Increasingly, Administrative Law Judges (“ALJs”) and the Medicare Appeals Council were upholding Part A denials on RAC audit appeals based on determinations that inpatient admissions were not reasonable and necessary, and then ordering payment under Part B as if services were rendered at an outpatient or “observation level” of care. The problem with this practice is that Medicare Benefit Policy Manual (“MBPM”) allows hospitals to bill a Part B inpatient claim for only a limited set of medical and other health services. Additionally, the providing for payment of all reasonable and necessary Part B services under these circumstances are contrary to CMS policy that the services be billed within the usual timely filing restrictions. The Centers for Medicare & Medicaid Services (“CMS”), concerned about this practice, recently released both a Ruling and a Proposed Rule to seemingly help the hospital community. How much relief it will actually provide is yet to be seen.

Since Congress and CMS allowed for more Medicare claims review contractors, including Medicare administrative contractors (“MACs”), recovery audit contractors (“RACs”) and comprehensive error rate testing contractors to audit Medicare Part A hospital inpatient claims, the denial of these due to them being not reasonable and necessary has increased substantially. Providers must continually challenge these auditors through lengthy appeals processes. The inconsistencies in the decisions have, according to CMS, “created numerous operational difficulties.”

The Ruling, issued on March 13, 2013, only related to Part A inpatient claims that are denied by auditors because the inpatient admissions are not reasonable and necessary (i.e., claims denied for other reasons are not subject to the Ruling). When such a denial occurs, the hospital may now submit a Part B inpatient claim for more services that just those listed in the MBPM. Specifically, the hospital may submit a Part B inpatient claim for payment for the Part B services that would have been payable to the hospital had the beneficiary originally been treated as an outpatient rather than admitted as an inpatient. Excluded from this re-billing opportunity are Part B services which explicitly require an outpatient status, such as ER visits.

The Ruling also establishes a time period within which a provider must bill the Part B claims. Where no Part A payment is made because the Part A inpatient claim is denied on the basis that the inpatient admission was not reasonable and necessary, hospitals may continue to bill separately for the outpatient services furnished during the 3-day (or 1-day for non-inpatient prospective payment system hospitals) payment window prior to the inpatient admission as the outpatient services that they were, including observation and other services furnished in accordance with Medicare’s requirements.

Claims denied by auditors after March 13, 2013, or Medicare claims in a pending RAC appeal at any level as of March 13, 2013 are subject to the Ruling. Now, in accordance with the Ruling, appeals will be limited to review of Part A inpatient claims.

The Proposed Rule, issued in conjunction with the Ruling, proposes to adopt a regulation that would provide for the payment of Part B outpatient services if a Medicare Part A inpatient claim is denied on the basis that services were not reasonable and necessary. This would not only apply to Part A claims denied by auditors, but also claims that a hospital’s utilization review committee did not meet medical necessity criteria for the inpatient stay. The Proposed Rule mandates that claims would have to be filed within the one-year CMS timely filing requirements. Comments to the Proposed Rule are due by May 18, 2013.

CMS readily admits there are “currently thousands of appeals pending that are subject to this Ruling.”  Providers must now consider denials in the context of the Ruling. A choice must be made to (a) pursue the Part A payment by arguing the inpatient admission was reasonable and necessary; or, (b) drop the appeal and re-bill the claim as Part B inpatient. Providers should revisit their billing and claims practices as well as their reasonable and necessary requirements so as to take advantage of this concession given by CMS.