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HHS Office of Inspector General Releases Report: Highlights Needed Changes To Observation Status Policy

Posted on 7/31/2013 by NTOCC ®

On Monday, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) released a report which analyzed hospitals’ use of observation stays and short inpatient stays for 2012. The report concludes that patients who have been hospitalized for three days and are sent to nursing homes should not have to pay extra for nursing home stays merely because they were on “observational status” while in the hospital. While the OIG gives no formal recommendation, and recognizes a fix may require legislation, the report states, “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.”

Congress and provider and patient groups have raised concerns about how hospitals use observation stays and short inpatient stays.  Under current law, to qualify for the Skilled Nursing Facility (SNF) benefit, Medicare requires that the patient must have an inpatient stay of three or more consecutive days.  However, hospitals are increasingly classifying patients as “outpatients” despite the fact that they stay for many days and nights and receive the care and medical services as if they were inpatients.  These beneficiaries face greater financial liability when accessing skilled nursing care, and many are forced to forgo care because the costs are too burdensome.  NTOCC has been following this issue closely as it poses a significant barrier for accessing critical follow-up care provided by the SNF benefit, leading to the possibility of an improper transition from the hospital, and increasing the risk for a readmission.


As you may recall, in April, CMS tried to address some of the concerns in its proposed FY2014 Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital Prospective Payment System (LTCH PPS) rule.  CMS clarified that Medicare Recovery Audit Contractors (RAC) should presume that inpatient hospital stays lasting two nights or more are reasonable and necessary. The draft policy was intended to relieve some of the pressure on hospitals to avoid having their admissions second guessed by Recovery Audit Contractors, which recover “improper” Medicare payments.  NTOCC submitted comments to this proposed rule in June, and while we appreciated CMS’ clarification, we expressed support for further expanding the type of patient classification which would qualify for the SNF benefit to ensure that time spent in observation stay could be counted toward meeting the three-day prior inpatient stay requirement needed to qualify for Medicare SNF coverage.

Importantly, the report raises concerns around ensuring that Medicare beneficiaries have the same access to skilled-nursing services after they leave the hospital, regardless of how their stay is coded on the claim.

Please click here to view the full report.

Below you will find some helpful articles analyzing the OIG’s report:

·         Kaiser Health News, “HHS Inspector General Scrutinizes Medicare Observation Care Policy”

·         Modern Healthcare, “OIG wants skilled-nursing access for all Medicare beneficiaries”