Stakeholders take NOTICE of mounting ­observation status reform legislation

In mid-March, the U.S. House of Representatives unanimously approved the Notice of Observation Treatment and Implication for Care Eligibility ­(NOTICE) Act (H.R. 876). As a result, the bill is now poised to become the first to gain legal standing among a collection of proposed legislation aimed at remedying today’s fallout from observation status.

Reforming this outpatient designation?which leaves affected Medicare beneficiaries eligible only for Part B coverage?has drawn support from an unlikely assemblage of healthcare stakeholders in the acute, postacute, and beneficiary advocacy spheres.

"We’ve been working very closely with a very broad coalition of groups around [observation status], and it’s a coalition of groups where sometimes we’re on different sides of issues, but as it pertains to this issue, we’ve been completely and totally united," says Clifton J. Porter II, senior vice president of government relations at the American Health Care Association, a national trade association for long-term care providers.

The reason behind this widespread traction: Today’s heavy-handed application of observation status is having devastating effects on those in acute and postacute settings. The designation often disrupts a beneficiary’s eligibility for Medicare coverage in SNFs following a hospital stay, sparking patient confusion and potentially narrowing the client pool for long-term care providers.

In addition, the outpatient designation severely limits Medicare coverage in the hospital itself, ­slapping beneficiaries with a copayment for each individual service rendered during an observation stay instead of the one-time deductible granted during the Part A inpatient alternative. In addition, patients are expected to pay for prescription charges that accumulate during an observation stay.

Because of these potential liabilities, observation status has traditionally been reserved for patients who undergo brief hospital stints, during which time clinicians are charged with assessing whether they are ill enough to warrant inpatient admission or well enough to return home. However, as Recovery Auditors (RA) have ramped up scrutiny on the appropriateness of inpatient stay determinations, hospitalists have become much more liberal in their use of observation status, applying it to stays as long as a week, says Diane Brown, BA, CPRA, director of postacute education at HCPro, a division of BLR, in Danvers, Massachusetts. She underscores the huge impact on beneficiaries, many of whom are left in the dark about their outpatient status and its ramifications until long after their stay has ended.

"The beneficiaries who weren’t aware that they hadn’t been officially admitted come out of the hospital, and then they get whacked with a bill," says Brown.

And underlying the recent outcrop of beneficiaries under observation is a flawed foundational concept that fails to account for the clinical services provided in the hospital, says Ann M. Sheehy, MD, MS, associate professor and division head of hospital medicine at the University of Wisconsin School of Medicine and Public Health.

"We can deliver the same exact care to two patients that are in the beds next to each other?one is observation, one is inpatient?for three nights, and the inpatient gets to go to a nursing home and have the Medicare coverage; the outpatient does not," she explains. "That’s just really hard to swallow."

Flying under RA radars

Observation status has been a provision of the Medicare benefit since the program’s inception in 1965, but healthcare providers attribute the backlash facing beneficiaries today to the instatement of the nationwide Recovery Audit Contractor Program (now known simply as the Recovery Audit Program) nearly half a century later.

RAs are charged with combating reported instances of fraud and abuse throughout the healthcare system by detecting and recouping improper payments, such as those for noncovered, incorrectly coded, and duplicative services. However, because RAs are paid on a contingency basis, healthcare providers argue there’s a financial incentive for them to target practices that will yield the biggest monetary reward while providing the least grounds for contest, a strategy that Brown says has inspired them to take a hard line on regulations with obvious gray areas, like observation status.

"If you’re going to be paid that way . . . you want to find the low-hanging fruit," says Brown. "[Observation status is] a broad-based rule . . . and unless you have a lot of concrete examples to support a broad-based rule, nobody knows how it really works, and so the RAs took advantage of that."

Since CMS began phasing in the national RA program as directed by the Tax Relief and Health Care Law of 2006, the prevalence of observation status designation has soared. According to a March 2014 report by the Medicare Payment Advisory Commission, the number of outpatient observation claims increased 88% between 2006 and 2012?a trend that runs counter to financial motivation for hospitals, which are paid less for care delivered to a patient under observation than for that provided during an inpatient stay, even if the services are equivalent in both cases.

