MedPAC Calls for Medicare Audit Reforms, Changes to Coverage for Nursing Home Care

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By Michael D. Williamson and Mindy Yochelson

June 15 — A congressional advisory panel June 15 recommended a policy change that would alter Medicare's requirements for coverage of nursing home admissions.

In addition, the panel's report to Congress urges the secretary of health and human services to implement changes that would affect how outside government contractors, known as Recovery Audit Contractors or RACs, are paid and operate and to end the “two-midnight” policy on paying for short stays in hospitals.

Under this Centers for Medicare & Medicaid Services policy, adopted in 2013, a Medicare beneficiary is not an “inpatient” unless the admitting physician expects that beneficiary to need care in the hospital for a period spanning two midnights. Hospital and other health-related groups say the two-midnight rule shortchanges hospitals because it leads to incorrect reimbursements by the CMS.

The Medicare Payment Advisory Commission’s report also includes policy options for Medicare coverage of medications administered by infusion or injection in physician offices and for linking certain program drug payments to clinical effectiveness evidence.

Nursing Home Coverage 

Congress should allow Medicare to cover beneficiaries’ nursing home stays if they are admitted from a hospital after being classified in outpatient observation status for up to two days and in inpatient status for at least one day (for a total of three days), MedPAC said in a report issued June 15.

The current rule doesn’t allow any time spent in hospital outpatient observation status to count toward the three-day threshold needed for Medicare to cover skilled nursing facility admissions.

Hospitals increasingly are classifying patients under outpatient observation, and the greater use of observation status has caused concern about beneficiaries’ financial liability and increased the likelihood that they won’t qualify for Medicare coverage of post-acute skilled nursing facility services (SNF), the panel said in its annual report on Medicare payment policy.

Senator's Statement 

In a June 15 press release, Sen. Sherrod Brown (D-Ohio) applauded MedPAC's recommendation to allow time spent in observation status to count toward the SNF three-day rule.

“When seniors are hospitalized, they should never be worried about whether or not they’ll be able to afford skilled nursing care after their hospital stay,” Brown said.

For too long, many seniors have been hit with unexpected costs because they didn’t know if they were hospitalized under observation status, and this recommendation “is wonderful news” for seniors who’ve been hit with out-of-pocket costs, he said.

MedPAC’s recommendation follows the introduction of the proposed Improving Access to Medicare Coverage Act (S. 843) by Brown, according to his statement.

The bill, co-sponsored by 15 other senators, including Susan Collins (R-Maine), Bill Nelson (D-Fla.), and Shelley Moore Capito (R-W.Va.), would allow patients’ time under observation status to count toward the three-day hospital stay requirement for coverage of SNFs, Brown said.

Brown introduced the legislation in March. After introduction, the Senate referred it to the Finance Committee.

Industry Reaction 

The American Health Care Association (AHCA), a nursing home trade group, also applauded the recommendation to alter Medicare coverage rules for SNF stays.

“At first review, we are pleased with the Commission's views” on three-day stays, AHCA's senior vice president for public affairs, Greg Crist, told Bloomberg BNA June 15. The group, he said, has long believed the three-day stay rule is antiquated, especially as hospital stays are increasingly shorter.

In addition, AHCA and its associated group, the National Center for Assisted Living, “believes elimination of the rule would be ideal,” Crist said. However, short of eliminating the rule, he said policies that continue to examine observation stays and short stays are positive steps forward.

RAC Changes 

In its report, MedPAC also made three recommendations related to RACs.

Specifically, MedPAC recommended that the HHS secretary:

• direct RACs to focus reviews of short inpatient stays on hospitals with the highest rates of this type of stay;

• modify each RAC’s contingency fees to be based, in part, on its claim denial overturn rate; and

• ensure that the RAC review period is shorter than the Medicare rebilling period for short inpatient stays.


In a June 15 e-mail to Bloomberg BNA, the Association of American Medical Colleges (AAMC), a trade association for teaching hospitals, said it's encouraged that MedPAC recommended a RAC’s contingency fees be based in part on its claim denial overturn rate and that the RAC look-back period should be shorter than the Medicare rebilling period.

Likewise, the American Hospital Association (AHA) supports the recommendation on RAC contingency fees, Melissa Jackson, the group's senior associate director for policy, told Bloomberg BNA June 15.

Reviewing Hospitals

However, both the AAMC and AHA aren't fully pleased with the other RAC recommendations.

The AAMC's e-mail said it believes that focusing RAC focus reviews on hospitals with the highest rates of short stay must be directed toward hospitals that are truly outliers.

Furthermore, the group said the selection of the hospitals to be reviewed must be risk-adjusted for factors such as the sociodemographics of the patient population and the severity of the patients treated by the hospital.

