called the Recovery Audit Contractor (RAC) Program and continues to be most commonly referred to as the RAC program. The RAC program, tasked with finding and correcting improper claims to the Medicare program, began as a demonstration required in the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), and subsequently became a nationwide audit program under the Tax Relief and Health Care Act of 2006. Under this program, private contractors review hospital and billing records of Medicare patients and are paid on a contingency fee (8%12.5%) for all underpayments and overpayments that are identified and corrected.[19] Importantly, the RACs are not subject to any financial penalties for cases improperly denied.

RACs initially targeted many overnight inpatient stays for recoupment. These cases were attractive audit targets because the RACs could argue that the inpatient hospital services were delivered in the improper status based solely on the length of stay, without having to consider in their audit the complexity of decision making or medical necessity of the services provided. However, it is worth noting that with improvement in efficiency and advancements in medical technology, hospitals and physicians have been increasingly able to safely evaluate and treat medically complex and severely ill patients quickly, sometimes with just an overnight stay. As perspective, in 1965, the average length of stay for a Medicare patient was 13 days; in 2010, it was 5.4 days, with over one‐third of hospitalizations lasting <3 days.[20]

Concurrent with the increased RAC denials for services provided in an inpatient status, the use of observation services changed significantly from 2007 to 2012. The average length of stay for Medicare patients under outpatient status with observation services exceeded 24 hours in 2007, was 28.2 hours by 2009,[21] and grew to 29 hours by 2012.[22] Between July 2010 and December 2011, at the University of Wisconsin Hospital, 1 in 6 observation stays lasted longer than 48 hours, suggesting that long observation stays were no longer rare and exceptional as stated in CMS' own definition.[23] This same University of Wisconsin study also found that observation services were not well defined, with 1141 distinct diagnosis codes used for these services.[23]

Additionally, a Medicare Payment Advisory Commission (MedPAC; described on their website, www.medpac.gov, as a nonpartisan legislative branch agency that provides the US Congress with analysis and policy advice on the Medicare program) 2014 Report to Congress showed that from 2006 to 2012, outpatient services increased 28.5% whereas inpatient discharges decreased 12.6% over the same time period.[22]

Hospitals have also expressed concern that the RAC contingency fee payment model and a lack of penalty for improper denials promotes overzealous auditing.[24, 25] RAC recoupment has increased from approximately $939 million in 2011, to $2.4 billion in 2012, to $3.8 billion in 2013.[26, 27, 28] Given the money now at stake, it is not surprising that hospitals have become very active in appealing RAC denials. Self‐reported data submitted to the American Hospital Association (AHA) for the months January 2014 to March of 2014 show that hospitals now appeal 50% of RAC denials and win 66% of these appeals.[29] The AHA data also show that 69% of self‐reporting hospitals spent over $10,000 to manage their audit and appeals process over this same 3‐month time period, with 11% spending more than $100,000.

This appeals process is not only costly to hospitals, it is also lengthy. As of January 2014, the average wait time for an appeal hearing with an administrative law judge (level 3 appeal) exceeded 16 months.[30] In fact, the appeals process has become so backlogged that hospitals' rights to assignment of level 3 (administrative law judge) appeals have been temporarily suspended.[30] In August 2014, CMS offered a $0.68 on the dollar partial payment for hospitals willing to settle all eligible outstanding appeals in an attempt to relieve the appeals backlog.[31] In addition, the AHA currently has a suit against the US Department of Health & Human Services over the RAC appeals backlog.[32]

Increased use of outpatient status may be driven by pressures from the RAC program and, potentially, by improvements in the efficiency of care. Because hospitals are paid less for care provided under outpatient status than they are for the identical care provided under inpatient status, hospitals faced both potential financial penalty for improvements in efficiency and the threat of RAC audits.

THE 2‐MIDNIGHT RULE: A FIX?

Given the challenges in defining inpatient versus outpatient hospitalization, the increasing use of outpatient status and the increasing length of stay of outpatient hospitalizations with observation services, in 2013, CMS responded with new policies to define the visit status for hospitalized patients. On August 2, 2013, CMS announced the fiscal year 2014 hospital Inpatient Prospective Payment System final rule (IPPS‐2014) to become effective October 1, 2013. This document was formally issued as part of the Federal Register on August 19, 2013.[33] Central to the CMS IPPS‐2014 was a 2‐midnight benchmark that offered a major change in how physicians were to determine the status (inpatient vs outpatient) of hospitalized patients. With this 2‐midnight benchmark, now informally known as the 2‐midnight rule, CMS finalized its proposal to generally consider patients that are expected by a practitioner (with knowledge of the case and with admitting privileges) to need hospitalization that will span 2 or more midnights as inpatient. The IPPS‐2014 also finalized the converse of this: hospitalizations expected to span <2 midnights are to be regarded as outpatient with 2 exceptions:

1. If the hospitalization is associated with a procedure appearing on the previously described Medicare inpatient‐only procedures list, or
2. A rare and unusual circumstance in which an inpatient admission would be reasonable regardless of length of stay. Currently, unanticipated mechanical ventilation initiated during the hospitalization visit is the only rare and unusual circumstance that qualifies as such an exception.[7]