For their part, RAs deny responsibility for the climb. ­After a July 2014 Senate hearing that addressed observation status, the American Coalition for Healthcare Claims Integrity, an RA trade association, issued a statement stressing that the contractors audit less than 2% of Medicare records from any given provider and only focus on CMS-approved billing hot spots.

"While our coalition agrees that the use of observation status has evolved from its initial intent and administrators should work to clarify these payment policies, the suggestion that the Recovery Audit Contractor (RAC) program has caused this issue is false," Becky Reeves, spokesperson for the group, said in the statement.

But this alleged audit rate of less than 2% doesn’t hold for providers across the board, according to Sheehy, who points to a recent study she led that found RAs performed complex Part A audits on 8% of the total inpatient encounters had by three academic hospitals from 2010 to 2013. Complex reviews, as opposed to their automated or semi-automated counterparts, produce the vast majority of RA recoupments.

Regardless of disputes over the reasons behind observation status spikes, CMS introduced the two-midnight rule in 2013 in an effort to curtail them. Through the provision, the agency sought to clarify that hospitals can consider beneficiaries whose stays are expected to last at least two nights inpatients without the fear of RA review. But enforcement of the rule has been repeatedly delayed since its introduction, lambasted by hospitals as arbitrary, reductive, and potentially punitive toward innovations used to reduce lengths of stay.

Because many healthcare providers maintain that hikes in observation status are tied to RA scrutiny, Sheehy thinks major reform in both domains is necessary to make progress throughout the industry.

To that end, CMS and a couple of its RA contractors are currently locked in disputes over the terms of new contracts, which propose revisions to the way RAs are paid?a possible effort by CMS to discourage faulty recoupment of payments and to unclog RA decision appeal logjams.

SNF implications

Although hospitals are at the heart of the observation status crisis, those in the postacute sector are also feeling the fallout. SNFs are often the next stop for recently hospitalized patients whose stays have been deemed observation, such as those who will require short-term intensive therapy services after a medical illness. But days spent under observation don’t count toward the three consecutive days a beneficiary must remain in the hospital before Medicare coverage for subsequent nursing home care kicks in?a rule that is itself contentious. Some say the requirement flies in the face of continuum-wide pushes to return beneficiaries to the community as often and as quickly as possible.

"The reality is that the sooner a patient is out of the hospital, the better," says Porter. "Requiring a patient to be in a hospital for three days before they can access a benefit that gets them out of the hospital and ultimately on their way home seems a bit archaic to me."

And now that the requirement is increasingly tangled with observation stays, more and more patients are disqualified from SNF coverage, forcing them to choose between paying for rehabilitation services entirely out of pocket and jeopardizing their recovery by forgoing the follow-up care deemed necessary by their doctors.

Sheehy recalls the first time she witnessed the detrimental effects of such a decision. It was 2010, and she had just treated a woman who had stayed three nights in the hospital following a recent cancer diagnosis. At the time of discharge, Sheehy decided to order nursing home services for the patient, who was weak and dehydrated. But when Sheehy informed her case manager of this plan, she was told that the patient?a longtime Medicare contributor?would have to pay the cost in full because she had been under observation during her entire stay.

"All she should have had to do was worry about getting better," says Sheehy. "Now she was worried about her bill and how she was going to take care of herself at home because she didn’t have the resources to pay for a nursing home on her own."

But not all patients are granted even this modicum of warning that subsequent services won’t be covered?a shortfall that saddles SNF providers with the task of verifying the hospital admission status of prospective clients and communicating bad news to those whose nursing home stay wouldn’t be covered by Medicare.

Brown says hospitals sometimes compound this burden by retrospectively deciding to tag a stay as observation, potentially leaving nursing home providers as blindsided as residents come billing time.

