Medicare Payment and Reimbursement

HFMA Comments on Medicare Short Stay Payment Policy

April 20, 2015 3:35 pm

April 21, 2015 

Andy Slavitt
Acting Administrator
Centers for Medicare & Medicaid Services
Department of Health and Human Services
Hubert H. Humphrey Building
200 Independence Avenue, SW, Room 310G
Washington, DC 20201  

Mr. Daniel R. Levinson
Inspector General
U.S. Department of Health and Human Services
Washington, DC 20201  

Re:  Medicare Short Stay Payment Policy, Recovery Audit Contractor Program, and Beneficiary Impacts  

Dear Mr. Slavitt and Mr. Levinson:  

The Healthcare Financial Management Association (HFMA) would like to thank the Centers for Medicare & Medicaid Services (CMS) for the opportunity to proactively comment on issues related to Medicare’s current payment policy for short stays, the Recovery Audit Contractor (RAC) program, and the impact of both on Medicare beneficiaries.   

HFMA is a professional organization of more than 40,000 individuals involved in various aspects of healthcare financial management. HFMA is committed to helping its members improve the management of healthcare delivery systems, comply with the numerous rules and regulations that govern the industry, and further the principles of administrative simplification.  


In 2008, HFMA convened a group of healthcare stakeholders representing payers, providers, employers, and patients to define the key principles that a reformed payment system must achieve. The group came to consensus around five key principles, which are discussed briefly below:1 

  • Quality: Payments should encourage and reward high-quality care and discourage medical errors and ineffective care. Wherever possible, payments should reward positive outcomes, rather than adherence to processes. In the absence of outcome measures, payment systems should reward the use of accepted practice and evidence-based processes and protocols that meet or exceed standards of quality and safety to promote optimal outcomes. Payers should not be responsible for payment to cover costs directly related to serious preventable medical errors.  

Unfortunately, due to the current policies related to the Part A skilled nursing benefit, there are many documented instances of Medicare beneficiaries having difficulty accessing and paying for necessary post-acute care as a result of a non-qualifying hospital stay, despite being admitted to “observation status” for more than three days. For some seniors who cannot afford post-acute care, this limits their access to medically necessary and normally covered services and has a deleterious impact on patient outcomes, the ultimate quality measure. As currently conceived, this policy inappropriately shifts costs the program was intended to cover to the beneficiary.  

Beyond the inequity of shifting cost to beneficiaries in instances where a beneficiary stays in a hospital three nights but doesn’t qualify due to the inpatient criteria, the current policy discriminates against Medicare beneficiaries based on their circumstances. For example:  

a. At the product level, Medicare Advantage plans are allowed to waive the three-day requirement (which 95 percent do).2 Under this situation “traditional” Medicare beneficiaries who do not enroll in an Advantage plan could have significant costs shifted to them due to a non-covered skilled nursing facility (SNF) stay resulting from the three-day requirement. Their neighbor who elects to enroll in a Medicare Advantage plan is almost certain not to face this issue.  

b. A similar situation occurs at both the market and service level for Centers for Medicare & Medicaid Innovation (CMMI) projects, assuming certain conditions are met.  

     i. Pioneer Accountable Care Organizations are allowed to waive the three-day requirement. As a result, beneficiaries who do not have access to a Pioneer ACO are exposed to the risk of non-covered SNF services that their peers who have access to these health systems are not.

     ii. Bundled Payment for Care Improvement Model Two Awardees are allowed to waive the three-day requirement for their contracted episodes. Again, a beneficiary whose services are not covered under the CMMI episode are exposed to the risk of non-covered SNF services while their peer who receives services under a qualifying episode does not face the same risk.  

To date, CMS has not done a good job of communicating these issues to Medicare beneficiaries.  

  • Alignment: Payments should align incentives among all stakeholders to maximize the efficiency and coordination of health services based on accepted practice and evidence-based delivery models and protocols. Payment systems should stimulate and reward healthful behavioral choices and selection of value-based services by consumers related to prevention, primary care, acute care, and chronic disease management. Care decisions should be made through a shared decision-making process in which patients’ values and preferences are identified and respected.  

