ED. NOTE: The O'Connor Hospital ruling has generated significant interest at RACmonitor. In response to readers requesting more information, we asked Duane Abbey to weigh in on this crucially important issue for you.

A RAC appeals case originating in 2004 has reached the Medicare Appeals Council. The next step in the appeals process would be Federal Court. ⁽¹⁾

At issue are four claims judged by the RAC to be unjustified for inpatient admission and associated services. The RAC demanded return of the inpatient payments as overpayments. The Administrative Law Judge (ALJ), which is the appeals step just before the Medicare Appeals Council, ruled that three of the claims actually were justified and medically necessary. The fourth claim was judged as being medically unnecessary for inpatient admission, BUT the services provided would have met requirements for observation services.

Note: this appeal involves the very sensitive and broadly based issue of short-stay inpatient admissions that should have been classified as observation. The Medicare program has never adopted formal standards for inpatient admissions; thus any short-stay inpatient admission can be questioned and there is no definitive way for auditors to know that an admission is proper.

The CMS stance on this type of situation is that the hospital is to lose all  reimbursement. If a hospital determines after the fact or an auditor determines for them, the only billing is a Type of Bill 110 for a no-pay claim. In theory, there might be some incidental services that would not be part of the inpatient claim, but basically all reimbursement is lost. ⁽²⁾

The ALJ ruled that the observation services should be paid in lieu of denying payment for the inpatient services. CMS appealed, stating that there was an error in law.

"In its referral memorandum to the Council, CMS asserts that the ALJ erred as a matter of law by ordering Medicare payment for ‘the observation and underlying care' provided to the beneficiary because those services are not separately billable under Part A."

From the Ruling

"The Council does not agree that the case contains an error in law. The position advanced by CMS in its memorandum is inconsistent with the guidance set forth in the CMS Manuals.

CMS has expressly stated that Part B payment may be made if Part A payment is denied."

The ruling goes on to discuss various Medicare rules and regulations supporting that CMS should make payment for the observation services that will offset some portion of the inpatient overpayment.

"In this case, the provider submitted a timely claim for services which was paid under Part A. When the RAC reopened the determination on the initial claim at issue here, it had the same plenary authority to process and adjust the claim as it did when that claim was first presented and paid. The RAC's revised initial determination states that the beneficiary met the criteria for outpatient observation status.

Consistent with the CMS manual provisions discussed above, the contractor shall work with the provider to take whatever actions are necessary to arrange for billing under Part B, and thus, offset any Part A overpayment.  The contractor shall issue a new initial determination upon effectuation."  (Emphasis added.)

The ruling clearly indicates that when the RAC reopens  a determination, everything starts over. Thus, if there should have been some other payment, the claim should have been adjusted and the proper payment credited against the overpayment.

Understandably, CMS is very concerned about this type of interpretation. If it  holds up, assuming CMS does not take this to court, there are significant issues of reduced overpayments and complicated processing issues. Let us consider an example.

Case Study 1 - Sam, a retired rancher, has been brought to the Apex Medical Center's ED one afternoon. He is complaining of chest pains and a severe headache. An extensive workup is provided at the ED including laboratory testing, cardiology testing and extensive radiology tests, inclusive of a CAT scan.  Sam's attending physician decides to admit him as an inpatient due to a likely cardiac event.

The next morning, Sam is feeling much better. Virtually all of his symptoms are abated. Additional testing indicates no problems and Sam is discharged just before lunch.

⁽¹⁾ See "The Medicare Recovery Audit Contractor Program" authored by Dr. Abbey.  CRC Press, ISBN: 1-4398-2100-8.

⁽²⁾ For instance, see "Hospital Guidelines for Outpatient Observation Services", AdminaStar Federal, Inc., December 2002 Medical Director's Corner.