What Are Medical Necessity and Patient Status?
The Social Security Act (SSA) outlines that all services provided under Medicare must be reasonable and necessary as a basis for payment.[2] Section 1862(a)(1)(A) of the SSA further defines that payment may not be made for any expenses incurred for items or services which are not reasonable and necessary for the evaluation and management of a disease, condition, illness, or injury.[3] It is important to note this clarification, as the focus is on payment and not the quality of care received. For compliance professionals, this key point is center stage when discussing medical necessity with providers, ensuring proper documentation that supports medical necessity is within the medical record, and ensuring understanding that medical necessity is not a reflection of the care provided.
Medical necessity for healthcare services is evidenced through documentation. Documentation within the medical record serves several key functions—it is the communication vehicle between members of the team providing care to a patient across multiple settings to ensure continuity of patient care, serves as the legal document to support services provided, and demonstrates the justification to support payment for the medical care and services provided to the patient. Care must be considered reasonable when compared against current medical standards of care.
The Centers for Medicare & Medicaid Services (CMS) Conditions of Participation for Medicare and Medicaid and the SSA require that hospitals and health systems have an effective utilization review (UR) plan/UR function in place, with specific processes to review medical necessity, resource use, length of stay (LOS), denials, and outcomes, which directly affect reimbursement.[4] In addition, payers and health plans have contractual requirements that affect reimbursement. Given the role of the UR function and the regulatory complexities within healthcare, UR can be the bridge between quality, medical necessity, resources, coverage, and reimbursement and facilitate compliance with regulatory, risk, and quality requirements.
Coordination among UR, care management, revenue cycle, and the physician is imperative. Medicare reimbursement for inpatient and outpatient hospital services differ, with CMS providing payment for inpatient stays under the hospital inpatient prospective payment system (IPPS) in the Medicare Part A program or under payment structures for critical access hospitals, inpatient rehab, long term acute care, cancer, religious, or inpatient psych.[5] Whereas hospital outpatient visits are paid under the hospital outpatient prospective payment system (OPPS) under the Medicare Part B program.[6] When a patient presents to a hospital in need of medical care, the physician must determine whether the patient needs inpatient care or can be treated in an outpatient setting. This decision has implications for hospital payment and beneficiary cost sharing, and the physician documentation must support the level of care provided and that services are medically necessary regardless of the setting where the patient receives those services.
Two main clinical criteria are used as guidance for determining level of care: McKesson’s InterQual Criteria and MCG. Both are evidence-based clinical guidelines used to assess whether a patient’s level of care was appropriate. As these are guidelines, each physician must use their expertise to determine appropriate level of care, which may not align with clinical criteria. This is where it becomes critical for physicians to document their thought processes when making determinations of level of care and include in their documentation their evaluation of the patient, prior patient history, current symptoms or course of illness, and the details behind their clinical decisions. Patient evaluation does not always need to meet InterQual or MCG to admit the person as an inpatient.
CMS has two requirements to document and validate medical necessity of inpatient admission:
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Reasonable expectation based on clinical standards of medical practice that the patient is likely to require two midnights or more of inpatient care, and
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Specific explanation of the clinical conditions, circumstances, complications, comorbidities, and risks to the patient upon which that expectation is based.
Payment under Medicare Part A is generally not appropriate for hospital stays expected to span less than two-midnights, unless the admission falls into an exception as outlined by CMS, as either a procedure on the “inpatient only” list or qualifies for a case-by-case exception. To meet the qualification for the case-by-case exception, the medical record documentation must clearly support the physician’s determination that the patient required hospital services in the inpatient setting regardless of the expectation of staying at least two-midnights. CMS’ expectation is that an inpatient admission less than 24 hours would seldom qualify for the case-by-case exception to the two-midnight benchmark.
Effective October 1, 2018, CMS updated regulations that govern hospital admissions under Medicare Part A.[7] The changes removed the requirement that an inpatient admission order “must be present in the medical record and be supported by the physician admission and progress notes, in order for the hospital to be paid for hospital inpatient services under Medicare Part A.”[8] More importantly, CMS did not change the standard in that same regulation that an individual becomes an inpatient when formally admitted under an order for inpatient admission by a physician. According to CMS, this regulatory standard remains significant because it reflects a determination by the treating physician that inpatient services are medically necessary.