CMS' stated goals and expectations for the 2‐midnight benchmark were:

1. Reduce the growing number of prolonged hospitalizations (>48 hours) for Medicare beneficiaries under outpatient status.
2. Decrease billing disputes between hospitals and Medicare auditors, especially RACs, by establishing more clearly defined, time‐based status criteria.
3. Reduce the number of outpatient encounters overall. Because CMS expected the rule to convert a net increase of cases from outpatient to inpatient, resulting in higher payments to hospitals, CMS included a 0.2% payment cut in hospital reimbursement in the IPPS‐2014 as an offset.[33, 34]

Although unrelated to the goals and expectations above, the IPPS‐2014 also included a requirement that:

CMS allowed for an authentication (generally regarded as a cosignature that is timed and dated) of the inpatient admission order by an attending physician with admitting privileges, done prior to discharge, in cases where the inpatient order had been placed by a practitioner (such as a resident, fellow, or physician assistant) without admitting privileges. Attending physician authentication of the inpatient admission order must be done prior to discharge [a]s a condition of payment for hospital inpatient services under Medicare Part A.[35]

From the August 2, 2013 announcement until the effective date of October 1, 2013, hospitals had just 2 months to interpret and comply with the IPPS‐2014, a complex 546‐page document that required hospitals to make extensive changes to admission procedures, workflows, and electronic health records (EHRs). In addition, extensive physician, provider, and administrator education was needed. During these 2 months, hospitals continued to request additional information and clarification from CMS regarding many aspects of the IPPS‐2014, including basic questions that included (1) how to apply the 2‐midnight benchmark to patients who were transferred from 1 hospital to another and (2) when the clock started for hospital services in determining a patient's expected length of hospitalization.

Despite concerns voiced by Congress and medical organizations, the new policy went into effect as scheduled.[36, 37] However, just days prior to October 1, 2013, CMS issued a 3‐month limited suspension of auditing and enforcement of the 2‐midnight rule by the RACs that was subsequently extended by CMS 2 more times, first through March 31, 2014 and then again through September 30, 2014. Other audits to be performed by RACs and all other government audits, including those performed by Medicare Administrative Contractors (MACs) were allowed to continue.[38] In particular, the MACs were instructed to conduct patient status reviews using a probe and educate strategy, which, via educational outreach efforts, would instruct hospitals how to adapt to the new rule. On April 1, 2014, the Protecting Access to Medicare Act of 2014 was signed into law, which, under section 111 of this law, permitted CMS to continue medical review activities under the MAC probe and educate process through March of 2015, and prohibited CMS from allowing RACs to conduct inpatient hospital status reviews on claims with these same dates of admission, October 1, 2013 through March 31, 2015.

The MACs were created by the MMA of 2003, which mandated that the Secretary of Health & Human Services replace Part A Fiscal Intermediaries and Part B carriers with Medicare Administrative Contractors (MACs).[39] As established by CMS, MACs are multi‐state, regional contractors responsible for administering both Medicare Part A and Medicare Part B claims and serve as the primary operational contact between the Medicare Fee‐For‐Service program, and approximately 1.5 million health care providers enrolled in the program.[39]

THE IPPS‐2014 AND CMS' STATED GOALS AND EXPECTATIONS

In the analysis that accompanied the IPPS‐2014, Medicare expected the use of outpatient services to decrease overall, as the new rules would effectively eliminate almost all outpatient hospitalizations >48 hours. Although no official data are yet available from CMS, our early experience under the 2‐midnight rule has suggested that long observation stays have declined in frequency, a favorable outcome of the new policy. However, as designed, the new 2‐midnight IPPS rule most predominately affects 1‐day stays, or more accurately, 1‐midnight stays. This is because many hospitalizations that previously met inpatient criteria (as defined by commercially available products such as MCG or InterQual), but spanned <2 midnights would have been classified as inpatient prior to October 1, 2013. However, since October 1, 2013, these same hospitalizations are now classified as outpatient. An example of such a case is a patient who presents to an emergency department with symptoms of a transient ischemic attack and has a high ABCD (age 60 years, blood pressure 140/90 mm Hg at initial evaluation, clinical features, duration of symptoms, diabetes score).[40] Prior to the 2‐midnight rule, this patient, based on the severity of the signs and symptoms upon presentation, could have been appropriately hospitalized as an inpatient.

Now, under the current IPPS and the ability of many hospitals to efficiently evaluate and treat such patient in <2 midnights, the patient should be categorized as an outpatient, at least initially, despite the severity and high risk of his/her presentation. In fiscal year 2013, The Johns Hopkins Hospital had 1791, 1‐day inpatient stays for Medicare beneficiaries, representing 15.2% of all Medicare admissions. Similarly, in the 12 months just prior to the 2‐midnight rule (October 1, 2012 to September 30, 2013), 10.4% (1280) of all Medicare encounters at the University of Wisconsin were 1‐day inpatient stays under previous criteria. Because of implementation of the 2‐midnight rule in October 2013, Medicare outpatient hospitalization for 1‐day stays at The Johns Hopkins Hospital increased by 49%, from an average of 117 patients/month to 174 patients/month. Nationally, it is possible that a reduction in long observation stays could be offset by an increase in 1‐day‐stay outpatient hospitalization encounters.

