On December 21, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule implementing an order from the Federal district court for the District of Connecticut in Alexander v. Azar.[1] See the fact sheet here. The rule would establish an appeals process for certain fee-for-service Medicare beneficiaries who believe hospitals incorrectly classified their stays as observation instead of admissions.

The court directed the Department of Health and Human Services (HHS), as a result of a nationwide class action case filed in 2011, to establish an appeals process for certain beneficiaries with Medicare Part A and B initially admitted to a hospital as an inpatient but whose status is changed to outpatient by the hospital during their stay. [2]^,[3] Changing the status effectively denies the patient Medicare Part A coverage for their hospital stay. This then requires those beneficiaries to fulfill cost-sharing requirements under Part B for their hospital care. In addition, the status change can affect the availability of coverage for a beneficiaries’ post-hosptial skilled nursing facility stay under Part A.

The class of beneficiaries affected includes those who have had or will have Part A benefits denied for hospital inpatient services and Skilled Nursing Facility (SNF) care as a result of the hospital’s reclassification, or those beneficiaries who did not have Part B coverage at the time of hospitalization.

This rule is scheduled to be published in the Federal Register on December 27, 2023. Comments are due February 25, 2024.

BACKGROUND

The rule proposes appeals processes that would apply to beneficiaries who on or after January 1, 2009, have been or will have been formally admitted to a hospital as a hospital inpatient, were or will be subsequently reclassified by the hospital as an outpatient receiving “observation services,” received an initial determination or Medicare Outpatient Observation Notice (MOON) indicating the observation services are not covered under Medicare Part A, and either:

• Were not enrolled in Medicare Part B at the time of their hospitalization; or
• Stayed at the hospital for 3 or more consecutive days but were designated as inpatients for fewer than 3 days. (This would not apply if more than 30 days have passed after the hospital stay without the beneficiary being admitted to a SNF.)

In Alexander v. Azar, the court determined that these beneficiaries should have the opportunity to appeal the denial of their Part A coverage, and, if they are still in the hospital, the right to an expedited appeals process similar to the existing expedited appeals process for challenging hospital discharges. if they stayed at a hospital for 3 or more consecutive days but were designated as inpatients for fewer than 3 days.

The goal of the appeals process is to allow beneficiaries to argue that their inpatient admissions satisfied the criteria for Part A coverage. This would include showing that that medical record supported a medically necessary two-midnight stay[4] at the time of the physician’s initial patient order and that the hospital’s utilization review committee (URC)’s determination to the contrary was erroneous.

CMS PROPOSES THREE APPEALS PROCESSES

Expedited Appeals

The expedited appeals process would allow beneficiaries still in the hospital who disagree with the hospital’s decision to reclassify their status from inpatient to outpatient resulting in denial of coverage by Part A for their hospital stay to file an appeal with a Beneficiary & Family Centered Care – Quality Improvement Organization (BFCC-QIO). The BFCC-QIO would review the beneficiary’s patient record to determine whether the inpatient admission satisfied the criteria to be covered under Part A. A determination would be rendered within one day of the BFCC-QIO receiving the patient records from the hospital.

Standard Appeals

The standard appeals process would apply to beneficiaries who do not file an expedited appeal. Beneficiaries could appeal the hospital’s decision to reclassify their status from inpatient to outpatient that resulted in a denial of coverage for their hospital stay under Part A. This includes cases where the stay is denied after processing of the hospital’s Part B outpatient claim and denial of SNF coverage. The appeals process would be similar to the expedited process, with longer time frames for filing and decision.

Retrospective Appeals

CMS also proposes to establish a retrospective appeal process for beneficiaries with hosptial admissions on or after January 1, 2009. The beneficiary must demonstrate that the initial inpatient admission satisfied criteria for Part A coverage of the stay. CMS indicates they would use an existing appeals contractor to handle and determine eligibility for these appeals. Beneficiaries would have a full year from the implementation date of the final rule to file an appeal request.

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This Applied Policy® Summary was prepared by April Gutmann with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact her at agutmann@appliedpolicy.com or at (202) 558-5272.

[1] Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020), aff’d sub nom., Barrows v. Becerra, 24 F.4th 116 (2d Cir. 2022)

[2] Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. See CMS IOM Pub.100-4, Medicare Claims Processing Manual, Chapter 12, Section 30.6.8.

[3] The government appealed the decision, but in 2022 the United States Court of Appeals for the Second Circuit affirmed the district court’s decision.

[4] The two-midnight rule was established by CMS in 2013. It states that hospital inpatient admissions are considered reasonable and necessary and therefore covered under Part A for patients expected to require hospital services for at least two midnights.