Center Comments Re: Reducing Regulatory Burdens Imposed by the Patient Protection and Affordable Care Act & Improving Healthcare Choices to Empower Patients

July 12, 2017

Thomas E. Price
Secretary
Department of Health and Human Services

Seema Verma
Administrator
Centers for Medicare & Medicaid Services
Department of Health and Human Services
Room 445-G, Hubert H. Humphrey Building
200 Independence Ave., S.W.
Washington, D.C.  20201

Re: Request for information: Reducing Regulatory Burdens Imposed by the Patient Protection and Affordable Care Act & Improving Healthcare Choices to Empower Patients, 82 Fed. Reg. 26885 (June 12, 2017)

Submitted electronically: http://www.regulations.gov

Dear Dr. Price, Ms. Verma, and CMS Colleagues:

The Center for Medicare Advocacy (Center) is a national, private, non-profit law organization, founded in 1986, that provides education, analysis, advocacy, and legal assistance to assist people nationwide, primarily the elderly and people with disabilities, to obtain necessary health care, therapy, and Medicare.  The Center focuses on the needs of Medicare beneficiaries, people with chronic conditions, and those in need of long-term care and provides training regarding Medicare and health care rights throughout the country.  It advocates on behalf of beneficiaries in administrative and legislative forums, and serves as legal counsel in litigation of importance to Medicare beneficiaries and others seeking health coverage.  These comments are based on our experiences talking with and representing hundreds of Medicare beneficiaries and their families who have been caught in observation status.

CMS has legal authority to correct the burdens and costs of observation status for Medicare beneficiaries through subregulatory guidance

In response to the Centers for Medicare & Medicaid Services’s (CMS’s) request for feedback on burden reductions and empowering patient choice, the Center urges CMS to issue subregulatory guidance and allow all time spent by a patient in an acute care hospital to be counted towards meeting the three-day requirement that is a statutory prerequisite to Medicare Part A-covered care in a SNF.  This subregulatory change would not require changing CMS’s rules for hospital billing.

As you both and the Department are aware, observation status is creating enormous financial problems for hospitalized patients who find that their multiple-day stays in the hospital – where they receive medical and nursing care, diagnostic tests, treatments, medications, food, etc. that are indistinguishable from the medical and nursing care, diagnostic tests, treatments, medications, food, etc. that are received by patients during inpatient stays – make them ineligible to receive Medicare coverage of their subsequent stays in skilled nursing facilities (SNFs) solely because their hospital stays were billed to Medicare as outpatient/observation (Part B), rather than as inpatient (Part A).  The costs for hospitalized patients in observation or other outpatient status are significant.  These patients must pay for their SNF stays entirely out-of-pocket; they do not have Part A coverage, as patients in inpatient status have.

CMS has confirmed repeatedly that physicians can order whatever care, tests, treatment, and services their patients need, whether the patients are inpatients or outpatients.[1]  This confirmation makes clear that observation status is not an issue of hospital care for beneficiaries.  It is solely a Medicare billing issue – whether hospitals bill Part A or Part B for a patient’s stay. 

In a 2013 report on observation status, Memorandum Report: Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, the Inspector General found that observation stays and inpatient stays were often for the same kinds of medical conditions.[2]  The Inspector General concluded, “CMS should consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost-sharing for SNF services.”[3] 

CMS promulgated the two-midnight rule in 2013 and implemented it in 2014, with the expectation that more patients would be formally admitted as inpatients.  That result did not occur.  As the Inspector General found in a 2016 report, Vulnerabilities Remain Under Medicare’s 2-Midnight Hospital Policy, hundreds of thousands of patients continue to be hospitalized for multiple days but the hospitals classify them as outpatients.[4]  

CMS could easily correct this problem for beneficiaries through subregulatory guidance.  This letter summarizes the legal memorandum that I wrote in 2014 (copied in full at the end of this comment letter) that set out the agency’s current authority under the Medicare statute to count all time in the hospital.