A second key expectation and goal of IPPS‐2014 was, by shifting to a more concrete, time‐based definition of inpatient, to decrease the disagreement between hospitals and auditors regarding patient status (inpatient vs outpatient). As noted earlier, many disputes with auditors for hospitalizations prior to October 2013 did not involve the need or type of hospital services provided, but rather the status under which the care was provided. However, the new time‐based criterion hinges not on actual length of hospitalization, but the expected length of hospitalization as determined by a practitioner with admitting privileges and knowledge of the patient. Accurately and consistently predicting the length of hospitalization has proven to be challenging, even for the most experienced practitioners. Since October 2013, for patients hospitalized at The Johns Hopkins Hospital through its emergency department, the admitting physicians' expectation of whether a patient would require 1 versus 2 or more midnights of necessary hospitalization was correct only half of the time. Given past experience, the RACs may challenge the medical judgment that lead practitioners to expect a hospitalization of 2 or more midnights without having to challenge whether the care provided was medically necessary.

Further, the IPPS‐2014 has not been accompanied by any significant changes to the payment scheme for auditors. RACs continue to be paid a percentage of any monies they determine to have been improperly paid by CMS, but with no penalty for cases that are overturned on appeal. Historically, the vast majority of RAC recovery fees have been due to determination of overpayments by CMS.[41, 42] Despite the 2‐midnight rule, RACs will continue to have a financial incentive to allege overpayment. In the initial probe and educate audits by MACs under the new 2014‐IPPS, despite inpatient admission orders being authenticated and certified by an attending physician, claims are being denied because the documentation does not support an expectation for a 2‐midnight hospitalization. Namely, auditors are continuing to challenge not the medical necessity of the services that hospitals provide, but rather the status in which those services were provided. Thus far, the IPPS‐2014 does not appear to fully remedy the auditing conflict that existed prior to October 2013.

As noted above, the IPPS‐2014 also requires, as of October 1, 2013, as a condition of payment for hospital services under Part A, that the inpatient admission order must be either entered by a practitioner with admitting privileges or authenticated prior to discharge by an attending physician involved in the care of the patient in cases in which the inpatient admission order was entered by a practitioner without admitting privileges (eg, resident, physician assistant, or fellow).[43] The requirement of an attending physician's cosignature has involved major changes to physician workflow and the electronic heath record (EHR) framework at The Johns Hopkins and the University of Wisconsin Hospitals, and does not keep up with modern healthcare systems in which patients are admitted 24 hours a day by a variety of providers (eg, residents, nurse practitioners) who otherwise may write stand‐alone orders. These changes have proven to be time‐consuming, costly, and have not, to our knowledge, improved patient care or utilization of resources.

The new visit status rules have also led to confusion among clinicians. A recent large survey of hospitalists conducted by the Society of Hospital Medicine demonstrated that more than half of respondents disagreed that the 2‐midnight rule improved hospitalist workflow compared to prior observation policy.[44] In addition, only 40% of hospitalists reported confidence in how to apply the rule.[44] Thus, the intent to clarify visit status policy with the IPPS‐2014 has not translated to clear and useful rules for frontline clinicians.

FUTURE DIRECTIONS

After over a year under the 2‐midnight rule, although long observation stays may be reduced, it seems unlikely these new regulations will achieve 2 of CMS' stated goals: (1) decreasing the use of outpatient status for hospitalizations and (2) resolving status disputes between auditors and hospitals. In addition, attempts at compliance with the new rules and regulations have diverted large amounts of physician time and hospital resources away from patient care. There is a clear need to reform both the hospitalization status policy and the RAC programs that enforce these rules.

One path Congress and CMS could consider is to reform the current Medicare reimbursement paradigm for hospital services to eliminate the need to distinguish inpatient from outpatient status. For example, H.R. 1179Improving Access to Medicare Coverage Act of 2013,[45] of the 113th Congress, if reintroduced, would decouple the link between the qualification for skilled nursing facility benefits from visit status by allowing time spent hospitalized as an outpatient to count toward the 3‐day benchmark. The overarching goals of any visit status policy reform should be to: (1) simplify or eliminate the 2‐track status process for hospitalized patients, (2) stop or minimize the threat of audits based on status, and (3) maintain budget neutrality. Two additional options for consideration would be to: (1) create a low‐acuity modifier for use with patients anticipated to have short stays and low resource use and (2) preselect specific Diagnosis Related Groups based on historical data and create designations for those diagnoses of lesser intensity. Accountable care organizations contracts, a new model for healthcare payment, could potentially be structured to eliminate or simplify payment based on visit status for hospitalized patients. With bundled payments on the horizon and the possible phase‐out of fee‐for‐service reimbursement, the issue may become less paramount in the coming years. No solution will be perfect and must balance costs, ease of administration, and beneficiary protection.