“Failure to do that may unfairly penalize those hospitals treating the sickest and the poorest patients, not the institutions that should be the focus of RAC audits,” the AAMC said.

For its part, Jackson said the AHA is concerned that the other recommendations don't fully address the RAC program’s systemic problems. “Any attempt to address these issues will continue to fail if it is not combined with fundamental RAC reform,” she said.

The Council for Medicare Integrity, a RACs trade association, said in a June 15 e-mail to Bloomberg BNA that it is still reviewing the report.

MedPAC approved the RAC recommendations and SNF coverage changes during its April meeting.

Drug Payment Policies

During a media call with reporters, MedPAC Executive Director Mark Miller said that the commissioners will return in the fall for further discussion and possible recommendations on modifications to Medicare's payment policies on pharmaceuticals—both those office-administered under Part B and provided on an outpatient basis under Part D.

MedPAC's next public meeting will be held Sept. 10-11.

In the area of Part B drugs that are mostly furnished by physicians, the current payment system might have the effect of encouraging the use of more expensive pharmaceuticals, he said.

Medicare pays for most Part B drugs, which are administered by infusion or injection, at payment rates set at the average sales price (ASP) plus 6 percent (or 4 percent under the sequester).

In 2013, Medicare and beneficiaries paid more than $19 billion for those drugs.

However, there has been concern that the 6 percent add-on to the ASP may encourage the use of higher-priced drugs when lower-priced alternatives are available, the report said.

Medicare pays providers the ASP plus 6 percent, regardless of the price a provider pays to acquire the drug.

Under the formula, 6 percent of a higher-priced drug gives a provider more revenue than 6 percent of a lower-priced drug.

Policy Options

An alternative policy being discussed would convert all or part of the 6 percent to a flat-fee add-on. One option the commissioners are considering is a flat add-on—100 percent of ASP plus $24 per drug per administration day.

Another option mentioned in the report is 102.5 percent of ASP plus $14 per drug per administration day.

“Our modeling demonstrates that a flat-fee add-on would increase payment rates for lower priced drugs and reduce payment rates for higher priced drugs compared with current policy,” the report said.

Therefore, “it might increase the likelihood that a provider would choose the least expensive drug in situations where differently priced therapeutic alternatives exist, potentially generating savings for Medicare beneficiaries and taxpayers,” the report said.

Miller said he believes that the Part B drug payment issues will be tackled before other Part B drug topics in the report.

Another issue that the commissioners are “likely to come back to” later is a “least costly alternative” policy in which Medicare set the payment rate for a group of drugs with similar health effects based on the payment rate of the least costly product in the group.

Paying for Part D Drugs

On the other Medicare pharmaceutical payment issue, Miller said that a decade of experience with the Part D drug benefit has raised concerns about certain patterns that have been exhibited by the private plans that offer this benefit.

The Part D benefit is sponsored by a large number of companies including Health Net Inc., Humana Inc., United HealthCare and Cigna.

There has been relatively slow growth in the direct subsidy that plans get from Medicare on a per member per month basis and which reduces premiums for enrollees.

“Competition has kept growth in average Part D premiums fairly low over time,” the report said.

However, growth has been much faster on the benefit's catastrophic side—in which plans have limited risk—and take effect for beneficiaries who have extremely high drug costs.

Under this side of the benefit, after enrollees hit an out-of-pocket threshold, Medicare acts as the reinsurer and pays 80 percent of drug costs, while the plan pays 15 percent and enrollees 5 percent.

“By exposing plans to greater risk, plan sponsors would have stronger incentives to manage benefit spending,” the report said.

Bidding Patterns

Medicare makes prospective payments to Part D plans based on sponsors’ bids. At the end of each benefit year, the CMS reconciles prospective payments from Medicare with actual benefit costs that plans paid.

Miller said that when plans bid to serve beneficiaries, in general, they are bidding too high on the direct subsidy and too low on the catastrophic benefit.

Some of the overbidding on the direct subsidy is because plan sponsors fear they may lose money if their enrollees’ drug spending is higher than the combination of direct subsidy payments and enrollee premiums.

“Between 2009 and 2013, about three-fourths of parent organizations returned overpayments to Medicare” during reconciliation, the report said.

However, on the catastrophic portion, in recent years, a majority of plan sponsors received additional money from Medicare at reconciliation because their prospective payments for individual reinsurance were too low.

“Medicare’s reconciliation payments show consistent patterns rather than the randomness one might expect from projection errors in the actuarial assumptions behind bids,” according to the report.

After 10 years of experience, policies should be examined that would encourage bidding accuracy, Miller said.

To contact the reporters on this story: Michael D. Williamson in Washington at and Mindy Yochelson at

To contact the editor responsible for this story: Brian Broderick at

The MedPAC report is at

A MedPAC fact sheet on the recommendations is at

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