Barrows v. Becerra – The Prelude to Another Required Beneficiary Notice?

Hospitals need to ensure that patients are placed in the right status from the start, so that patients have access to the benefits available to them.

Since 2011, a Medicare coverage case has been moving through the federal court system. Originally titled Bagnall v. Sebelius, it involves a group of Medicare beneficiaries who were hospitalized for over three days and then transferred to a skilled nursing facility (SNF).

Because they were hospitalized as outpatients with observation services for part or all of their hospital stays, they never accrued the three consecutive inpatient days necessary to access their Part A SNF benefits, and had to pay for part of their nursing home care themselves. The original plaintiffs claimed that the use of observation services violated the Administrative Procedure Act, the Medicare statute, the Freedom of Information Act, and the Due Process Clause of the Fifth Amendment. They asked the court to stop the use of observation and provide remedy to those harmed.

Fast forward to 2022, and the U.S. Court of Appeals for the Second Circuit, the last stop before the Supreme Court, finally issued a decision in the case, now titled Barrows v. Becerra. Without trying to understand and explain all the legal permutations made to the case in the intervening 10 years, the final decision refers to patients who were formally admitted as inpatients, had their status changed to outpatient (+/- observation services) after review by the hospital’s utilization review (UR) committee via the condition code 44 process, spent three or more days in the hospital, and were transferred to a SNF for skilled care without access to Part A SNF coverage. It appears that the Court determined that such patients had a property right when they were admitted as inpatients, and lost that right when their status was changed to outpatient, and they therefore deserve “relief.”

This ruling affects many patients who in the past were subjected to long observation stays, especially in the early days of the Recovery Audit Contractor (RAC) audits, when patients routinely stayed in observation for days on end. But in the world of the Two-Midnight Rule, since Oct. 1, 2013, that seems to be a narrow class of patients. The patient would have to a) present to the hospital, b) be formally admitted as an inpatient, c) have their status changed to outpatient via the condition code 44 process, d) stay at least three days in the hospital, not counting the day of discharge, e) have skilled needs, and f) be discharged to a SNF as self-pay. Because medically necessary observation stays are limited to under two midnights (or 72 hours, if you use the Centers for Medicare & Medicaid Services/CMS claims edit for G0378), a patient with medically necessary hospital care should never fall into this narrow class.

This can certainly happen, though, depending how “the need for hospital care” is viewed by whoever is reviewing the patient’s stay. I can envision an elderly patient with a fall who has a non-operative pelvic fracture. If this patient has pain and immobility such that they are unable to return home, the admitting physician may admit them as an inpatient for management of their pain and to formulate a safe discharge plan. The UR committee may review this admission and determine that there is not a reasonable expectation that the patient would require at least two midnights of hospital care, since the patient is on oral analgesics and pain is controlled when the patient is at rest, and the patient theoretically could be transferred to a nursing facility that day. The attending may agree, and the patient’s status is changed to outpatient with observation services. Over the next day or two, the patient’s pain remains controlled, but the patient’s immobility is such that they are unable to return home. The case manager continues to discuss options with the patient and family. Physical therapy determines that the patient does require skilled care to return to their initial living situation, and that due to a lack of a stable support system and a 24-hour caregiver, treatment in a nursing facility is indicated. After several days of coordination between the patient, the family, and the medical team, the patient is transferred to a local SNF for rehabilitation as “self-pay,” with the therapy services to be billed to Part B.

More likely, though, is the patient with a similar presentation who is placed observation from the start and deemed “unsafe to go home,” but has no ongoing medical need for hospital care. Even though their hospital stay will pass a second midnight, there is no justification for inpatient admission, so they remain in the hospital as an outpatient until a plan can be formulated or they are able to ambulate enough to go home.

But at this point, we have no idea what CMS will do. In particular, the judgment states, “the Secretary (of the U.S. Department of Health and Human Services, or HHS) may provide greater procedural protections than the ones described above, and may provide these protections to a broader class of beneficiaries, provided that the due process rights of the class members are fully protected as set forth above.” In other words, as long as the patients who meet all those conditions listed above have a remedy, CMS is free to widen the net to a much broader patient type.

42 CFR 482.30 requires that any change from inpatient to outpatient follow the utilization review process, and we already have claim guidelines in the Medicare Claims Processing Manual, Chapter 1, section 50.3, but the requirement referenced in 42 CFR 482.30(d) is simply for the patient to be notified in writing. There is no CMS-mandated form. The patient is not required to sign the notice, nor does the notice need to say anything more than that their care will be billed to Part B instead of Part A. In addition, the patient has no right to appeal their status change. CMS could develop an official condition code 44 change notice that requires verbal explanation and signature, as does the Medicare Outpatient Observation Notice (MOON). They could provide the right of any condition code 44 patient to request an immediate appeal of their status change, or they could limit the appeal to patients who then spend at least three days in the hospital, since that is the determining factor for Part A SNF coverage.

The possible options raise a myriad of questions. For patients who already received their care since 2011 and paid for SNF care out of pocket, despite a three-day hospital stay, how will they be made whole? Will there be a process for each to apply for a refund? Will the medical records be reviewed to determine if the hospital stay was indeed medically necessary?

For future patients, what will this appeal process look like? Will it be every condition code 44, or just a limited subset? Perhaps only outpatients with a SNF stay at stake? If a patient’s status is changed from inpatient to outpatient and the patient appeals and wins, meaning the review agency determined that inpatient admission was warranted, will that inpatient admission be exempt from any future audit?

If a patient appeals and the review agency sides with the hospital that outpatient status was correct, in most cases, the patient will have spent at least three days in the hospital. Does the hospital still only get paid the comprehensive APC for observation services, despite providing care for many more days than a normal observation visit? How will that claim be submitted, since there is an edit for observation hours set to reject claims with more than 72?

Will surgery patients who have outpatient surgery and stay overnight be permitted to appeal the decision not to admit them as an inpatient? What if they stay two nights?

What will the CMS notice include? For many patients, the out-of-pocket costs of a Part A stay (the Part A deductible) exceed those of an outpatient observation stay (the 20-percent co-insurance for the C-APC 8011, plus self-administered medication costs, if the hospital charges for those). If the notice is given to all patients changed from inpatient to outpatient, will the notice inform them that their appeal could result in a higher out-of-pocket cost for the hospital stay?

Also mentioned in the decision are patients who have Part A Medicare, but not Part B. Will patients who elected not to purchase Part B receive special appeal rights, since an outpatient stay would be fully out of pocket, while an inpatient stay would be covered?

As with the Notice of Observation Treatment and Implication for Care Eligibility (NOTICE) Act and the development of the MOON, which took about a year, CMS will have their hands full for the next several months, deciding what to do and how to implement it.

In the meantime, hospitals need to continue to ensure that patients are placed in the right status from the start, avoiding the frustrations and complexities of changes from inpatient to outpatient, and ensuring patients have access to the benefits available to them.

Programming Note: Listen to Dr. Ronald Hirsch when he makes his Monday rounds every Monday during Monitor Monday, 10 Eastern.


Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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