There are reasons to be optimistic that change may soon be realized. CMS is currently considering significant hospitalization status policy reform. In the proposed IPPS‐2015, CMS asked for input on payment for short‐stay hospitalizations and, in the final IPPS‐2015 released August 4, 2014, CMS indicated its willingness to continue to work with stakeholders in revising these policies.[46] Additionally, CMS has responded to hospitals on 3 separate occasions by delaying RAC audits pertaining to the 2‐midnight rule. Further, the current MAC probe and educate audits focus on education with respect to 2‐midnight rule implementation rather than threatening hospitals with major financial penalties.[47] Congress has also been responsive in this area. In addition to the 3 delays announced by CMS, Congress passed legislation that mandated an additional delay to RAC audits that pertain to the 2‐midnight rule. Moreover, the Subcommittee on Health of the House Ways and Means Committee held hearings that included the 2‐midnight rule and RAC reform in May 2014, and the Senate Special Committee on Aging held hearings on the impact of visit status on Medicare beneficiaries in July 2014.[48, 49] Additionally, the House Ways and Means Health Subcommittee recently issued a draft bill to address Medicare hospital issues.[50] The OIG has also been responsive to hospital concerns regarding the current RAC program with a recent report recommending that CMS develop additional performance evaluation metrics to improve RAC performance and ensure that RACs are evaluated on all contract requirements.[51] Additionally, MedPAC has been considering several short‐stay payment reform options, modifying the need for a 3‐day inpatient hospitalization to qualify for postdischarge skilled nursing facility benefits and adjusting RAC contingency fees based on overturn rates.[52, 53] These actions by CMS, Congress, and the OIG, as well as the options under consideration by MedPAC, demonstrate a degree of regulatory and legislative responsiveness to hospital and provider concerns in the area of visit status determination.

The Medicare program is vital to tens of millions of disabled and elderly Americans. Fraud and abuse of the Medicare program should not be tolerated. Yet, the current system of assigning, monitoring, and auditing outpatient versus inpatient hospital care is in need of reform. It will be up to CMS and Congress to continue to work with hospitals and physicians to find an improved way to appropriately and fairly compensate hospitals for hospital services in a way that that does not depend on a poorly defined and contentious status of a patient. Such reform must include the RAC program. It is our hope that both CMS and Congress will prioritize status determination and payment reform so that Medicare beneficiaries, physicians, and hospitals all have a sustainable, fair, and transparent process.

Status determinations (outpatient versus inpatient) for hospitalized patients have become a routine part of patient care in the United States. Under the guidance provided by the Medicare Benefits Policy Manual, hospitalized Medicare beneficiaries are assigned 1 of these 2 statuses. The status assignment does not affect the care a patient can receive, but rather how the hospital services provided are billed to Medicare. Hospital services provided under inpatient status are billed under Medicare Part A. Hospital services provided under outpatient status, which includes all patients receiving observation services (commonly referred to as under observation), are billed under Medicare Part B. Whether hospital services are billed under Part A or Part B is important to hospitals and Medicare beneficiaries, as both the hospital reimbursement and beneficiary liability can vary greatly depending on whether services are billed under Part A versus Part B. Hospitals are generally reimbursed at a higher rate for services provided as an inpatient (Part A). The Office of the Inspector General (OIG) recently found that Medicare paid nearly three times more for a short inpatient stay than an [outpatient] stay for the same condition.[1] Medicare beneficiary liability also varies based on status. First, beneficiaries hospitalized as inpatients are subject to a deductible under Part A ($1,216 in 2014) for hospital services associated with that hospitalization and any future inpatient hospitalization beyond 60 days of discharge.[2] Beneficiaries hospitalized as outpatients are subject to the Medicare Part B deductible ($147 in 2014), and then a 20% copay on each individual outpatient hospital service, with no cumulative limit.[2, 3] In addition, hospital pharmacy charges for Medicare beneficiaries hospitalized as inpatients are covered under Medicare A. However, for Medicare patients hospitalized as outpatients, many medications are not covered by Medicare Part B benefits. Finally, time spent hospitalized as an outpatient does not count toward the Medicare 3‐day medically necessary inpatient stay requirement to qualify for the skilled nursing facility care benefit following discharge.

HISTORY AND INTENT OF INPATIENT AND OUTPATIENT STATUS DETERMINATIONS

Prior to October 1, 2013, the Centers for Medicare & Medicaid Services (CMS) stated that physician judgment and an expectation of at least an overnight hospitalization should determine inpatient status of hospitalized Medicare beneficiaries. Guidance as to when inpatient services were covered was found in the Medicare Benefits Policy Manual (MBPM)[4]:

For a subset of patients who are hospitalized under outpatient status, billing for observation services is allowed. CMS defines observation as a well defined set of services, that should last less than 24 hours and in only rare and exceptional casesspan more than 48 hours.[5] Many providers recognize the utility of a few additional hours of hospital care and/or testing in a hospital setting to determine whether a patient can go home or needs additional evaluation, monitoring, and/or treatment that can only be provided in a hospital, consistent with the CMS definition of observation.[6] It is important to note that although observation and outpatient are frequently used interchangeably, only outpatient is technically a CMS status. Patients in observation or under observation are, in fact, a subset of patients who are hospitalized under an outpatient status.

