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Observation Part 2: Presumed Medical Necessity

August 30, 2013:

Regina Magnani, RHIT, Clinical/Technical Editor

The final rule for fiscal 2014 inpatient prospective payment system (IPPS) changes finalizes the Centers for Medicare and Medicaid Services’ proposed time-based presumption of medical necessity for hospital inpatient services that is based on the patient’s length of stay. The rule was published August 19, 2013, in the Federal Register.

An individual becomes an inpatient of a hospital, including a critical access hospital (CAH), when formally admitted by order for inpatient admission by a physician or other qualified practitioner. The order is required for payment of hospital inpatient services under Medicare Part A. CMS will presume that Medicare hospital inpatient admission is reasonable and necessary and therefore Part A (inpatient) payment appropriate when the physician expects the patient to require care that crosses two midnights and the admission is based upon that expectation.

This provides a new benchmark for medical review of hospital inpatient admissions. Medicare’s external review contractors will presume that hospital inpatient admissions are reasonable and necessary for patients who require more than one Medicare utilization day (defined by encounters crossing two midnights) in the hospital receiving medically necessary services. These contractors will consider all time after the initiation of care at the hospital in applying the benchmark and will also presume that a medically necessary stay exceeding two midnights after the patient was admitted as an inpatient was appropriately provided as an inpatient service.

Conversely, if the physician expected the patient to require care of less than two midnights, payment under Medicare Part A is generally inappropriate. Reviewers will presume that hospital services spanning less than two midnights should have been provided on an outpatient basis, unless the medical record clearly documents that the physician’s order and expectation were that the patient would require care spanning more than two midnights or the beneficiary received a service or procedure designated by CMS as inpatient-only.

If a hospital is found to be abusing this two-midnight presumption for non-medically necessary inpatient hospital admissions and payment by systematically delaying the provision of care to surpass the two-midnight time frames, CMS review contractors will disregard the two-midnight presumption when reviewing that hospital.

For fiscal 2014, CMS actuaries estimate that this policy change will increase IPPS expenditures by approximately $220 million. This is mainly due to an expected net increase in hospital inpatient encounters from the movement of encounters spanning more than two midnights from outpatient to inpatient settings and the movement of encounters of less than two midnights from inpatient to outpatient. CMS will offset this increase in IPPS expenditures by reducing the operating IPPS standardized amount, the hospital-specific rates, and the Puerto Rico-specific standardized amount by 0.2 percent. CMS will further reduce the national capital federal rate and Puerto Rico-specific capital rate by 0.2 percent (an adjustment factor of 0.998) to offset the estimated increase in capital IPPS expenditures associated with the projected increase in inpatient encounters that is expected to result from the revised inpatient admission guidelines.


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