The NOTICE Act only sets stage for reform

These knowledge gaps are precisely what theNOTICE Act targets. The bill would amend the Social Security Act with a provision requiring hospitals to provide oral and written notice to patients placed under observation for more than 24 hours, the reason for this designation, and its implications for service coverage within 36 hours of the classification, or, if the stay is shorter, upon discharge.

Advocates say the bill is an important move toward empowering beneficiaries to make informed decisions about their healthcare.

"They deserve to know [their status] in the hospital, so I think this transparency measure is a very good one," says Sheehy, though she adds that the bill would also increase pressure on hospital employees, who would be expected to create, supply, and test comprehension of additional paperwork, thereby upholding a regulation that doesn’t sit well with many. "It kind of leaves us holding the bag defending the policy which many of us don’t believe in," she explains.

But this burden may be more emotional than operational. Porter notes that similar requirements have been successfully implemented in some states, and that since hospitals are already expected to supply beneficiaries with notifications about many other services, one more variation shouldn’t be too hard to integrate into the workflow.

In addition to better preparing patients for care costs, Sheehy says the NOTICE Act would provide a bonus benefit for SNFs by ensuring new beneficiaries are already aware of their eligibility for Medicare coverage, thereby heading off painful conversations and payment disputes down the road.

First introduced last July and reintroduced in February of this year, the NOTICE Act breezed through the House in March. Because of its smooth sailing thus far, experts believe it’s a matter of when?not if?the legislation will become law.

"It passed the House unanimously, which doesn’t happen often in Congress, and I would venture to guess that the same will occur in the Senate," says Porter.

Digging deeper

Although advocates applaud the NOTICE Act for shining a light on the current state of observation status, they note that it doesn’t address the root of the problem.

"This does nothing to change observation policy," says Sheehy. "We really want this to be the first step and not the last step. We don’t want Congress to feel like they’ve . . . done something on observation and then not move forward on real observation reform."

Sheehy and Porter point to one recent bill in particular that digs deeper into the impact of observation status on beneficiaries seeking subsequent SNF care. The Improving Access to Medicare Coverage Act?first introduced in previous Congresses and revived this March as S. 843 in the Senate and H.R. 1571 in the House?would update Medicare policy to allow time spent under hospital observation to count toward the three-day inpatient stay required for Medicare coverage of subsequent SNF care.

Porter is in strong favor of this bill, as well as one that would rescind the three-day prior hospitalization requirement altogether: the Creating Access to Rehabilitation for Every Senior (CARES) Act of 2015 (H.R. 290), which was reintroduced in January.

"The three-day stay requirement . . . is as old as the program, but healthcare clearly has changed dramatically in the last 50 years, so there is a gross need for modernization of this particular policy," says Porter.

While the NOTICE Act and its more reform-oriented counterparts continue making their congressional rounds, Porter says stakeholders can aid the cause by forming coalitions or joining existing efforts to inform potential residents and the community at large about the current state of observation status, its damaging tie-in with the three-day stay rule, and the efforts underway today to remedy it. He also recommends contacting local members of Congress to further underscore these urgent issues.

In addition to widespread displays of support, Porter thinks the passage of either reform-driven bill hinges on the assumptions the Congressional Budget Office makes when calculating potential costs of their enactment. However, he says, their basic math makes sense.

"It is clearly a lot less expensive to be in a nursing facility receiving rehab than it is to be in a hospital under the acute care benefit," Porter explains.

Sheehy adds that bills centered on observation status reform could also potentially boost SNFs’ bottom lines by increasing eligibility for Medicare coverage of the services they provide and, in turn, making their care more affordable for prospective residents.

But even more importantly than the potential government and provider savings, Porter says severing the link between observation status and the three-day rule would speed beneficiaries’ recovery and return home.

"We heal better at home; there are less germs at home," he explains. "Doing away with the three-day stay, which would effectively solve the related issue of observation stays, would be . . . beneficial for the patient and their outcomes, and that’s the most important result."

HCPro.com – Billing Alert for Long-Term Care