Outpatient status may also be appropriate for patients who require hospitalization for routine and expected overnight monitoring following a procedure. These patients are often not eligible for billing of observation services or as an inpatient because alternative methods of billing for the recovery time following the procedure exist. When determining the appropriate status of a Medicare beneficiary for a hospitalization following a procedure, physicians need to be aware of whether a specific procedure appears on the Medicare inpatient‐only procedures list.[7] Per CMS, procedures designated as inpatient only are reimbursed only when the patient is admitted as an inpatient at the time the procedure is performed.[8] Conversely, outpatient status for an overnight hospitalization associated with a procedure not on the inpatient‐only list is generally appropriate. Therefore, patients hospitalized for a procedure that appears on this list should always be hospitalized under inpatient status, regardless of the amount of time that the patient is expected to be hospitalized following the procedure, including those cases for which the hospitalization is expected to be only overnight.[7, 8] Only a limited number of Current Procedural Technology (CPT) codes, mostly surgical, automatically qualify for inpatient status and do not have outpatient prospective payment system eligibility. Although most procedures on the inpatient‐only list are associated with a hospitalization that commonly span at least 2 midnights, such as coronary artery bypass grafting, some potentially overnight stay cases, such as cholecystectomy (CPT 47600) appear on the 2014 inpatient‐only list.[9]

As noted above, prior to October 1, 2013, the Medicare definitions governing outpatient versus inpatient status included a 24‐hour benchmark. However, the MBPM also notes that: Admissions of particular patients are not covered or non‐covered solely on the basis of the length of time the patient actually spends in the hospital.[10]

In practice, status determination was ultimately dependent on physician or other practitioner's complex medical judgment as specified by CMS. To validate this judgment, CMS recommended that reviewers use a screening tool as part of their medical review. This screening tool could include practice guidelines that are well accepted by the medical community but did not require or identify a specific criteria set.[11] Not surprisingly, there was and continues to be great variability in the application of outpatient versus inpatient status across hospitals in actual practice.[1, 12, 13] The ambiguity in the definition of a hospitalized patient's status helped spawn commercial clinical decision tools, such as InterQual (McKesson Corporation, San Francisco, CA) and MCG (formally known as Milliman Care Guidelines; MCG Health, LLC, Seattle, WA), to help define inpatients versus outpatients.[14, 15] However, these guidelines are complex, can be difficult to interpret and apply, and have been criticized for poor predictive value and attempting to replace physician judgment.[16, 17, 18] Furthermore, CMS has never formally endorsed any specific decision tool.

INPATIENT AND OUTPATIENT PAYMENTS AND THE RECOVERY AUDIT CONTRACTOR PROGRAM

In 2000, CMS started using Ambulatory Payment Classifications for hospital services, which made inpatient care more financially favorable for hospitals. In response to concerns that hospitals would be incentivized to overuse inpatient status, CMS made a number of changes to their payment system, including the creation of the Recovery Audit Program in 2003. This program was originally called the Recovery Audit Contractor (RAC) Program and continues to be most commonly referred to as the RAC program. The RAC program, tasked with finding and correcting improper claims to the Medicare program, began as a demonstration required in the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), and subsequently became a nationwide audit program under the Tax Relief and Health Care Act of 2006. Under this program, private contractors review hospital and billing records of Medicare patients and are paid on a contingency fee (8%12.5%) for all underpayments and overpayments that are identified and corrected.[19] Importantly, the RACs are not subject to any financial penalties for cases improperly denied.

RACs initially targeted many overnight inpatient stays for recoupment. These cases were attractive audit targets because the RACs could argue that the inpatient hospital services were delivered in the improper status based solely on the length of stay, without having to consider in their audit the complexity of decision making or medical necessity of the services provided. However, it is worth noting that with improvement in efficiency and advancements in medical technology, hospitals and physicians have been increasingly able to safely evaluate and treat medically complex and severely ill patients quickly, sometimes with just an overnight stay. As perspective, in 1965, the average length of stay for a Medicare patient was 13 days; in 2010, it was 5.4 days, with over one‐third of hospitalizations lasting <3 days.[20]

Concurrent with the increased RAC denials for services provided in an inpatient status, the use of observation services changed significantly from 2007 to 2012. The average length of stay for Medicare patients under outpatient status with observation services exceeded 24 hours in 2007, was 28.2 hours by 2009,[21] and grew to 29 hours by 2012.[22] Between July 2010 and December 2011, at the University of Wisconsin Hospital, 1 in 6 observation stays lasted longer than 48 hours, suggesting that long observation stays were no longer rare and exceptional as stated in CMS' own definition.[23] This same University of Wisconsin study also found that observation services were not well defined, with 1141 distinct diagnosis codes used for these services.[23]

Additionally, a Medicare Payment Advisory Commission (MedPAC; described on their website, www.medpac.gov, as a nonpartisan legislative branch agency that provides the US Congress with analysis and policy advice on the Medicare program) 2014 Report to Congress showed that from 2006 to 2012, outpatient services increased 28.5% whereas inpatient discharges decreased 12.6% over the same time period.[22]

Hospitals have also expressed concern that the RAC contingency fee payment model and a lack of penalty for improper denials promotes overzealous auditing.[24, 25] RAC recoupment has increased from approximately $939 million in 2011, to $2.4 billion in 2012, to $3.8 billion in 2013.[26, 27, 28] Given the money now at stake, it is not surprising that hospitals have become very active in appealing RAC denials. Self‐reported data submitted to the American Hospital Association (AHA) for the months January 2014 to March of 2014 show that hospitals now appeal 50% of RAC denials and win 66% of these appeals.[29] The AHA data also show that 69% of self‐reporting hospitals spent over $10,000 to manage their audit and appeals process over this same 3‐month time period, with 11% spending more than $100,000.

