CMS Proposes New Appeal Process – Complexity is High, but Impact is Low

EDITOR’S NOTE: Listen to Dr. Ronald Hirsch as he makes his Monday Rounds on Monitor Mondays, this coming Monday, Jan. 8 at 10 a.m. EST. Register here to listen.

Back in 2010, a class-action lawsuit was filed by a group of Medicare beneficiaries who had to pay out of pocket for their stays at a skilled nursing facility (SNF) for rehabilitation after an illness – because their hospital stays, all of which exceeded three days, were outpatient Part B stays.

For those who were involved in utilization review (UR) in 2010, you probably recall that it was the heyday of the Recovery Audit Contractor (RAC) program. The RACs, paid on a contingency basis, saw inpatient admissions as easy prey for denial. The rules governing inpatient admission were vague, and many hospitals did not have the resources to fight back. In addition, the Centers for Medicare & Medicaid Services (CMS) at the time paid “observation” stays on a fee-for-service basis, without the limitations of the Diagnosis-Related Group (DRG) payment model. As a result, some hospitals kept a significant number of patients as outpatients with observation for the duration of their stays – avoiding the risk of a RAC denial, but also depriving the patients of access to Part A coverage for a SNF stay, if necessary.

CMS did take note of these long outpatient stays, and “fixed” that by adopting the Two-Midnight Rule in October 2013. No longer could patients in necessary hospital stays be kept as outpatients for days and day and not have the opportunity to gain access to their SNF benefit. Unfortunately, the real fix, the elimination of the rule requiring a three-day inpatient stay for Part A SNF access, was not addressed.

Fast forward to 2020. The U.S. Supreme Court finally made a final ruling against CMS in the case (at that point called Alexander v. Azar), and ordered CMS to develop an appeal process for a specific class of patients whose rights were violated. It took three years for CMS to finally work through the legal issues after the final decision, then draft and release this proposed rule, CMS-4204-P. You can read the rule at this link.

First thing to note is that it is a proposed rule, so nothing needs to change yet. Do not start citing Condition Code 44 or telling any patients they have new appeal rights, and do not scare your staff with warnings about a new notice that patients will need to receive. This rule is open for comment until Feb. 26 (you can comment here), and then CMS will review the comments and publish a final rule – and then there will be time for implementation. That means nothing will change until about June 2024.

The second thing is that, as written, there are a lot of ambiguities between how CMS thinks things happen in hospitals and how they really happen. As a result, I expect significant revisions will be made in the final rule. My comments to CMS numbered 15. Now, not all of those will bring about a change to the proposed rule, but it will certainly get them thinking.

That said, despite false rumors that “all patients whose status is changed from inpatient to outpatient will have appeal rights,” this rule will be very limited in scope. Who will have these new appeal rights, including the ability to have an expedited review of their status change from inpatient to outpatient by the Beneficiary and Family Centered Care-Quality Improvement Organizations (BFCC-QIOs)? Two groups are affected. First is the patient who has Medicare Part A, but not Part B, who is admitted as inpatient, then has their status changed to outpatient, has observation services ordered and receives observation services, and receives a Medicare Outpatient Observation Notice (MOON). For this group, the appeal rights make sense; the patient is shifting from a stay covered by insurance to one that will need to be paid out of pocket. It will also be crucial that patients are properly registered, and that those with A and not B are clearly identified.

Second, is the Medicare patient with parts A and B who is admitted as inpatient, then has their status changed to outpatient, has observation services ordered and receives observation services, receives a MOON, and then stays in the hospital for a total of three or more days. It is noteworthy that this patient does not have to need SNF care to appeal, but rather only three or more days in the hospital. 

Now, if you have been listening to my segments on Monitor Mondays and reading RACmonitor eNews, and adopting my advice, you may have to use this new process once or twice a year. 

So, what have I said in the past that proved to be a forewarning? First, if you do a Condition Code 44 change, I advised as recently as July 2023 not to provide a MOON except for those rare patients who will stay an additional 24 hours after the status change. As I pointed out, the MOON does not tell them their status has changed, as the Condition Code 44 process requires, so why use a form that takes more work and does not even serve the purpose? As this rule is proposed, if they do not get the MOON, they do not have appeal rights. Now, if you are doing a Condition Code 44 change early in the stay, you will have to give the MOON, but that will be a limited number of patients.

In addition, I have spoken repeatedly about the fact that CMS defines observation services as “clinically appropriate” monitoring – and if the patient is staying in the hospital for custodial care, that is not by definition observation care, and you should not be billing observation hours, but rather billing custodial care with HCPCS code A9270 under revenue code 0760. If you are doing a Condition Code 44 on a patient who was “admitted for placement” or who spent a night as inpatient and is now a placement issue, when you change their status to outpatient, you should not be billing for observation services. If they stay three days or 20 days while placement is addressed, it is still custodial care and not observation services. As a result, they do not qualify to appeal for two reasons: no MOON and no observation services.

In fact, as described in this rule, if you change an inpatient to outpatient and provide ongoing observation care, and their stay reaches three days, you have violated the Two-Midnight Rule by leaving a patient needing necessary hospital care as an outpatient past the second midnight. As you may know, the National Correct Coding Initiative (NCCI) edit for observation hours is 72, so a claim surpassing three days of observation will be rejected by the claims processing system.

Could I envision any case that would fit? As I write this during the holidays, I imagine a Medicare patient presenting on a Friday afternoon to a small community hospital with chest pain. They are high-risk and deemed to be in need of further testing in the hospital. Because of the holiday, the next time to do a stress test is Tuesday. Because the patient is stable, it is decided to keep them in the hospital from Friday to Tuesday on telemetry, “just in case.”

The attending admits them as inpatient. The UR staff sees this admission on Saturday, runs criteria (which do not meet inpatient standards), and refers the case to the physician advisor. The physician advisor, also on the UR Committee, contacts the attending and recommends a change to outpatient with observation services for continued monitoring. The MOON, with a notation, added indicating that “your status has changed to outpatient” is delivered. On Tuesday, the patient has now met every qualification to be afforded the right to an expedited appeal of the change from inpatient to outpatient.

There is more to this proposal. During the expedited appeal process, patients can stay hospitalized, but do not get financial protections as they do when they appeal their discharge – yet CMS does not describe how hospitals should charge patients for such care. In addition, CMS specifies that patients are allowed to request an appeal from the QIO via phone, fax, or email. But neither Kepro nor Livanta currently accept emails or faxes from patients, nor would I expect them to be excited about that option.   As we learn more, RACmonitor and Monitor Mondays will keep you informed. But for now, this is really a “nothing burger.”