CMS, in many other parts of the program, is attempting to create larger packages of care that support value-based payment. These activities range from increased packaging of select ambulatory payment classification codes (APCs) at the per-unit level to population-based payment under the Medicare Shared Savings Program and Pioneer ACO model. The current system of observation payments for short stays and RAC audits runs against this trend by unbundling the DRG payment.  

  • Fairness/Sustainability: Payment systems should balance the needs and concerns of all stakeholders. Payments should recognize appropriate total costs for the efficient delivery of healthcare services that are necessary and consistent with evidence-based care, high-quality/low-cost provider benchmarks, and the advancement of medical science. Payment systems should accommodate payers’ and purchasers’ needs to allocate funds in a predictable, manageable fashion. In addition, consumers should have financial incentives to select high-quality, efficient care without being discouraged from seeking necessary and appropriate services. Finally, the payment system should be sustainable, providing a stable funding stream in the face of competing claims on public and private capital.  

In addition to the shifted costs beneficiaries may be exposed to as a direct result of “traditional” Medicare’s benefit design, there are other ways cost is unfairly shifted to patients as a result of the current short-stay policy framework.  When the DRG is unbundled as a result of either medically necessary inpatient stays denied by RAC reviews or increased use of observation that resulted from the two-midnight rule, beneficiaries are billed for self-administered drugs that were provided during an admission. They are also subject to the Part B coinsurance which in some instances (particularly surgeries) is more than the inpatient deductible. Often, beneficiaries are unaware that they received outpatient services as they were physically located on an inpatient unit. This is especially true when an inpatient admission is subsequently denied by a RAC.  

From the provider perspective, the current short-stay policy framework poses a sustainability issue. When short stays are billed as observation, Medicare payment for the services provided is inadequate to support the resources used to treat short-stay patients.  

In instances when short stay admissions are subsequently denied by the RAC, it is unacceptable that hospitals must refund appropriate payment and then wait (as is most frequently the case) to prevail through a lengthy appeals process to receive payment.  

According to Medicare’s stated policy, on the rare occasion when providers do not prevail on appeal, or choose not to appeal, they often do not receive any payment for the medically necessary services provided to Medicare beneficiaries due to the mismatch between the three-year retrospective RAC audit window and Medicare’s one-year timely filing requirements.    

Medicare does allow providers to bill for inpatient Part B services provided during an inpatient stay that is denied by a RAC. However, even though the original Part A claim was filed in a timely manner, it requires any inpatient Part B claim filed after the Part A claim was denied by a RAC to adhere to the statutory 12-month timely filing limit. Given the time lag from patient discharge to RAC review, few if any claims are denied by RACs in a timeframe that would allow for the rebilling of inpatient Part B services. Further, on the rare occasion when a claim is denied in time to rebill for inpatient Part B services (or the provider voluntarily cancels the Part A claim and elects to bill the admission on an outpatient basis), Medicare does not allow hospitals to bill for medically necessary services such as diabetes self-management training, physical therapy, speech-language pathology, occupational therapy, observation, and emergency department visits. Even though the hospital has canceled the original claim and re-classified the patient as an outpatient, CMS contends that these services are provided on an outpatient basis only and therefore cannot be paid under any circumstances if the patient was initially admitted to the hospital as an inpatient and a claim filed for Part A services.  

  • Simplification: Payment processes should be simplified, standard, and transparent. All parties should use payment methodologies, standardized at the national level, to reduce complexity. The payment methodologies should be transparent to those affected by them, and comply with privacy, security, and antitrust laws and regulations.

Since its inception, the rules related to “observation status” have been needlessly vague and complex. Over time the administrative complexity and resources necessary to appropriately document the care provided and receive payment for medically necessary care have increased significantly.  

RAC audits only add to this burden. The administrative and clinical resources spent managing these audits do nothing to improve quality for patients.   As an example, Billings Clinic estimates it spends 8,600 staff hours (over four full-time-equivalent employees) and $740,000 annually ($2,731 per staffed bed) managing RAC reviews.3 (As a point of comparison, 30 percent of respondents to an HFMA survey report spending less than $2,5004 per bed to achieve meaningful use). Their experience is not uncommon, from what we hear from our members. The resources consumed responding to RAC audits, whose denials are often overturned on appeal, could be better spent by hospitals on care coordination and patient safety improvement programs, which would  lead to better outcomes for beneficiaries at a lower cost to the Medicare program.  