This appeals process is not only costly to hospitals, it is also lengthy. As of January 2014, the average wait time for an appeal hearing with an administrative law judge (level 3 appeal) exceeded 16 months.[30] In fact, the appeals process has become so backlogged that hospitals' rights to assignment of level 3 (administrative law judge) appeals have been temporarily suspended.[30] In August 2014, CMS offered a $0.68 on the dollar partial payment for hospitals willing to settle all eligible outstanding appeals in an attempt to relieve the appeals backlog.[31] In addition, the AHA currently has a suit against the US Department of Health & Human Services over the RAC appeals backlog.[32]

Increased use of outpatient status may be driven by pressures from the RAC program and, potentially, by improvements in the efficiency of care. Because hospitals are paid less for care provided under outpatient status than they are for the identical care provided under inpatient status, hospitals faced both potential financial penalty for improvements in efficiency and the threat of RAC audits.

THE 2‐MIDNIGHT RULE: A FIX?

Given the challenges in defining inpatient versus outpatient hospitalization, the increasing use of outpatient status and the increasing length of stay of outpatient hospitalizations with observation services, in 2013, CMS responded with new policies to define the visit status for hospitalized patients. On August 2, 2013, CMS announced the fiscal year 2014 hospital Inpatient Prospective Payment System final rule (IPPS‐2014) to become effective October 1, 2013. This document was formally issued as part of the Federal Register on August 19, 2013.[33] Central to the CMS IPPS‐2014 was a 2‐midnight benchmark that offered a major change in how physicians were to determine the status (inpatient vs outpatient) of hospitalized patients. With this 2‐midnight benchmark, now informally known as the 2‐midnight rule, CMS finalized its proposal to generally consider patients that are expected by a practitioner (with knowledge of the case and with admitting privileges) to need hospitalization that will span 2 or more midnights as inpatient. The IPPS‐2014 also finalized the converse of this: hospitalizations expected to span <2 midnights are to be regarded as outpatient with 2 exceptions:

1. If the hospitalization is associated with a procedure appearing on the previously described Medicare inpatient‐only procedures list, or
2. A rare and unusual circumstance in which an inpatient admission would be reasonable regardless of length of stay. Currently, unanticipated mechanical ventilation initiated during the hospitalization visit is the only rare and unusual circumstance that qualifies as such an exception.[7]

CMS' stated goals and expectations for the 2‐midnight benchmark were:

1. Reduce the growing number of prolonged hospitalizations (>48 hours) for Medicare beneficiaries under outpatient status.
2. Decrease billing disputes between hospitals and Medicare auditors, especially RACs, by establishing more clearly defined, time‐based status criteria.
3. Reduce the number of outpatient encounters overall. Because CMS expected the rule to convert a net increase of cases from outpatient to inpatient, resulting in higher payments to hospitals, CMS included a 0.2% payment cut in hospital reimbursement in the IPPS‐2014 as an offset.[33, 34]

Although unrelated to the goals and expectations above, the IPPS‐2014 also included a requirement that:

CMS allowed for an authentication (generally regarded as a cosignature that is timed and dated) of the inpatient admission order by an attending physician with admitting privileges, done prior to discharge, in cases where the inpatient order had been placed by a practitioner (such as a resident, fellow, or physician assistant) without admitting privileges. Attending physician authentication of the inpatient admission order must be done prior to discharge [a]s a condition of payment for hospital inpatient services under Medicare Part A.[35]

From the August 2, 2013 announcement until the effective date of October 1, 2013, hospitals had just 2 months to interpret and comply with the IPPS‐2014, a complex 546‐page document that required hospitals to make extensive changes to admission procedures, workflows, and electronic health records (EHRs). In addition, extensive physician, provider, and administrator education was needed. During these 2 months, hospitals continued to request additional information and clarification from CMS regarding many aspects of the IPPS‐2014, including basic questions that included (1) how to apply the 2‐midnight benchmark to patients who were transferred from 1 hospital to another and (2) when the clock started for hospital services in determining a patient's expected length of hospitalization.

Despite concerns voiced by Congress and medical organizations, the new policy went into effect as scheduled.[36, 37] However, just days prior to October 1, 2013, CMS issued a 3‐month limited suspension of auditing and enforcement of the 2‐midnight rule by the RACs that was subsequently extended by CMS 2 more times, first through March 31, 2014 and then again through September 30, 2014. Other audits to be performed by RACs and all other government audits, including those performed by Medicare Administrative Contractors (MACs) were allowed to continue.[38] In particular, the MACs were instructed to conduct patient status reviews using a probe and educate strategy, which, via educational outreach efforts, would instruct hospitals how to adapt to the new rule. On April 1, 2014, the Protecting Access to Medicare Act of 2014 was signed into law, which, under section 111 of this law, permitted CMS to continue medical review activities under the MAC probe and educate process through March of 2015, and prohibited CMS from allowing RACs to conduct inpatient hospital status reviews on claims with these same dates of admission, October 1, 2013 through March 31, 2015.

