Observation – Let the Regulations Speak - Insurers Won't Be Happy

The confusion over status determinations never seems to end. And as more patients choose Medicare Advantage plans, and more states move their Medicaid patients into Managed Medicaid plans, the confusion will only worsen. Recent activity suggests things are not getting better any time soon.

Blue Cross Blue Shield of Michigan recently released a notice that they are aligning local rules across all plans for acute inpatient medical admissions. They go on to specify that for a list of 22 conditions, from asthma to pulmonary embolus to TIA to meningitis, they will only approve inpatient admission after the patient has had 48 hours of observation services unless they are placed in the ICU and only then will they consider approving inpatient admission. At that point will they review InterQual? criteria and decide if inpatient admission is warranted. According to the memo, this will apply to all Blue Cross Michigan plans, including their Medicare Advantage plans.

Here are some commonly asked questions:

Can Blue Cross Blue Shield of Michigan do this? Yes, if hospitals let them. Each hospital or health system signs a contract agreeing to their policies and procedures. If your contracting staff signed the contract, you must abide by their rules. InterQual (and MCG Care Guidelines?) are merely screening tools, and if the payer chooses to only apply IQ after 48 hours, they have that prerogative. Now if they try to apply day 1 criteria on day 3 of a hospital stay, then that would certainly be a problem.?

What if the facility is not contracted with the payer? If the patient is a Medicare Advantage beneficiary, the payer must follow Medicare guidelines and therefore the 2-Midnight Rule applies. If the patient is not a Medicare Advantage beneficiary, then state law may determine how the payer must pay for services. Beyond that, almost anything goes.

Why does status matter? In most instances, it actually does not. A patient’s status should never affect the care the patient receives. But the patient’s status may affect how much the patient owes, with variable copayment rates for inpatient or outpatient care. Physician coding of visits depends on the status of the patient and can be confusing, with specialists who see observation patients billing their visits with office visit codes. But unlike traditional Medicare, a commercial or Medicare Advantage patient can get a covered SNF stay without any inpatient stay requirement, if the plan approves it.

But the biggest difference between inpatient and outpatient observation is payment to the hospital. Once again that falls back on the contract. Medicare pays most observation stays as a single payment that covers all care provided during the stay. For Medicare, and for most other payers, an inpatient admission is paid as a single payment. But for observation stays, a payer contract may specify a single payment for the whole stay, a per day payment, or a percent of charges rate. Depending on how the contract is structured, a four or five day observation stay may actually pay more than an inpatient admission. In that case, there is no sense in arguing for inpatient admission. But do remember that if it is a Medicare Advantage inpatient, the payer only pays you for the actual care provided; CMS still pays you additional money for medical education and disproportionate share funding only on inpatient admissions so the calculations can get complex.

What about patient rights? That’s an important point. When a Medicare beneficiary is admitted as inpatient, they get the right to appeal their discharge if they feel they are being discharged prematurely. Medicare’s Two-Midnight Rule limits medically necessary outpatient stays to under two midnights so no Medicare patient in a necessary stay ever passes 48 hours without getting rights to appeal their discharge.?But if a Medicare Advantage beneficiary is hospitalized for 48 or 72 hours (or more) and the plan never approves inpatient admission, that patient never gets discharge appeal rights. It certainly seems that CMS should disapprove of these long observation stays.

What about Managed Medicaid? The notice never mentions Blue Cross’s Managed Medicaid plan directly. Medicaid rules often vary from state to state. But, and this is HUGE, a seldom referenced federal regulation actually addresses inpatient and outpatient stays for Medicaid beneficiaries. 42 CFR 440.2 applies to any Medicaid health care program where the federal government pays a share of the expenditures.

The regulation states, “inpatient means a patient who has been admitted to a medical institution as an inpatient on recommendation of a physician or dentist and who (1) Receives room, board and professional services in the institution for a 24 hour period or longer, or (2) Is expected by the institution to receive room, board and professional services in the institution for a 24 hour period or longer even though it later develops that the patient dies, is discharged or is transferred to another facility and does not actually stay in the institution for 24 hours.” It even defines an outpatient: “outpatient means a patient of an organized medical facility, or distinct part of that facility who is expected by the facility to receive and who does receive professional services for less than a 24-hour period regardless of the hour of admission, whether or not a bed is used, or whether or not the patient remains in the facility past midnight.”

It certainly seems that if the care for a Medicaid recipient’s care is funded through the federal government, as all state Medicaid programs are, the plan must define an inpatient and outpatient this way. They cannot develop their own guidelines. While as noted above that the issue of status is generally contractual, it would seem that any Managed Medicaid plan would want to continue to receive that federal contribution to their payment from the state and would ensure they are following this definition of inpatient and outpatient.

What does the future hold? The move of Medicare and Medicaid patients from government-run plans to managed care is continuing unabated, and in fact, California is transitioning all of its Medicaid patients to managed care within the next two years. The move from volume to value is also proceeding unabated as more bundled payment programs and risk contracts are developed. While the utilization review staff often face the brunt of the burden, the power of change seems to lie in the contracting office. If the contract specifies that inpatient admission will never be approved until the COPD patient has passed 48 hours of observation, the solution lies in the contract, not in better documentation or running criteria again.?