  • Societal Benefit:The resources needed to support broad societal benefits (i.e., medical education and research, indigent care) should be paid for explicitly. Similarly, payment systems should reward innovators who develop technologies, services, processes, and procedures that enhance safe, high-quality, and efficient care.  

Despite the fact that most observation stays occur in inpatient units or when a RAC denies a short stay, the current payment system does not provide support for the necessary social goods that hospitals provide such as indigent care (disproportionate share hospital [DSH] payments) or medical education (indirect medical education [IME] payments). It also (as discussed under simplification) saps resources to administrative functions that could be better spent improving population health or furthering an organization’s community benefit mission.    


HFMA, through prior comment letters (links included below), has worked with its members to make recommendations to CMS designed to address concerns related to Medicare’s short-stay payment policy and the RACs.  In response to CMS’s request in the proposed 2015 Inpatient Prospective Payment Rule, HFMA would like to take this opportunity to not only make recommendations for a refined short- stay payment methodology but address related issues that harm both beneficiaries and hospitals.  

Specifically, we believe CMS should take the following actions.  

1. Implement a short-stay policy that adequately pays for the medically necessary services provided by hospitals to Medicare beneficiaries. This policy should build off of the existing “two-midnight” rule’s presumption that any inpatient admission is appropriate if it exceeds two midnights. HFMA believes that CMS should continue its current policy under the two-midnight rule of counting any time in which a patient is receiving services (e.g., observation, in the emergency department) toward the two-midnight threshold.  

A sensible short-stay payment policy will achieve the following goals:

1. Provides payment that covers the cost of medically necessary services provided to Medicare beneficiaries.

2. Addresses short stays across MS-DRGs as opposed to just “high-frequency” short stay MS-DRGs.

3. Is simple to administer, builds off of the existing MS-DRG payment system, and is stable over time. Using CMS’s current weight-setting methodology will help ensure a short stay policy is budget-neutral to the program, thereby eliminating the need for a payment offset.

4. Minimizes redistribution across the various types of acute hospitals.

5. Includes an outlier payment for high-cost, short-stay cases and all “add-on” payments that support the provision of societal benefits (e.g., DSH, IME).

6. Excludes MS-DRGs that CMS has classified as “inpatient only” from the short-stay policy. These should continue to be paid under the current methodology.  

The American Hospital Association (AHA) has modeled the impact of five alternative short-stay payment models and communicated the results to CMS (link to letter included below). One of the models studied is the concept of “MS-DRG refinement.” Under this policy, CMS would calculate a separate set of weights for stays of less than two days for each MS-DRG. Under this approach, the cases used to calculate weights for short-stay MS-DRGs would be removed from the cases used to determine the weights for MS-DRGs with “normal” lengths of stay. Based on their preliminary findings, the “refinement” policy appears to best achieve and balance the goals articulated above. However this policy, as discussed in AHA’s letter, is not without implementation challenges. HFMA encourages CMS to further study the MS-DRG refinement approach to understand if the challenges identified by AHA can be minimized in a manner that still makes the policy viable.  

2. Reverse the 0.2 percent reduction to the standardized amount implemented in the FY 2014 IPPS rule. CMS justified this reduction based on its hypothesis that more cases would be shifted to the inpatient setting as a result of the two-midnight rule. However, based on interviews with hospitals, it has had the opposite impact as many institutions are classifying patients that fail to meet the two-midnight threshold as observation.  

3. Remove the timely filing window from claims retrospectively denied by RACs. CMS needs to allow hospitals sufficient opportunity after a retrospective denial due to inappropriate site of service to either adjust or rebill claims and receive payment under Part B for all medically necessary services (including observation and inpatient therapy, etc.) rendered to the patient.     

