Medicare Payment and Reimbursement

Time for a Medicare Check-Up

April 28, 2017 12:15 pm

A level-of-care and length-of-stay review can provide a hospital with an effective means to assess compliance risk and identify revenue opportunities.

As the dust settles around the Two-Midnight policy administered by the Centers for Medicare & Medicaid Services (CMS), now is an appropriate time to review Medicare cases for appropriate billing and hospital level-of-care determinations. Such a review—let’s call it a “Medicare check-up”—is necessary not only to ensure compliance with CMS regulations but also to improve financial performance in the context of ever-shrinking margins.

A Medicare check-up involves reviewing admission and billing data to assess Medicare financial performance. The brief analysis can use a facility’s unique information systems and level-of-care assignment mechanisms to help identify areas of potential risk and of financial opportunity. This analysis is straightforward based on readily available data and does not require significant data manipulation.

The data required for the analysis comprise all commercial Medicare hospital patient data, with length of stay (LOS) and final hospital billed levels of care—i.e., observation, inpatient, and Part B.

The checkup consists of four tests:

  • An integrity test
  • A Part B test
  • An upgrade efficiency test
  • A clinical process efficiency test

Integrity Test

This test addresses two important questions: How effectively are one-midnight stays billed at an inpatient level (i.e., DRG) meeting approved CMS exceptions? And is there a strong program to enforce the Medicare Two-Midnight rule?

Billing a one-day hospital stay at a DRG level of care for Medicare patients is permissible only in the following situations:

  • A procedure was performed that is on the CMS inpatient-only list.
  • The patient expired, left against medical advice from an otherwise qualifying admission, or unexpectedly recovered.
  • The patient was transferred to another facility or to hospice for continued treatment.

The integrity test seeks to assess the organization’s compliance with the Medicare regulations, and there are two important resources available from CMS that can support this analysis:

  • The Program for Evaluating Payment Patterns Electronic Report (PEPPER), described by CMS as “a comparative data report that provides hospital-specific Medicare data statistics for discharges vulnerable to improper payments”
  • Results of “probe-and-educate” audits performed during the introductory phase of the Two-
Midnight rule

PEPPER describes a facility’s performance compared with all other facilities, while the probe-and-educate results provide insight specific to each facility. These resources are important not only because they provide information to support an analysis, but also because they reveal what CMS knows about each facility. Every participating facility should be familiar with and responsive to these report findings.

The first step of the integrity test is to use PEPPER data to compare the percentage of DRG-billed admissions involving a one-day LOS with national and regional benchmarks, thereby obtaining a snapshot of how the facility is doing in billing short-stay DRG cases. If the one-day DRG rate exceeds the benchmarks, a more detailed review is indicated, in accordance with the internal Medicare compliance plan the organization should already have in place. (It should be noted that this test is not a substitute for an organization’s CMS compliance plan, but it can be used to assess the efficacy of the plan.)

Integrity Test: PEPPER Report Graph Comparing One-Day Stays for Medical DRGs with Benchmarks

The exhibit above depicts results of such an analysis using PEPPER results for a hypothetical facility that appears to be performing in an acceptable range in terms of the percentage of medical DRG cases involving a one-day LOS. It seems this facility is at low risk of being audited, per CMS guidelines.

Yet these findings present only the facility’s performance compared with other facilities. It also is important to review results on CMS’s facility-specific probe-and-educate audits, which have been conducted since the institution of the Two-Midnight rule, and which provide more granular detail about the effectiveness of utilization review determinations in supporting the rule guidelines. If probe-and-educate audit findings for a facility indicate moderate or high risk of noncompliance, a more detailed review is required regardless of the PEPPER findings.

Part B Test

This test focuses on one important question within the Medicare check-up: How effective are physicians at appropriately identifying the observation level of care at the time of admission?

In an ideal world, the perfectly prescient physician has the innate ability to accurately predict a patient’s LOS at the time of admission. In the real world, LOS estimates at the time of admission can be extremely difficult, encountering several uncontrolled variables and a lack of complete information.

When a patient presents for admission, the physician considers all available factors to estimate whether a two-midnight stay will be required. In some cases, upon further evaluation and after treatment, the patient may be discharged after a single overnight stay. Yet without an observation order, a facility is prohibited from billing for observation services. The result is that the case may be changed to observation through the Condition Code 44 process, or more likely billed as Medicare Part B.

Medicare Part B billing is essentially unavoidable, but it should be minimized. A facility that has no or very low Part B billing should be concerned that appropriate post-admission utilization review is not being performed. Inpatient cases that are billed as Part B because they don’t meet Two-Midnight rule criteria represent a potential loss of income of about $1,500 per case, on average, based on the inability to bill for observation services during the hospital stay. This financial impact estimate can be derived from the average observation case payment compared with a typical short-stay DRG payment. A high rate of Part B billing indicates a potential for significant loss of revenue and suggests insufficient attention to or education about Medicare inpatient admission criteria.

The Part B test is a simple ratio of Medicare Part B billing cases compared with total Medicare observation cases—i.e., observation cases plus Part B cases over the same period, as shown in the last row of the exhibit below depicting results of a hypothetical Part B analysis. In this case, the Part B percentage of total observation varied from 18.5 percent to 40.7 percent over this period. Reducing part B billing from an average of 40 percent to 20 percent of all observation-level billing generates an additional $30,000 of revenue monthly (assuming 100 monthly observation cases).