A 2008 decision of the Second Circuit Court of Appeals confirms the Secretary of HHS under the Medicare statute to include a hospital patient’s time in observation as part of inpatient time in the hospital for purposes of determining whether the patient qualifies for Part A coverage of a subsequent stay in a skilled nursing facility (SNF).  Estate of Landers v. Leavitt, 545 F.3d 98 (2^nd Cir. 2008).  The Court recognized that neither the statute nor regulations define the word “inpatient” and that the Secretary defined inpatient in the subregulatory Medicare Benefit Policy Manual as occurring after a formal physician order for admission.  Although the Court upheld the Secretary’s position in litigation – that only time in formal inpatient status may be counted toward satisfying the qualifying three-day inpatient requirement – it acknowledged that the Secretary has authority under the Medicare law to change his interpretation of inpatient to include time spent in observation.  The Court wrote:

[W]e note that the Medicare statute does not unambiguously require the construction we have adopted.  If CMS were to promulgate a different definition of inpatient in the exercise of its authority to make rules carrying the force of law, that definition would be eligible for Chevron deference notwithstanding our holding today.

545 F.3d at 112. 

CMS recognized its existing authority to change its definition in 2005 when it asked for public comment on whether time in observation should be counted towards satisfying the three-day inpatient requirement for Medicare Part A SNF coverage.  70 Fed. Reg. 29069, 29098-29100 (May 19, 2005).   In final rules published in August 2005, CMS acknowledged that most commenters “expressed support for the idea that hospital time spent in observation status immediately preceding a formal inpatient admission should count toward satisfying the SNF benefit’s statutory qualifying three-day hospital stay requirement.”  70 Fed. Reg. 45025, 45050 (Aug. 4, 2005).  CMS reported that “some advocated eliminating the statutory requirement altogether.”  Id.

CMS analyzed the two suggestions separately.  With respect to repealing the three-day requirement entirely, CMS wrote, “we note that such an action would require legislation by the Congress to amend the law itself and, thus, is beyond the scope of this final rule.”  Id.  With respect to counting time in observation towards the qualifying inpatient stay, CMS wrote, “we note that we are continuing to review this issue, but are not yet ready to make a final determination at this time.”  Id.

CMS correctly understood that it could not repeal the three-day statutory requirement by regulation but that it could count the time in outpatient status, if it chose.  Its only stated reason for not counting observation time, despite widespread support of such a change from commenters, was that it wanted to continue reviewing the issue.

Observation status results in hospitals using Medicare reimbursement that should be spent on care

Medicare pays for observation status in multiple ways when hospitals spend Medicare reimbursement trying to make the “correct” decision on patient status.  These hundreds of millions of dollars, if not billions of dollars, could and should be spent on care for patients. 

1. As confirmed by the American Case Management Association in a survey of its members, hospitals have expanded their utilization review committees to be available beyond normal business hours, five days a week.  Medicare dollars spent on reviewing physicians’ inpatient admission decisions could have been spent on patient care.
2. Hospitals buy InterQual and Milliman, the proprietary computer-based programs that Recovery Auditors and other reviewers use to determine whether hospitals’ inpatient decisions are correct.  Understandably, hospitals’ utilization review committees want to know how their decisions will be reviewed and therefore purchase and use the same computer programs to analyze their own decisions in advance.  Medicare dollars spent on purchasing computer programs could have been spent on patient care.

   Even preparing for Recovery Auditors was expensive for hospitals and the Medicare program.  At the May 20, 2014 House Ways and Means Committee hearing, “Current Hospital Issues in the Medicare Program,” Amy Deutschendorf, Senior Director of Clinical Resource Management, Johns Hopkins Hospital and Health System, testified that the hospital spent more than $2 million preparing for the Recovery Audit Contractor (RAC) program.  https://waysandmeans.house.gov/event/bak_chairman-brady-announces-hearing-on-current-hospital-issues-in-the-medicare-program-2/.  The hospital’s efforts were understandable; the RAC program retroactively reviewed hospitals’ inpatient decisions and required full repayment of Medicare reimbursement by the hospital if its auditors concluded that a patient should have been called an outpatient instead of an inpatient.

3. Finally, hospitals consult with Executive Health Resources (EHR), when they are not certain whether to call patients inpatients or outpatients.  The Philadelphia-based EHR has physicians throughout the country who are available around the clock to consult with hospitals.  EHR reports that it works with “more than 2,300 providers and 300 health plans across the country,” http://www.ehrdocs.com/, and that since its founding in 1997, its “Physician Advisors have successfully performed more than 10 million medical necessity reviews, conducted hundreds of audits at hospital facilities, and successfully identified and reversed thousands of inappropriate medical necessity denials, concurrently and retrospectively, at all levels of appeal,” 

http://www.ehrdocs.com/aboutehr_corporateoverview.php.