HFMA is concerned the solution put forward by CMS in the new RAC contracts (which  limits the look-back period for patient status reviews if the hospital submits the claim within three months of the date of service) is insufficient.  While HFMA appreciates CMS’s efforts to better align the RAC look-back period with timely filing limits, the new policy fails on two counts. First, it does not provide sufficient time for hospitals to rebill for Part B services after an unsuccessful appeal. This forces a hospital to in effect waive its appeal rights to guarantee some level of payment for medically necessary services. Second, the policy change does not allow adjustment billing for services such as observation and therapy services under Part B that were initially billed under Part A.

The short-stay policy discussed above will address this issue it will take time to develop and implement. Additionally, even after a refined short-stay policy is implemented, there will likely still be some instances where RACs retrospectively deny claims for medically necessary care due to site of service. To ensure hospitals receive appropriate payment for medically necessary services, CMS should use one of the following two options within its regulatory purview to address the timely filing problem:  

a. The agency could remove the timely filing provision from the rebilling process by continuing to treat rebilled claims as “new” requests for Part B payment without invoking the one-year timely filing requirement. Congress gave CMS explicit authority to waive the one-year time limit, and this is precisely the type of situation in which a waiver would be appropriate.  

b. Alternatively, prior to CMS-1455-R many administrative law judges (ALJs) ordered hospitals to “adjustment bill” medically necessary services, ensuring hospitals received some payment even when the site of services was denied. CMS could allow hospitals to “adjustment bill” rather than treating a rebilled claim as a new claim. This would avoid triggering the timely filing limit in the first place. Adjusting an initial reimbursement request would not require the hospital to submit a new claim, and thus the rebilled claim would not run afoul of the general requirement that hospitals submit reimbursement requests within one year of the date services were provided.  

Under this second approach, the timely filing limits would be irrelevant; CMS would simply use the already-timely-filed Part A claims to pay hospitals, collecting supplemental information as needed. Nothing in the law prevents CMS from doing this, and there is no question that this approach is practically feasible. The Departmental Appeals Board and ALJs have already ordered it done many times.  

HFMA strongly encourages CMS to use either of these options to eliminate the unwarranted and unnecessary timely filing limit from the rebilling process.   

As discussed above, CMS continues to exclude the following services from rebilling subsequent to a RAC denial:   

  • Physical, speech, and occupational therapy
  • Observation and related services provided by nurses and other personnel, e.g., therapists, that are furnished to an inpatient  

HFMA continues to find the argument supporting CMS’s position (as articulated in CMS-1455-P) troublesome for several reasons. First, it willfully (and in contradiction of CMS’s own program manuals) overlooks the fact that the excluded services were medically necessary services provided to eligible Medicare beneficiaries. In these cases, hospitals have provided a medically necessary service for which they incurred a cost and should be appropriately reimbursed. CMS’s own manuals support this principle. CMS has stated in the Benefits Policy Manual in Chapter 1, § 10 and Chapter 6, § 10, that Part B payment will be made for hospital services provided if Part A payment is denied.  Further, the Financial Management Manual in Chapter 3, § 170.1 directs contractors to “ascertain whether the beneficiary is entitled to any Part B payment for services in question when the contractor determines that a Part A overpayment has been made.”5 By ignoring its own administrative pronouncements and refusing to pay for medically necessary services, CMS is further shifting the cost of caring for eligible beneficiaries onto other purchasers of health care.  

Second, as CMS is well aware, the administrative distinction between an inpatient stay and an observation stay (during which many of these services are received) is not supported clinically. In almost all instances, observation patients are admitted to a bed on an inpatient unit and receive care from the same clinical staff as would an inpatient. This administrative distinction between inpatient services and observation was created at a time when it was inconceivable that three years after an admission, a Medicare contractor who has never seen the patient in question and who lacks the prerequisite education and credentialing to make an admission decision could subsequently deny a claim.  