A physician order to admit a patient for inpatient services is binding and inpatient status begins at formal admission pursuant to the order. If after admission it is determined that the inpatient admission decision was incorrect or cannot be supported, the hospital can use the Condition Code 44 process to change the status to outpatient if the patient is still a patient in the hospital. To use the Condition Code 44 process, the attending physician and a UR Committee physician must both concur.[9] If the patient has already been discharged or the attending physician does not concur with the change to outpatient, the hospital may self-deny and rebill to Medicare part B.[10] In order to rebill, the attending physician must be afforded the opportunity to express his or her views but two physician members of the UR committee may approve self-denial without concurrence of the physician.[11] In both scenarios, the patient must be notified.
Prolonged Observation Services Guidance
Several CMS policies provide guidance relating to prolonged observation services: the definition provided for “observation services,” Medicare Outpatient Observation Notice (MOON), comprehensive Ambulatory Payment Classification (APC) C-APC-8011, two-midnight rule, and Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act).
Observation Services and Medicare Outpatient Observation Notice (MOON)
To be covered by Medicare, observation services must be reasonable and necessary. Observation is a short-term treatment that allows for assessment to determine whether a patient needs additional treatment as a hospital inpatient. An order by a qualified provider is required to place the patient in observation and start the clock to calculate the hours the patient is in observation for billing purposes. General supervision by the physician is required by CMS for observation services, and the presence of the physician is not required.[12] Notification to the patient if observation extends beyond 24 hours must occur through the MOON. Decisions to admit the patient to inpatient level of care or discharge the patient rarely extend beyond 48 hours.
Ambulatory Payment Classification (APC) C-APC-8011
Observation services are reported using HCPCS code G0378 for hourly observation services and is assigned a status indicator of N, identifying that payment is always packaged. As part of the CMS Comprehensive Ambulatory Payment Classification (C-APC) payment policy methodology, C-APC 8011 was established to capture claims that contain a specific combination of services provided to a patient during the same encounter; one of which must be eight or more units of service for G0378. In addition, the other criteria that qualify claims for payment under C-APC 8011 are: 1) HCPCS codes with a status indicator of T are not listed on the claim; 2) the claim contains one of the following codes: G0379 on the same date of service; 99281 – 99285 (emergency department visit); G0380--G0384 (type B emergency department visit); 99291 (critical care); or G0463 (hospital outpatient clinic visit) provided on the same date of service or 1 day before the date of service for G0378; and 3) HCPCS codes with status indicator J1 are not listed on the claim.
Two-Midnight Rule
Length of stay plays a key role in inpatient care decision-making, as outlined in the two-midnight rule adopted by CMS in 2014.[13] CMS recognizes that a patient with a hospital stay that does not cross two midnights may be appropriately considered an inpatient, if the medical record documentation supports the inpatient stay and it meets certain circumstances (such as death, transfer, leaving against medical advice, undergoing an inpatient-only procedure, or receiving ventilation). There are three concepts to consider:
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Stays that are expected to last less than 24 hours should rarely be provided as an inpatient, except for patients undergoing a procedure on the Medicare inpatient-only list or medically necessary with extenuating circumstances where the physician determines inpatient admission is warranted. The patient should be admitted regardless of the expected length of stay.
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Stays greater than 48 hours should rarely be considered an outpatient unless there are concerns regarding medical necessity.
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Any stay between 24 and 48 hours should be under close observation of the physician.
Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act)
In 2016, Bill H.R. 876, the NOTICE Act, amended Title XVIII of the SSA to require hospitals to notify patients verbally and in writing if they have been in observation more than 24 hours and also outlined several other requirements to provide patients with information on their status, financial obligations, and documentation and signature specifications for compliance under the act.[14]
Utilization Review (UR) Function
Each hospital must also comply with the hospital conditions of participation (CoPs) in order to participate in the Medicare and Medicaid programs. 42 C.F.R. § 482.30 (Condition of Participation: Utilization Review) outlines the requirements of the hospital to establish a UR function: “The hospital must have in effect a utilization review (UR) plan that provides for review of services furnished by the institution and by members of the medical staff to patients entitled to benefits under the Medicare and Medicaid programs.” This includes establishment of a UR committee for medical necessity reviews, denials, and internal processes for UR and physician advisor (PA) reviews.[15]
Risk Area Governance
Medical necessity and associated payment mechanisms related to both inpatient and outpatient services are defined by CMS in several federal regulations governing the Medicare and Medicaid programs in healthcare, including the SSA, the two-midnight rule, the Medicare Benefit Policy Manual, and the Medicare Claims Processing Manual. In addition, the Medicare Conditions of Participation also outline the expectations of hospitals and health systems to design and implement a UR program with direct responsibility for review of medical necessity of inpatient admissions.