If EHR charged $100 for each of its 10 million medical necessity reviews, these charges would be $1 billion out of the Medicare program that could have been spent on care.If EHR charged $200 for each of its 10 million medical necessity reviews, these charges would be $2 billion out of the Medicare program that could have been spent on patient care.

Center for Medicare Advocacy’s Legal Memorandum (2014)

CMS HAS AUTHORITY UNDER EXISTING LAW TO DEFINE INPATIENT CARE

Under a 2008 decision of the Second Circuit Court of Appeals, the Secretary of HHS has authority under the Medicare statute to include a hospital patient’s time in observation as part of inpatient time in the hospital for purposes of determining whether the patient qualifies for Part A coverage of a subsequent stay in a skilled nursing facility (SNF).  Estate of Landers v. Leavitt, 545 F.3d 98 (2^nd Cir. 2008).  The Court recognized that neither the statute nor regulations define the word “inpatient” and that the Secretary defined inpatient in the Medicare Benefit Policy Manual as occurring after a formal physician order for admission.  Although the Court upheld the Secretary’s position in litigation – that only time in formal inpatient status may be counted toward satisfying the qualifying three-day inpatient requirement – it acknowledged that the Secretary had authority to change his interpretation of inpatient to include time spent in observation.  The Court wrote:

[W]e note that the Medicare statute does not unambiguously require the construction we have adopted.  If CMS were to promulgate a different definition of inpatient in the exercise of its authority to make rules carrying the force of law, that definition would be eligible for Chevron deference notwithstanding our holding today.

545 F.3d at 112. 

In fact, the Centers for Medicare & Medicaid Services (CMS) has recognized its authority to change the definition of inpatient.  In May 2005, CMS asked for public comment on whether time in observation should be counted towards satisfying the three-day inpatient requirement for Medicare Part A SNF coverage.  70 Fed. Reg. 29069, 29098-29100 (May 19, 2005).  In August 2005, CMS acknowledged that most commenters “expressed support for the idea that hospital time spent in observation status immediately preceding a formal inpatient admission should count toward satisfying the SNF benefit’s statutory qualifying three-day hospital stay requirement.”  70 Fed. Reg. 45025, 45050 (Aug. 4, 2005).  CMS reported that “some advocated eliminating the statutory requirement altogether.”  Id.

CMS analyzed the two suggestions separately.  With respect to repealing the three-day requirement entirely, CMS wrote, “we note that such an action would require legislation by the Congress to amend the law itself and, thus, is beyond the scope of this final rule.”  Id.  With respect to counting time in observation towards the qualifying inpatient stay, CMS wrote, “we note that we are continuing to review this issue, but are not yet ready to make a final determination at this time.”  Id.

CMS correctly understood that it could not repeal the three-day statutory requirement by regulation but that it could count the time in outpatient status, if it chose.  Its only stated reason for not counting observation time, despite widespread support of such a change from commenters, was that it wanted to continue reviewing the issue.

Finally, CMS allows certain hospital stays to count in qualifying a patient for Part A-covered SNF care even when the hospital care is different from Part A-covered hospital care.

In the context of hospice services, CMS has recognized that “general inpatient care” in a hospital, although “not equivalent to a hospital level of care under the Medicare hospital benefit,” nevertheless qualifies a hospice beneficiary for Part A-covered SNF services.  Medicare Benefit Policy Manual, Chapter 9, §40.1.5, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c09.pdf. 

Similarly, a three-day stay in a foreign hospital may qualify a beneficiary for Part A SNF coverage if the foreign hospital is qualified as an “emergency hospital.”  Medicare Benefit Policy Manual, Chapter 8, §20.1.1,

http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c08.pdf. 

The argument for counting observation or outpatient time for purposes of calculating eligibility for the Part A SNF benefit is, of course, far stronger than either of the prior examples since the consensus is that care in the hospital is indistinguishable whether the patient is formally admitted as an inpatient or called an outpatient.