Part B Test: Correct Level of Care at Time of Admission

Facilities should strive to maximize observation revenue by minimizing Medicare Part B billing as a percentage of all observation-level cases. Efforts to minimize inappropriate acute inpatient admissions should focus on the point in the hospitalization when the decision to admit is made. A high level of Medicare Part B admissions results from admitting physicians being insufficiently trained or supported (by utilization staff or information systems) in making level-of-care decisions. It is crucial to identify the barriers to selecting the appropriate level of care. Interventions will be institution-specific and will likely include physician education, IT solutions, and patient-flow process improvements.

Upgrade Efficiency Test

This test is concerned with assessing how effectively the correct level of care is being assigned to inpatient admissions involving longer stays.

Organizations must manage observation cases appropriately from an LOS standpoint. Ideally, for example, all one-day inpatient stays that do not meet two-midnight criteria should be admitted at the observation level of care. By extension, all observation cases also should be discharged on hospital day two, because any case in which the patient remains in the hospital for a medically necessary reason for more than one night should be converted to and billed as an inpatient case. In other words, the ideal observation LOS should be 1.0.

Unfortunately, the reality of inpatient medicine does not always allow for such a simple result.

First, prolonged stays can result from patient or facility factors that are not medically necessary, but a fact of life. Delays in treatment, consultation, or discharge planning can lead to a prolonged LOS that is not medically necessary from a Two-Midnight rule perspective.

Second, and more important within the context of a Medicare check-up, there are instances where patients admitted under observation remain in the hospital for a second night for appropriate, medically necessary reasons. Such cases should be identified on hospital day two and have their level of care upgraded concurrently after the first midnight when appropriate.

The upgrade efficiency test assesses how effectively a facility identifies observation patients who meet Medicare inpatient criteria and makes the appropriate level-of-care upgrade in accordance with CMS regulations.

Medicare observation cases in this test are analyzed by average LOS, and/or the percentage of such cases whose LOS is more than one day. Medicare Part B cases are excluded from this analysis because, by definition, they do not meet inpatient criteria and cannot be upgraded. The exhibit below shows a hypothetical hospital observation LOS analysis.

Upgrade Efficiency Test: Utilization Review Concurrent Management

In such an analysis, it is appropriate to question why the observation LOS for Medicare patients is generally substantially longer than one day. In January 2016, for instance, the observation LOS was 1.86, and more than 50 percent of observation cases remained in the hospital for more than one midnight. Was there a snowstorm that prevented safe discharges? Was hospital volume excessive, preventing timely evaluation and treatment? Or was there a utilization-review staffing problem that impeded concurrent upgrading of observation cases to inpatient level of care? The answer to such questions lies in reviewing each of the Medicare Part B cases with a lengthy LOS to determine whether it resulted from a discharge delay or a failure to upgrade observation cases appropriately.

Some discharge delays are not avoidable, but failure to make an appropriate upgrade can have a negative financial impact of $3,500 per case or more. If 10 of the cases in January involved missed upgrade opportunities, the revenue impact of the misses would have been $35,000 in that month.

Clinical Process Efficiency Test

This test looks at the facility’s LOS for Medicare Part B cases.

These cases can be defined generally as cases with inpatient orders that have been individually reviewed by a utilization expert and found not to meet Medicare two-midnight inpatient criteria. The LOS for such a case should be one day, and if the care received on hospital day two was medically necessary, then the case would have been billed at an inpatient level of care in accordance with the Two-Midnight rule and would not have been billed as Medicare Part B.

The priority in managing Medicare Part B cases is to concentrate efforts on avoiding them in the first place, which is the purpose of the previously described the Part B test. Assuming all efforts are being made to minimize Part B billing, the clinical process efficiency test is the next step to take to maximize financial performance for cases that don’t meet inpatient criteria but have an admission order.

If a facility is billing significant numbers of Medicare cases under the Part B benefit, and those cases have an LOS of two or more days, then attention should be paid to the efficiency of inpatient care (or discharge facilitation) processes. Problems in these areas are the major factors leading to a prolonged LOS for observation and Part B cases. For instance, if patients are remaining in the hospital waiting for testing or test interpretation, skilled nursing facility transfer, or transportation difficulties, Medicare Part B LOS will be negatively affected.

Clinical Process Efficiency Test: Medicare Part B Average Length of Stay

The exhibit above depicting hypothetical findings of a clinical process efficiency test shows that 15 of 26 Medicare Part B cases in August 2015 had an LOS longer than one day. Because the excess LOS was, by definition, not medically necessary, the treatment provided to these patients could or should have been accomplished in a single day. The excess days therefore represent expense and inefficiency for which no additional payment will be received.

An Imperative Step for Improving Performance

A Medicare check-up that assesses readily available billing information can lead to valuable insights into a facility’s compliance with the Medicare Two-Midnight rule, and the facility’s efficiency in patient care and opportunities for improved revenue. Although such an analysis does not identify the specific sources of problems or inefficiencies, the four simple tests may indicate the need for further review of clinical and utilization processes that can unearth these sources. Moreover, a Medicare check-up can produce findings of relevance to hospital operations and payment by commercial health plans that can lead to process changes whose impact—on both processes and revenue—extends beyond only Medicare patients.

Charles L. Buttz, MD, MBA, CPE, FAAFP, 
is medical director, utilization, Tandigm Health, Philadelphia, and a member of HFMA’s Metropolitan Philadelphia Chapter.


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