The MACs were created by the MMA of 2003, which mandated that the Secretary of Health & Human Services replace Part A Fiscal Intermediaries and Part B carriers with Medicare Administrative Contractors (MACs).[39] As established by CMS, MACs are multi‐state, regional contractors responsible for administering both Medicare Part A and Medicare Part B claims and serve as the primary operational contact between the Medicare Fee‐For‐Service program, and approximately 1.5 million health care providers enrolled in the program.[39]

THE IPPS‐2014 AND CMS' STATED GOALS AND EXPECTATIONS

In the analysis that accompanied the IPPS‐2014, Medicare expected the use of outpatient services to decrease overall, as the new rules would effectively eliminate almost all outpatient hospitalizations >48 hours. Although no official data are yet available from CMS, our early experience under the 2‐midnight rule has suggested that long observation stays have declined in frequency, a favorable outcome of the new policy. However, as designed, the new 2‐midnight IPPS rule most predominately affects 1‐day stays, or more accurately, 1‐midnight stays. This is because many hospitalizations that previously met inpatient criteria (as defined by commercially available products such as MCG or InterQual), but spanned <2 midnights would have been classified as inpatient prior to October 1, 2013. However, since October 1, 2013, these same hospitalizations are now classified as outpatient. An example of such a case is a patient who presents to an emergency department with symptoms of a transient ischemic attack and has a high ABCD (age 60 years, blood pressure 140/90 mm Hg at initial evaluation, clinical features, duration of symptoms, diabetes score).[40] Prior to the 2‐midnight rule, this patient, based on the severity of the signs and symptoms upon presentation, could have been appropriately hospitalized as an inpatient.

Now, under the current IPPS and the ability of many hospitals to efficiently evaluate and treat such patient in <2 midnights, the patient should be categorized as an outpatient, at least initially, despite the severity and high risk of his/her presentation. In fiscal year 2013, The Johns Hopkins Hospital had 1791, 1‐day inpatient stays for Medicare beneficiaries, representing 15.2% of all Medicare admissions. Similarly, in the 12 months just prior to the 2‐midnight rule (October 1, 2012 to September 30, 2013), 10.4% (1280) of all Medicare encounters at the University of Wisconsin were 1‐day inpatient stays under previous criteria. Because of implementation of the 2‐midnight rule in October 2013, Medicare outpatient hospitalization for 1‐day stays at The Johns Hopkins Hospital increased by 49%, from an average of 117 patients/month to 174 patients/month. Nationally, it is possible that a reduction in long observation stays could be offset by an increase in 1‐day‐stay outpatient hospitalization encounters.

A second key expectation and goal of IPPS‐2014 was, by shifting to a more concrete, time‐based definition of inpatient, to decrease the disagreement between hospitals and auditors regarding patient status (inpatient vs outpatient). As noted earlier, many disputes with auditors for hospitalizations prior to October 2013 did not involve the need or type of hospital services provided, but rather the status under which the care was provided. However, the new time‐based criterion hinges not on actual length of hospitalization, but the expected length of hospitalization as determined by a practitioner with admitting privileges and knowledge of the patient. Accurately and consistently predicting the length of hospitalization has proven to be challenging, even for the most experienced practitioners. Since October 2013, for patients hospitalized at The Johns Hopkins Hospital through its emergency department, the admitting physicians' expectation of whether a patient would require 1 versus 2 or more midnights of necessary hospitalization was correct only half of the time. Given past experience, the RACs may challenge the medical judgment that lead practitioners to expect a hospitalization of 2 or more midnights without having to challenge whether the care provided was medically necessary.

Further, the IPPS‐2014 has not been accompanied by any significant changes to the payment scheme for auditors. RACs continue to be paid a percentage of any monies they determine to have been improperly paid by CMS, but with no penalty for cases that are overturned on appeal. Historically, the vast majority of RAC recovery fees have been due to determination of overpayments by CMS.[41, 42] Despite the 2‐midnight rule, RACs will continue to have a financial incentive to allege overpayment. In the initial probe and educate audits by MACs under the new 2014‐IPPS, despite inpatient admission orders being authenticated and certified by an attending physician, claims are being denied because the documentation does not support an expectation for a 2‐midnight hospitalization. Namely, auditors are continuing to challenge not the medical necessity of the services that hospitals provide, but rather the status in which those services were provided. Thus far, the IPPS‐2014 does not appear to fully remedy the auditing conflict that existed prior to October 2013.