Most recently, in describing why a beneficiary continues to be eligible for Part A SNF coverage after the hospital withdraws its Part A claim and submits Part B claims for the patient’s care instead (the hospital rebilling option), CMS writes, “the 3-day inpatient hospital stay which qualifies a beneficiary for ‘posthospital’ SNF benefits need not actually be Medicare-covered, as long as it is medically necessary.”  78 Fed. Reg. 50495, 50921 (Aug. 19, 2013). CMS confirms that a hospital’s decision to withdraw its claim for Part A reimbursement and to seek Part B reimbursement instead does not negate the fact that the patient received medically necessary inpatient care, for purposes of Part A SNF coverage.  CMS continues:

In addition, the status of the beneficiaries themselves does not change from inpatient to outpatient under the Part B inpatient billing policy.  Therefore, even if the admission itself is determined to be not medically necessary under this policy, the beneficiary would still be considered a hospital inpatient for the duration of the stay – which, if it occurs for the appropriate duration, would comprise a “qualifying” hospital stay for SNF benefit purposes so long as the care provided during the stay meets the broad definition of medical necessity described above.

Id.  A patient’s receiving “medically necessary” care in the hospital, not the classification of the care as “inpatient,” is the key factor for determining the patient’s eligibility for Part A SNF coverage.

Conclusion

As the Court in Landers held and CMS itself recognized in 2005, CMS has authority under the Medicare statute to redefine inpatient status to count all time in the hospital.  In Manual provisions, CMS recognizes that time in a hospital that is different from Medicare-covered hospital time can count for purposes of Part A SNF coverage.  In the hospital rebilling option, CMS recognizes that receiving medically necessary care in the hospital is the key factor in determining Part A SNF coverage.  CMS should confirm that time spent in observation or outpatient status qualifies a patient for Medicare Part A SNF coverage so long as the time in the hospital was medically necessary.

The Background statement below shows CMS’s ongoing consideration of this issue, CMS’s repeated expressions of concern about the impact of extended observation stays on Medicare beneficiaries, and the findings of independent research on observation.

Background

CMS’s concern about observation and outpatient status

In the nine years since it declined commenters’ recommendations to include observation time as inpatient time, CMS has received considerable input from the public and repeatedly expressed its own concern about the significant impact of observation on Medicare beneficiaries. 

In July 2010, CMS sent letters to the national hospital associations asking why they used observation status for extended periods. 

In August 2010, CMS held a Listening Session about observation status.  http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalOutpatientPPS/downloads/94244031HosptialObservationBedsListeningSession082410.pdf.  Commenters opposed use of observation status to deprive beneficiaries of Part A coverage of their subsequent medically necessary SNF stay.

In 2012, in proposed and final rules for the outpatient prospective payment system, CMS expressed concern about the increasing amount of time that patients spend in the hospital under observation.  77 Fed. Reg. 45155-157 (July 30, 2012) (proposed rules); 77 Fed. Reg. 68426-433 (Nov. 15, 2012) (final rules). 

In 2012, CMS asked for public comment on possible changes to observation status, 77 Fed. Reg. 45061, 45155 (July 30, 2012), but again declined to make any changes, 77 Fed. Reg. 68209, 68433 (Nov. 15, 2012) ("[w]e will take all of the public comments that we received into consideration as we consider future actions that we could potentially undertake to provide more clarity and consensus regarding patient status for purposes of Medicare payment.")

In proposed rules on the Part A-B hospital rebilling option, CMS repeated its concerns.  78 Fed. Reg. 16632, 16634 (March 18, 2013). 

In proposed rules on the inpatient prospective payment system, published May 10, 2013, 78 Fed. Reg. 27486, 27644-649, CMS once again commented on the increased use of observation status by hospitals and the consequences for Medicare beneficiaries.

In 2013, CMS established a hospital rebilling program and time-based definitions of inpatient care (the two-midnight rule), 78 Fed. Reg. 50495, 50906-931, 50938-954, respectively (Aug. 19, 2013).  CMS expressed the hope and expectation that these changes would address concerns about extended observation and outpatient stays.  78 Fed. Reg. at 50922.

Research and studies

In the nine years since CMS first asked for public comment on observation time, a considerable amount of research and analysis has shown the increasing use of observation and outpatient status, the declining use of inpatient status, and the financial consequences for beneficiaries of the changed descriptions of their status in the hospital.