When a retrospective audit denies the inpatient admission but recognizes the medical necessity of other services, the auditor is in essence stating that observation services were appropriate. Yet even in these instances where the place of care, not necessity of the care, is in question, CMS refuses to infer from the admission order that the physician would have ordered observation services had the option for inpatient admission been foreclosed. Again, CMS’s policy directly contradicts its own manual. Chapter 29, § 280.3 of the Claims Processing Manual recognizes that providers are entitled to correct payment for services that are not “covered as billed.”6  

HFMA believes the steps above would further the reform goal of developing a sustainable payment system by ensuring hospitals receive payment for medically necessary services provided.  

4. CMS needs to work with stakeholders to provide access to medically necessary care in skilled nursing facilities for Medicare beneficiaries. The implementation of the two-midnight rule combined with the short-stay policy discussed above will not mitigate the beneficiary fairness issues associated with the qualifying three-day stay requirement. In 2012, over 600,000 beneficiaries had hospital stays that lasted at least three nights. But, because not all of those nights were considered “inpatient,” the beneficiary did not qualify for Medicare SNF services.7 While we realize that CMS is limited in the steps it can take without Congressional action, we strongly encourage it to:  

a. Put significantly more resources into educating Medicare beneficiaries to the potential for non-covered SNF stays as a result of a hospital stay that did not meet the three- inpatient-day requirement.

b. Work with Congress to repeal the qualifying three-day inpatient stay requirement.

c. Expand the three-day waiver available to organizations participating in select CMMI programs in the interim. Given that Congressional action on this issue may not be immediately forthcoming due to reasons unrelated to policy considerations, CMS should use its regulatory authority to redefine what constitutes a qualifying stay. CMS declined to use its authority in the 2006 SNF PPS final rule (70 FR 45050 – 45051) concluding:  

Thus, any potential changes in the SNF benefit’s qualifying hospital stay requirement would need to be carefully evaluated, in order to ensure that they accurately reflect Congressional intent in establishing the qualifying hospital stay requirement, and would not result in altering the unique nature of the SNF benefit in a manner that is inconsistent with that intent.  

HFMA appreciates CMS’s need to adhere to Congressional intent as articulated in the 2006 SNF PPS Final Rule. However, the original three-day stay policy was created at the inception of the Medicare program. It was last revisited in 1988 as part of the Medicare Catastrophic Coverage Act. In the ensuing years the practice of medicine has changed drastically while lengths of stay have fallen significantly (-31%8 from 1992 to 2012). This is just one example of an area of the Medicare program where the benefit design still reflects the era in which the program was first conceived.  

HFMA believes that the actions above allow all beneficiaries equal access to medically necessary skilled nursing care, thereby improving quality. This would resolve many of the fairness issues associated with the current qualifying three-day stay policy. These actions would protect “traditional” Medicare beneficiaries from “cost shifting” and the related catastrophic financial harm that their peers in Medicare Advantage plans or served by CMMI-participating organizations are currently not exposed to.  

5. Reduce patient financial liability for beneficiaries who have medically necessary inpatient stays denied by RACS. HFMA believes that CMS should take this step immediately while it develops an appropriate short-stay payment policy, as described above. Not only will it protect beneficiaries from the unintended consequences of CMS’s current patchwork of short-stay policies, but from future unintended consequences that may arise from a new policy. To do so, HFMA strongly encourages CMS to:  

a. Work with Congress to cap patient liability for Inpatient Part B services billed subsequent to the denial of an inpatient stay for inappropriate site of service at the inpatient amount. Given beneficiaries’ inability to influence the circumstances under which they are admitted for medically necessary care, we believe it is patently unjust that they are financially harmed by programs that generate savings for Medicare.    

b. In the interim, work with the OIG to develop a safe harbor from Civil Monetary Penalties (CMPs) for providers who waive or reduce the beneficiary’s Part B liability if it exceeds the Part A deductible for Part B rebilling of services associated with a RAC denial for inappropriate site of service.  

