Proposed Changes in Inpatient Status Would Reduce Expensive Stays, OIG Finds

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By Nathaniel Weixel  

The number of short, expensive inpatient hospital stays would be significantly reduced under policies in the Centers for Medicare & Medicaid Services' proposed hospital inpatient prospective payment system (IPPS) rule, a July 30 report by the Department of Health and Human Services Office of Inspector General found.

According to the report, Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries (OEI-02-12-00040), short inpatient stays on average cost Medicare and beneficiaries more than observation stays. The report made no recommendations and was issued in its final form.

When beneficiaries enter a hospital, hospital physicians often need to decide whether to admit them as inpatients or provide observation services. Observation services are short-term treatments and assessments provided to outpatients to determine whether they require further treatment as inpatients or can be discharged. CMS policy says observation services are usually needed for 24 hours or less. Observation stays can occur anywhere in the hospital, including the emergency department, a separate observation unit, or an inpatient unit.

According to OIG, CMS and others have raised concerns about hospitals' use of observation stays and short inpatient stays, which are stays that last less than two nights. In particular, they are concerned that beneficiaries may pay more as outpatients than if they were admitted as inpatients. Moreover, beneficiaries who are not admitted as inpatients may not qualify under Medicare for skilled nursing facility (SNF) services following discharge from the hospital.

Cost of Stays

In total, Medicare paid $5.9 billion for short inpatient stays in 2012, an average of $5,142 per stay, OIG found. In contrast, it paid $2.6 billion for observation stays, an average of $1,741 per stay. For each of the most common reasons for the stays, the average payment was always higher for short inpatient stays than for observation stays.

Beneficiaries also paid more for short inpatient stays than for observation stays, OIG found. Beneficiaries paid a total of $831 million for short inpatient stays, an average of $725 per stay. In contrast, they paid a total of $606 million for observation stays, an average of $401 per stay.

The OIG report found that Medicare beneficiaries had 1.5 million observation stays in 2012; these beneficiaries commonly spent one night or more in the hospital. Beneficiaries had 1.4 million long outpatient stays (which lasted longer than one night but were not coded as an observation day); some of these might have been observation stays, OIG said. Beneficiaries also had 1.1 million short inpatient stays, which were often for the same reasons as observation stays.

Of the three types of stays, nationally, 28 percent were short inpatient stays; the remaining 72 percent were either observation or long outpatient stays. However, the use of short inpatient stays varied widely among hospitals. Some hospitals used short inpatient stays for less than 10 percent of their stays; others used them for more than 70 percent of their stays, OIG found.

Additionally, the report found that labeling of inpatient services varied; some hospitals were more likely to use short inpatient stays, whereas others were more likely to use observation or long outpatient stays. Beneficiaries had more than 600,000 hospital stays that lasted three nights or more but did not qualify them for skilled nursing facility (SNF) services. For 4 percent of these stays, beneficiaries received SNF services for which they did not qualify; Medicare inappropriately paid $255 million for these services, OIG said.

Time-Based Presumption

The OIG report noted that CMS is concerned about beneficiaries spending long periods of time in observation stays without being admitted as inpatients. To combat the use of observation status, CMS in the fiscal 2014 IPPS rule proposed the use of a time-based presumption of medical necessity for hospital inpatient services based on the beneficiary's length of stay. The proposed rule was published in the May 10 Federal Register (78 Fed. Reg. 27,486; 82 HCDR, 4/29/13). A final rule is due by Aug. 1.

Under the policy, CMS would instruct Medicare medical review contractors to presume an inpatient hospital admission is reasonable and medically necessary if a beneficiary requires more than one Medicare utilization day, which the agency defines as an encounter spanning “two midnights.”

According to CMS, the proposed policy “would address longstanding concerns from hospitals that they need more guidance on when a patient is appropriately treated and paid by Medicare as an inpatient. At the same time the proposed change would help beneficiaries who in recent years have been having longer stays as outpatients because of hospital uncertainties about payment if they admit the patient to the hospital.”

If finalized as proposed, OIG said the proposal “would substantially affect how hospitals bill for observation stays, long outpatient stays, and short inpatient stays. Our results may be useful to CMS as it considers policy changes.”

Although the number of short inpatient stays would be significantly reduced as a result of the proposal, OIG said the number of observation and long outpatient stays might not be reduced if outpatient nights are not counted toward the two-night presumption. OIG said its results further indicate that, under the rule's provisions, some hospitals would likely continue to bill observation and long outpatient stays as outpatient stays; other hospitals--given strong financial incentives and few barriers-- would likely not follow the provisions and would admit beneficiaries as inpatients as soon as possible to meet the two-night presumption.

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