In 2012, Brown University reviewed 100% of Medicare claims data for 2007-2009.  Researchers found that the number of observation stays increased 34% and inpatient admissions decreased, suggesting “a substitution of outpatient observation services for inpatient admissions.”  Zhanlian Feng, et al, “Sharp Rise In Medicare Enrollees Being Held In Hospitals For Observation Raises Concerns About Causes And Consequences,” Health Affairs 31, No. 6 (2012).  They also found that the average length of stay in observation increased by more than 7% and that more than 10% of patients were on observation for more than 48 hours.  The Brown researchers identified the Recovery Audit Contractor program (as the Recovery Audit program was then known) and Condition Code 44 as the primary causes of hospitals’ increased use of observation status.

In 2013, the HHS Office of Inspector General described observation stays, long outpatient stays, and short inpatient stays.  The Inspector General found that in 2012, 1.5 million hospital stays were classified as observation and 1.4 million hospital stays were classified as long outpatient stays (that is, the hospital described the patient as an outpatient but did not bill for observation hours).  Moreover, more than 600,000 hospital stays were for three or more midnights, but did not include three inpatient midnights.  The Inspector General recommended that CMS consider how to ensure that Medicare beneficiaries with similar post-acute care needs have the same access to, and cost-sharing requirements for, SNF care.  Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02—12-00040 (July 29, 2013), http://oig.hhs.gov/oei/reports/oei-02-12-00040.pdf.

Research at the University of Wisconsin Hospital and Clinics between July 1, 2010 and December 31, 2011 found

• 4,578 of the total 43,853 hospital stays (10.4%) were observation stays; and
• 756 observation stays (16.5%) exceeded 48 hours; 1,791 observation stays (39.1%) were 24-48 hours; 2,031 observation stays (44.4%) were less than 24 hours.

More than one quarter of patients in observation had longer lengths of stay and were more likely than inpatients to be discharged to a SNF, to have more acute/unscheduled admissions, to have more "avoidable days" (days not accounted for by medical need), and to have more "repeat encounters."  The researchers concluded, "observation care in clinical practice is very different than what CMS initially envisioned and creates insurance loopholes that adversely affect patients, health care providers, and hospitals."  Ann M. Sheehy, MD, MS, et al., "Hospitalized but Not Admitted: Characteristics of Patients With 'Observation Status' at an Academic Medical Center," JAMA Intern Med. 2013; ():-. doi:10.1001/jamainternmed.2013.7306. (abstract published online July 8, 2013), http://archinte.jamanetwork.com/article.aspx?articleid=1710122.

In an invited commentary on the Wisconsin study, Robert M. Wachter, MD, Department of Medicine University of California, San Francisco, described "Observation Status" as having "morphed into madness” and wrote, “[I]n fact, if one was charged with coming up with a policy whose purpose was to confuse and enrage physicians and nearly everyone else, one could hardly have done better than Observation Status.”  "Observation Status for Hospitalized Patients," JAMA Intern Med (published online July 8, 2013),

http://archinte.jamanetwork.com/article.aspx?articleid=1710118.

CMS’s new two-midnight rule has not changed the situation.  A retrospective application of the two-midnight rule at the University of Wisconsin Hospital and Clinics for the period January 1, 2012 – February 23, 2013 found

• Patients arriving at the hospital after 4:00 p.m. were admitted to inpatient status 31.2% of the time; if they arrived at the hospital before 8:00 a.m., they were admitted to inpatient status 13.6% of the time.
• There was little overlap in diagnosis codes for short-stay inpatients and observation patients.
• Most diagnosis codes in observation were the same, regardless of the patient’s length of stay in the hospital.

Ann Sheehy, M.D., et al, University of Wisconsin, “Observation and Inpatient Status: Clinical Impact of the 2-Midnight Rule,” Journal of Hospital Medicine (2014).

Conclusion

In the nine years since CMS first expressed concern about observation status, the use of outpatient status and observation status for hospitalized patients has dramatically increased.  There is widespread support for counting all time in the hospital in determining Medicare patients’ entitlement to Part A coverage of a SNF stay. 

Toby S. Edelman
Senior Policy Attorney
July 16, 2014

Conclusion

The Center urges CMS and HHS to correct the problem of observation status for Medicare beneficiaries through subregulatory guidance and to count all time spent in the hospital, whether labeled inpatient, outpatient, or observation, for purposes of satisfying the requirement for a three-day hospital stay.

Thank you for the opportunity to comment.

Sincerely,

Toby S. Edelman
Senior Policy Attorney