Rebilling Non-Medicare Inpatient Claims – Is it Observation or Not? 

It is crucial to understand the differentiation between a denial for lack of medical necessity and a denial for incorrect status.

Last week marked the eighth anniversary of the Centers for Medicare & Medicaid Services (CMS) release of ruling CMS-1455-R. This rule allowed inpatient admissions that were previously denied by any Medicare auditor for the incorrect admission status to be rebilled under Part B, even if that rebilled claim would exceed the timely filing limits. This ruling was followed six months later by the two-midnight rule, which limited denials of inpatient admissions for status to a six-month lookback period and allowed rebilling of those denied claims within a year of the date of service and in addition allowed providers to use their formal utilization review process to self-deny inpatient admissions if it is felt that the patient status was incorrect.

When a Medicare inpatient admission is self-denied, the hospital submits a rebill for Part B payment for all services provided to the patient and that claim is paid according to the Part B payment rules with bundling, conditional bundling, and so on. But unless the patient had an order for observation services prior to the inpatient admission being ordered, the rebilled claim will not result in any payment for nursing services or room and board like an inpatient claim. This is certainly not optimal, but CMS makes the rules, and the hospital must follow them.

While CMS outlined the self-denial and rebill process in regulation and in MLN Matters SE 1333, ensuring that the providers had clear guidance on proper claim submission for Medicare beneficiaries, the same could not be said for other payers. The Medicare Managed Care Manual specifies that Medicare beneficiaries who elect to enroll with a Medicare Advantage plan must have access to the same services available to patients with traditional Medicare, but the way that the Medicare Advantage plans pay contracted providers for that care is left to the provider and the plan to determine. This applies not only to status and site of service determinations, where Medicare Advantage plans are free to disregard the Medicare inpatient-only list and ambulatory surgery-approved list, but also to payment rates for inpatient and outpatient care.

In the case of a non-Medicare claim that is denied for improper status, most payers allow the provider to rebill the claim in order to receive some payment if the denial is not appealed. The issue then becomes how should that claim be prepared and submitted. Since it is not Medicare, with federal rules, the payers are free to determine what procedures providers must follow. It is clear that the rebilled claim will include the charges for all services received by the patient as on the inpatient claim, but the controversial issue is the handling of charges for nursing services and room and board.

Looking at it from the “fairness” standard, it seems that if the payer determines that the patient required hospital care, but the patient should have been treated as an outpatient with observation services that the hospital should be allowed to submit a claim that would pay them the same as if the patient were properly placed outpatient with observation services from the outset. To do that, the hospital would have to include a line item charge for observation services (HCPCS code G0378 per hour) to encompass the time from the inpatient admission order until the time the discharge was effectuated.  But that violates a basic coding principal that a provider cannot bill for a service that has not been ordered by a provider. Under that policy, observation services could not be billed since there was no order. On the other hand, CMS made it clear in the Managed Care Manual that payment to contracted providers is a contractual issue and not a regulatory one.

It is this author’s contention that if an insurer denies an inpatient admission but will allow the provider to submit a bill for “observation,” the payer is authorizing the provider to “convert” that inpatient time to observation hours and add it to the claim, even without an order from a provider. If the payer denies the admission but allows the provider to submit an outpatient claim with no mention of observation, then further questioning is warranted to determine if in fact, observation hours can be added to the claim. If approval for observation billing is given, providers would be wise to note the name of the person providing that information in case a retrospective audit determines that the observation hours were billed without an order and recoupment is attempted.

It should be noted that adding observation hours to a claim in order to let the claim process and be paid at an agreed upon rate is not the same as saying that the patient received observation services in retrospect. The patient received inpatient services, but the provider and payer are agreeing to allow payment at an outpatient rate and to accomplish that the claim must be prepared in a specific manner. In the same light, since the patient received inpatient services and not observation services, there is no requirement to provide the Medicare Outpatient Observation Notice (MOON) to the patient. And while 42 CFR 482.30(d) clearly requires that the Medicare patient be notified if their status has changed from inpatient to outpatient or billing changed from Part A to Part B either during their admission or afterwards, that requirement does not apply to any other payer.  

The other consideration in this situation is determining how the provider is paid for hospital care and whether adding those observation hours will in fact affect the payment for the stay. It is known that for Medicare patients an outpatient stay with at least eight hours of observation services pays as a comprehensive APC, with one set payment, and that payment will almost always exceed the payment if that same patient was admitted as inpatient and the stay was determined on post-discharge utilization  review to warrant self-denial and rebilling. The same cannot be said for Medicare Advantage or commercial payers. Contract rates vary with different rules for bundling services so predicting the payment differential is more difficult. Perhaps it is financially advantageous to not bill the observation hours on the claim; if that is the case, a provider would be wise to omit them.

It is crucial to understand the differentiation between a denial for lack of medical necessity and a denial for incorrect status. Few would argue that if it was determined that a surgery was unnecessary or that hospitalization was not needed whatsoever that denial of all payment is reasonable. But in these denials, there is no argument that the patient required the care they received and that the care required hospitalization. The only dispute is whether the patient should have been admitted as inpatient. Therefore, it is reasonable to argue that if the payer does not feel that inpatient admission was warranted, the provider should be paid in full for the care that was provided, but as if the care was provided as an outpatient instead of as an inpatient. The fact that Medicare regulations do not allow this should not even be considered.  On the other hand, if the payer argues that Medicare regulations do apply to this situation, it would only seem appropriate they would also apply to the admission determination and therefore the payer should follow the two-midnight rule as written by CMS. After all, providers do not get to pick and choose which federal regulations they must follow so why should others have that privilege?

Programming Note: Listen to Dr. Ronald Hirsch every Monday on Monitor Mondays, sponsored by R1 RCM.


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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