New CMS Patient Observation Policy: What Physicians Should Know

CMS' final rules concerning inpatient admission and observation become effective Oct. 1, 2013.  In June 2013, the AMA sent a letter opposing the majority of the provisions in the then proposed rule.

Some of the items that were not supported were:

• "new hospital inpatient admission medical review benchmark of one Medicare utilization day, or two midnight stays;"

• the policy’s impact on administrative costs, physician time, and patient care; and

• Medicare Recovery Audit Contractors (RACs) have additional requirements including "limit[ing] the scope of hospital admission audits to the information in the medical record that was known to the physician at the time of admission."

CMS and members of Congress, as expressed in a July 2013 OIG Report, had concerns that beneficiaries were spending prolonged periods of time in "observation" and the cost to the Medicare beneficiaries.

The FY 2014 Two Midnight Rule is critical for physicians to appreciate. It states: "The two midnight rule will … revise our guidance to hospitals and physicians relating to when hospital inpatient admissions are determined reasonable and necessary for payment under Part A." (78 Fed. Reg. 50506; Aug. 19, 2013). This is especially critical in light of RAC audits and the "presumption that a medically necessary stay surpassing two midnights after the initiation of care are generally appropriate for inpatient admission and payment" (IPPS Final Rule 1651/2225). The term, "presumption," according to the IPPS Final Rule, means, "[i]npatient hospital claims with lengths of say greater than two midnights after the formal admission following the order will be presumed generally appropriate for Part A payment and will not be the focus of medical review efforts."

According to CMS, the benchmark used to calculate the "expectation of a two-day stay of at least two midnights begins when the beneficiary starts receiving services in the hospital." Outpatient care encompasses services ranging from observation to operating room procedures and are included in the calculation.

This is one more item that can cost physicians and the joint ventures they may be involved with. Therefore, reviewing the new standards and getting back-office processes in place is crucial to avoid a financial loss.