Without a sufficient safe harbor from CMP, hospitals that attempt to waive all or part of the cost sharing associated with retrospective site-of-service denials expose themselves to significant compliance risk.   

c. Simplify the process necessary to bill self-administered drugs to Part D for patients whose inpatient stays were denied due to allegedly inappropriate site of service by a RAC. We appreciate CMS’s efforts to educate Part D beneficiaries on the appropriate steps necessary to bill for self-administered drugs.9  However, these efforts are insufficient as we frequently hear of the challenges patients face trying to bill these drugs.  

d. Standardize and simplify the requirements Part D plans place on beneficiaries when the beneficiary directly submits a claim. This will allow hospitals to create a standard package of documentation, given to beneficiaries at discharge, which will satisfy the documentation requirements imposed on beneficiaries when they bill Part D plans. In addition, CMS needs to provide beneficiaries more guidance and support beyond the relatively basic four-page document that is currently available to them. Further, HFMA would strongly encourage a blanket exception that allows coverage for any drug provided to a beneficiary during a RAC-affected stay that is not on the Part D plan’s formulary.  

e. Work with Congress to cover self-administered drugs provided during outpatient observation services under Medicare Part B. MedPAC’s recent draft recommendations support this measure.  This step would reduce the urgency for Part D providers to simplify their direct billing systems. More importantly this step would also provide protection for beneficiaries who do not have Part D.     

f. In the interim, CMS should work with the Office of Inspector General (OIG) to develop a safe harbor from CMPs for hospitals in instances where the hospital waives the charge in instances where an inpatient stay is retroactively denied due to allegedly inappropriate site of service.  

Given that the beneficiary has no say in the original site-of-service determination, taking the steps above would ensure fairness in Medicare’s short-stay payment policy by protecting beneficiaries from the negative financial impact of a RAC audit.  

CMS’s current uncoordinated patchwork of policies related to short stays is detrimental to both beneficiaries and providers. HFMA strongly believes it is necessary to enact all of the policies discussed above in concert with comprehensive RAC reform. HFMA has shared many of these ideas in previous comment letters (links included below) with CMS. We are at your service to help CMS gain a balanced perspective on this complex issue. If you have additional questions, you may reach me or Richard Gundling, Vice President of HFMA’s Washington, D.C., office, at (202) 296-2920. The Association and I look forward to working with you.  



Joseph J. Fifer, FHFMA, CPA
President and Chief Executive Officer
Healthcare Financial Management Association      

About HFMA

The Healthcare Financial Management Association (HFMA) provides the resources healthcare organizations need to achieve sound fiscal health in order to provide excellent patient care. With more than 40,000 members, HFMA is the nation’s leading membership organization of healthcare finance executives and leaders. HFMA helps its members achieve results by providing education, analysis, and guidance, and creating practical tools and solutions that optimize financial management. The organization is a respected and innovative thought leader on top trends and challenges facing the healthcare finance industry. From addressing capital access to improved patient care to technology advancement, HFMA is the indispensable resource for healthcare finance.  

Additional Resources

AHA Two-Midnight Policy Solutions Comment Letter    

Part B Rebilling Proposed Rule Comment Letter

2013 Proposed IPPS Rule

Proactive RAC Comment Letter – “Two-Midnight” Rule

Delay of RAC Appeals Assigned to Administrative Law Judges


1 Healthcare Payment Reform – From Principles to Action, September 2008, HFMA     
2 Medicare Testing Payment Options That Could End Observation Care Penalties, Kaiser Health News  
3 “Program Integrity: Oversight of Medicare Recovery Audit Contractors,” June 25, 2013, Senate Finance Committee Hearing
4 HFMA Survey: Electronic Health Records and Meaningful Use, August 2013
5 Financial Management Manual (FMM) (CMS Pub. 100-06), ch. 3, § 170.1 (internally referring to the Part B payment policy in BPM (CMS Pub. 100-02), Chapter 6, § 10)
6 Claims Processing Manual (CMS Pub. 100-04), ch. 29, § 280.3 (“Claims Where There is Evidence That Items or Services Were Not Furnished or Were Not Furnished as Billed”)
7 CMS Memorandum Report, “Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries,” July 29, 2013 
8 AHA Trendwatch Chartbook 2014, Chart 3.5 Average Length of Stay in Community Hospitals 1992 – 2012; HFMA Analysis
9 “How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings,” CMS Product No. 11333, Revised, February 2011


googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text1' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text2' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text3' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text4' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text5' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text6' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text7' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-leaderboard' ); } );