As noted above, the IPPS‐2014 also requires, as of October 1, 2013, as a condition of payment for hospital services under Part A, that the inpatient admission order must be either entered by a practitioner with admitting privileges or authenticated prior to discharge by an attending physician involved in the care of the patient in cases in which the inpatient admission order was entered by a practitioner without admitting privileges (eg, resident, physician assistant, or fellow).[43] The requirement of an attending physician's cosignature has involved major changes to physician workflow and the electronic heath record (EHR) framework at The Johns Hopkins and the University of Wisconsin Hospitals, and does not keep up with modern healthcare systems in which patients are admitted 24 hours a day by a variety of providers (eg, residents, nurse practitioners) who otherwise may write stand‐alone orders. These changes have proven to be time‐consuming, costly, and have not, to our knowledge, improved patient care or utilization of resources.

The new visit status rules have also led to confusion among clinicians. A recent large survey of hospitalists conducted by the Society of Hospital Medicine demonstrated that more than half of respondents disagreed that the 2‐midnight rule improved hospitalist workflow compared to prior observation policy.[44] In addition, only 40% of hospitalists reported confidence in how to apply the rule.[44] Thus, the intent to clarify visit status policy with the IPPS‐2014 has not translated to clear and useful rules for frontline clinicians.

FUTURE DIRECTIONS

After over a year under the 2‐midnight rule, although long observation stays may be reduced, it seems unlikely these new regulations will achieve 2 of CMS' stated goals: (1) decreasing the use of outpatient status for hospitalizations and (2) resolving status disputes between auditors and hospitals. In addition, attempts at compliance with the new rules and regulations have diverted large amounts of physician time and hospital resources away from patient care. There is a clear need to reform both the hospitalization status policy and the RAC programs that enforce these rules.

One path Congress and CMS could consider is to reform the current Medicare reimbursement paradigm for hospital services to eliminate the need to distinguish inpatient from outpatient status. For example, H.R. 1179Improving Access to Medicare Coverage Act of 2013,[45] of the 113th Congress, if reintroduced, would decouple the link between the qualification for skilled nursing facility benefits from visit status by allowing time spent hospitalized as an outpatient to count toward the 3‐day benchmark. The overarching goals of any visit status policy reform should be to: (1) simplify or eliminate the 2‐track status process for hospitalized patients, (2) stop or minimize the threat of audits based on status, and (3) maintain budget neutrality. Two additional options for consideration would be to: (1) create a low‐acuity modifier for use with patients anticipated to have short stays and low resource use and (2) preselect specific Diagnosis Related Groups based on historical data and create designations for those diagnoses of lesser intensity. Accountable care organizations contracts, a new model for healthcare payment, could potentially be structured to eliminate or simplify payment based on visit status for hospitalized patients. With bundled payments on the horizon and the possible phase‐out of fee‐for‐service reimbursement, the issue may become less paramount in the coming years. No solution will be perfect and must balance costs, ease of administration, and beneficiary protection.

There are reasons to be optimistic that change may soon be realized. CMS is currently considering significant hospitalization status policy reform. In the proposed IPPS‐2015, CMS asked for input on payment for short‐stay hospitalizations and, in the final IPPS‐2015 released August 4, 2014, CMS indicated its willingness to continue to work with stakeholders in revising these policies.[46] Additionally, CMS has responded to hospitals on 3 separate occasions by delaying RAC audits pertaining to the 2‐midnight rule. Further, the current MAC probe and educate audits focus on education with respect to 2‐midnight rule implementation rather than threatening hospitals with major financial penalties.[47] Congress has also been responsive in this area. In addition to the 3 delays announced by CMS, Congress passed legislation that mandated an additional delay to RAC audits that pertain to the 2‐midnight rule. Moreover, the Subcommittee on Health of the House Ways and Means Committee held hearings that included the 2‐midnight rule and RAC reform in May 2014, and the Senate Special Committee on Aging held hearings on the impact of visit status on Medicare beneficiaries in July 2014.[48, 49] Additionally, the House Ways and Means Health Subcommittee recently issued a draft bill to address Medicare hospital issues.[50] The OIG has also been responsive to hospital concerns regarding the current RAC program with a recent report recommending that CMS develop additional performance evaluation metrics to improve RAC performance and ensure that RACs are evaluated on all contract requirements.[51] Additionally, MedPAC has been considering several short‐stay payment reform options, modifying the need for a 3‐day inpatient hospitalization to qualify for postdischarge skilled nursing facility benefits and adjusting RAC contingency fees based on overturn rates.[52, 53] These actions by CMS, Congress, and the OIG, as well as the options under consideration by MedPAC, demonstrate a degree of regulatory and legislative responsiveness to hospital and provider concerns in the area of visit status determination.

The Medicare program is vital to tens of millions of disabled and elderly Americans. Fraud and abuse of the Medicare program should not be tolerated. Yet, the current system of assigning, monitoring, and auditing outpatient versus inpatient hospital care is in need of reform. It will be up to CMS and Congress to continue to work with hospitals and physicians to find an improved way to appropriately and fairly compensate hospitals for hospital services in a way that that does not depend on a poorly defined and contentious status of a patient. Such reform must include the RAC program. It is our hope that both CMS and Congress will prioritize status determination and payment reform so that Medicare beneficiaries, physicians, and hospitals all have a sustainable, fair, and transparent process.