Title XVIII of Social Security Act, Section 1862(a)(1)(A)
The SSA defines medical necessity as follows: “Notwithstanding any other provision of this subchapter, no payment may be made under part A or part B for any expenses incurred for items or services which…are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.”[16]
NOTICE Act, H.R. 876
Amendment to Title XVIII of the SSA that required hospitals to notify patients verbally and in writing of their observation status exceeding 24 hours, the reasons why they are in outpatient status, any financial obligations under Medicare Part B, as well as implications for impact on Medicare noncovered services and that outpatient observation hours do not count toward the three-day acute care qualifying stay requirement for skilled nursing facility coverage.[17]
Condition of Participation: Utilization Review, 42 C.F.R. § 482.30
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The UR plan must provide for review for Medicare and Medicaid patients with respect to the medical necessity of—
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Admissions to the institution;
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The duration of stays; and
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Professional services furnished, including drugs and biologicals.
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Review of admissions may be performed before, at, or after hospital admission.[18]
Two-Midnight Rule, Final Rule CMS-1599-F
Effective for admission beginning on or after October 1, 2013, the rule established payment policy regarding the benchmark criteria to use when determining whether inpatient admission is reasonable and necessary for purposes of payment under Medicare Part A. An inpatient stay is presumed appropriate if the patient requires hospital care that will cross two midnights.[19]
Common Compliance Risks
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Medical necessity denials (from complex medical reviews).
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Technical denials (from lack of response to government or quality improvement organization requests).
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Inadequate UR and PA internal controls (i.e., those that assess the effectiveness and timeliness of reviews).
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Breakdown in UR function (UR process not comprehensive or does not provide adequate coverage).
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Consistent billing irregularities (the federal government’s ability to investigate hospital-specific data for referral to the Office of Inspector General to pursue under the False Claims Act).
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Lack of adherence to regulatory requirements (for level of care assignment, patient notification, and billing).
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Lack of robust monitoring efforts (to ensure compliant processes).
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Cloning or overdocumentation (implementation of electronic medical records (EMR) has facilitated ease of incorporating ancillary and provider documentation within the EMR).
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Systemic abuse or delays in the provision of care (in an attempt to qualify for the two-midnight presumption (CMS may identify such trends through probe reviews and data provided by the Comprehensive Error Rate Testing (CERT) contractor, First-look Analysis Tool for Hospital Outlier Monitoring (FATHOM), and Program for Evaluating Payment Patterns Electronic Report (PEPPER).)
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Referral from beneficiary and family centered care quality improvement organization (BFCC-QIO) to the Medicare administrative contractor (MAC)/recovery audit contractor (RAC) (Enforcement of the two-midnight rule is delegated to one national BFCC-QIOs—Livanta.[20] These organizations are charged with evaluating the appropriateness of inpatient claims for hospital stays that do not cross two midnights. The BFCC-QIOs choose samples of one-day inpatient claims, often from hospitals whose percentage of short stay admissions is higher than the national average. If the sampled claims indicate that a hospital’s short-stay admissions are not appropriate, the BFCC-QIO meets with the hospital to share its concerns when they identify that a short-stay admission is not appropriate. Referral to the MACs for further review occurs when there is no improvement after a six-month period, the issue persists, and then is eventually referred to the RACs.)
Addressing Compliance Risks
Hospitals can address potential compliance risks through a variety of data analysis as well as process assessment and education.
Assess the UR Function
The UR function should undergo an assessment and evaluation of policies and procedures, as well as compliance with the CoPs. These are best practice to identify opportunities to improve organizational oversight, standardize processes, improve training, and create a feedback mechanism to the UR and PA leaders. Frequently, quick wins are to address appropriate patient status and adhering to the two-midnight rule. Monitoring of denials and observation rates can identify concerns in the UR process.
Educate Physicians
An effective UR process uses internal and external data to ensure physicians are aware of their responsibilities with respect to appropriate documentation and to prioritizing updates and guidance of the two-midnight rule to routinely educate physicians on applicability to patient services.
Robust Monitoring Activities to Ensure Compliance Processes
Several areas of focus for monitoring activities can include some of the following:
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Observation to inpatient ratio can give insight to how well an organization is performing.
