As Medicare auditors crack down on inappropriate classification of patients arriving at hospitals, systems are conducting self-audits to make sure they're doing their best to navigate the “gray zone” of medical necessity.
When Sarath Degala arrived at WellStar Health System, Marietta, Ga., nine months ago, one of his first projects as vice president of revenue cycle was to look at the group's rate of referrals for observation, singling out a common condition, chest pain.
The pilot program would ask whether the system was overusing observation status and what the financial impact would be if it decreased the number of observation stays.
Observation-status cases have increased in recent years as providers faced claim denials for admissions that were deemed inappropriate. Then the Obama administration last year launched penalties for excessive 30-day readmissions, which created an incentive for providers to use observation stays instead of admitting patients to an inpatient floor.
An analysis conducted for Modern Healthcare by the American Hospital Directory found that the number of Medicare outpatient observation cases rose by 230,000 claims between 2010 and 2011.
Yet in a presentation at the Healthcare Financial Management Association's 2013 Annual National Institute, Degala noted that observation stays increased most sharply among patients with Medicare Advantage plans and commercial insurance, with a double-digit growth rate.
“Our observation growth for Medicare has stayed consistent,” he said, citing data between fiscal years 2011 to 2013.
He also compared payments between the two statuses. For inpatient admissions, WellStar was receiving $1,915 for an inpatient stay under Medicare fee-for-service while getting $1,237 for an observation stay. Yet when the system factored in the increased costs associated with inpatient denials as well as the longer length of stay, the payments no longer looked so different.
Degala noted that commercial observation cases are probably about 4% higher than they should be, and the system is working to put more checks in place to reduce denials for inpatient claims and increase medical necessity checks.
Dr. Ralph Wuebker, chief medical officer at Executive Health Resources, a consultancy on medical necessity compliance issues, cited the TMF Health Quality Institute's Program for Evaluating Payment Patterns Electronic Report, which identifies area for auditors to target. About 65% to 70% of its focus, he estimated, is on the “gray zone” of medical necessity, while the rest is on DRG code selection.
While the report only addresses Medicare inpatient cases, commercial insurers have also been under greater government scrutiny, Wuebker noted.
The CMS has also proposed pushing back on long observation stays by no longer questioning the medical necessity of admissions for patients who stay in the hospital through two midnights. However, it will offset the increased costs with a 0.2% cut to inpatient payment rates.
Officials are concerned about the use of observation status because it means higher copayments for beneficiaries and other ripple effects, such as the inability of those patients to get coverage for skilled-nursing care after they leave the hospital.
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