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In order for Medicare Part A to pay for a patient’s stay in a skilled nursing facility (SNF), the patient must first have spent at least three consecutive days as an inpatient in an acute care hospital.[1]  For many Medicare beneficiaries, Part A SNF coverage is denied because the hospital classifies the stay as Outpatient or Observation Status.  Although the care provided by the hospital to patients with stays classified as Outpatient or Observation Status may be indistinguishable to the care provided to inpatients,[2] the Outpatient classification, by itself, prevents Part A coverage of the SNF stay.  Observation Status is a persistent problem nationwide, affecting tens of thousands of beneficiaries, or more, each year.[3]  While the Centers for Medicare & Medicaid Services (CMS) has become more insistent on the use of Observation Status,[4] the agency is simultaneously conducting multiple demonstrations that would waive the three-day inpatient hospital stay requirement entirely.  The most recent example is included in proposed rules, published July 15, 2016, that address the three-day waiver for certain Accountable Care Organizations.

Proposed Regulations

The Affordable Care Act created Medicare Shared Savings Programs for groups of health care providers and suppliers to work together providing care to beneficiaries who receive original (or traditional) Medicare.[5]  These groups of providers are called Accountable Care Organizations (ACOs).  One type of ACO, Track 3 ACOs, are ACOs to which Medicare beneficiaries are assigned in advance for an entire performance year. 

In final rules published in June 2015[6] and effective January 1, 2017, CMS authorized waiver of the three-day inpatient hospital stay requirement for beneficiaries assigned to Track 3 ACOs so long as the SNF had an “affiliate agreement” with the ACO and maintained at least three stars on the CMS Nursing Home Quality Rating System.  Beneficiaries could receive Medicare-covered care in a SNF if they were admitted either directly from the community or from a less-than-three-day inpatient hospital stay, or as under Original Medicare, if they had a three-day inpatient hospital stay.

In proposed rules published July 15, 2016,[7] CMS included additional protections for beneficiaries receiving care in a SNF under such a waiver.

First, CMS proposes protection for the very limited situation when a beneficiary whose Part B coverage is terminated (making the person ineligible for assignment to a Track 3 ACO) but is admitted to a SNF without a prior three-day inpatient stay before appearing on the quarterly exclusion list.  CMS proposes a 90-day grace period “that functionally acts as an extension of beneficiary eligibility for the SNF 3-day rule waiver.”[8]  Neither the beneficiary nor the SNF would be liable in these limited cases.

Second, in a more common situation, CMS describes an affiliate SNF that admits a beneficiary without a three-day hospital stay although the beneficiary, for some reason, does not qualify for waiver of the three-day inpatient requirement.  In these situations, the beneficiary would be protected from financial liability, but the SNF would not. 

Missing from the new proposed beneficiary protections is any discussion of SNFs whose star ratings decline from three stars to two or one star during the course of the year.

In comments on the original proposed rules for ACOs, the Center for Medicare Advocacy recommended two revisions addressing the eligibility of SNFs to admit beneficiaries without a three-day inpatient hospital requirement.  The Center suggested that eligibility be limited to SNFs (1) with at least three stars in the health survey component of the star rating system and (2) meeting the nurse staffing ratio used in Nursing Home Compare for four and five stars in the staffing measure.[9]  The Center cautioned CMS to consider the gaming in the star rating system, documented by The New York Times[10] and The Center for Public Integrity.[11]  CMS did not accept these recommendations.


As CMS tests waiving the three-day hospital requirement entirely, it needs to ensure that its current application of the three-day rule does not prevent Medicare beneficiaries from getting post-hospital care they need in SNFs.

The Center for Medicare Advocacy believes that CMS has authority under existing law to count all the time in the hospital, whether inpatient or outpatient, for purposes of determining patients’ eligibility for Part A coverage of care in a SNF.[12]  Alternatively, CMS could support bipartisan legislation now pending in Congress to count all time in the hospital, the Improving Access to Medicare Coverage Act of 2015.[13]

July 19, 2016 – T. Edelman

[1] 42 U.S.C. §1395x(i).
[2] Most recently, in proposed rules creating exceptions to the two-midnight rule, CMS confirmed that physicians can order whatever care their patients need, regardless of their status, and that determinations of inpatient/outpatient status are Medicare billing rules. (“We noted that we have been clear that this billing instruction does not override the clinical judgment of the physician to keep the beneficiary at the hospital, to order specific services, or to determine appropriate levels of nursing care or physical locations within the hospital,” 80 Fed .Reg. 39199, 39348 (July 8, 2015),  
[3] See Center for Medicare Advocacy’s materials on observation status, at
[4] In proposed rules implementing the Notice of Observation Treatment and Implications for Care Eligibility Act (NOTICE Act), 81 Fed. Reg. 24945 (April 27, 2016), CMS proposed to amend the federal regulations to make clear beyond doubt that observation status is not appealable.  Proposed 42 C.F.R. §405.926(u).  See Center, “Observation Status and the NOTICE Act: Advocates Not Over the Moon” (Alert, April 27, 2016),
[5] 42 U.S.C. §1395jjj (§3022 of the ACA); see CMS, Shared Savings Programs,
[6] 80 Fed. Reg. 32691, 32802-32807 (June 9, 2015),; 42 C.F.R. §425.612(a)(1).
[7] 81 Fed. Reg. 46436, 46437-46441 (July 15, 2016),
[8] 81 Fed. Reg., at 6439.

[10] Katie Thomas, “Medicare Star Ratings Allow Nursing Homes to Game the System,” The New York Times (Aug. 24, 2014), (showing high composite ratings for facilities with low survey results, based on facilities’ gaming their self-reported staffing and quality measures).
[11] Jeff Kelly Lowenstein, “Analysis shows widespread discrepancies in staffing levels reported by nursing homes; Data compiled for Medicare shows lower levels of care than website for consumers,” The Center for Public Integrity, (reporting that more than 80% of the 10,000 nursing facilities analyzed by The Center for Public Integrity reported higher registered nurse staffing levels on Nursing Home Compare than the investigative report calculated from the facilities’ Medicare cost reports).
[12] At the request of CMS, the Center for Medicare Advocacy prepared a legal analysis of CMS’s current authority to count all time in the hospital.  See memorandum , July 16, 2014, at  
[13] H.R. 1571, S. 843.


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