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Benchmarking the number of patient admissions that did not undergo a first-level review by UR and PA.
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Length-of-stay reviews with an additional component for outliers.
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Condition Code 44 rates can sometimes indicate physicians placing orders for incorrect status.
Use Tools to Evaluate Medical Necessity
Use national coverage determinations, local coverage determinations, CMS Internet-only manuals, clinical screening tools (MCG and InterQual), industry best practices, and clinical practice standards as tools to evaluate medical necessity.
Denial Analysis
Most CMS denials are based on the lack of documentation for reasonable and medically necessary inpatient admissions. Ongoing review of the various categories of denials include:
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Short inpatient stays (fewer than two midnights).
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Inpatient stays that are not medically necessary due to unreasonable care delays.
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Three-midnights-long inpatient admission that are transferred to a skilled nursing facility. (Is there significant volume, and were these admissions reviewed by UR?)
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Observation services longer than 48 hours (can assist the hospital in identifying areas to focus UR efforts).
Provide Proper Documentation to Avoid QIO/MAC/RAC Audits
Physicians and hospitals are at risk of being audited, or even sanctioned, by Medicare if they file claims for inpatient care when Medicare’s criteria are not met. Documenting a reasonable and legitimate expected length of stay of at least two days and identifying the clinical basis for it will substantiate the medical necessity of the inpatient care provided.
Monitor for Cloning/Overdocumentation
The implementation of electronic medical records (EMRs) and the use of templates, check-off boxes for provider documentation, and the ease with which to incorporate documentation from other areas of the record have introduced problems associated with cloning and overdocumentation of provider notes. The volume of documentation should never be the primary reason upon which a specific level of care is assigned and/or billed.
Possible Penalties
Sanctions can be imposed by the government related to noncompliance, which can range from education requirements to corrective action plans to expulsion from governmental programs. These penalties include:
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Referral to the recovery audit program to conduct patient status reviews for those providers referred by the QIO for persistent noncompliance with Medicare payment policies, including, but not limited to, consistently failing to adhere to the two-midnight rule or failing to improve their performance after a QIO educational intervention.
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Exclusion from governmental healthcare programs for not meeting the Conditions of Participation.
Compliance Resources
Centers for Medicare & Medicaid Services
The CMS manuals are available on the CMS website and can be located under the Internet-only manuals, which are a replica of the official agency copies. The manuals are available to the general public and contain a wealth of information on Medicare and Medicaid. In addition, the manuals contain CMS’s program memoranda, policies and procedures, and day-to-day operating instructions derived from regulations, statutes, guidelines, and directives. They provide direction for administration of CMS programs to providers, state surveyors, contractors, various program components, and Medicare Advantage programs.
https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Internet-Only-Manuals-IOMs
Medicare Benefit Policy Manual
The Medicare Benefit Policy Manual provides details relating to the types of services covered by Medicare within various care settings and outlines requirements needed for coverage.
Medicare Claims Processing Manual
The Medicare Claims Processing Manual outlines specific billing requirements and payment methodologies for various care settings. In addition, the manual details claims processing requirements.
Conditions of Participation
The CMS conditions that healthcare organizations must meet in order to begin and continue participating in the Medicare and Medicaid programs.
https://www.cms.gov/Regulations-and-Guidance/Legislation/CFCsAndCoPs
MCG Care Guidelines
The MCG Care Guidelines provide access to evidenced-based knowledge and best practices across care settings to assist facilities in care coordination and decision-making on patient settings.
InterQual
InterQual are level of care criteria that assist healthcare providers with decision-making of the most clinically appropriate patient care level based on the clinical condition.
https://www.changehealthcare.com/solutions/clinical-decision-support/interqual
Risk Takeaways
Main points of interest:
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The Medicare Conditions of Participation require hospitals to have a utilization review program responsible for ensuring the hospital is providing medical necessary healthcare services.
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Medical necessity for healthcare services is evidenced through documentation and is determined by the physician’s clinical assessment and determination of the clinical course of treatment.
Areas to watch:
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Increase in medical necessity denials and the type of denial
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Percent of patients receiving observation services longer than 48 hours
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Condition Code 44 rates
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Observation/inpatient admission ratio
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Number of observation and inpatient admissions without first-level screening by UR/PA
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CMS Targeted Probe and Educate (TPE) program results
Laws that apply:
All healthcare services must be reasonable and medical necessary to be reimbursed under the Medicare and Medicaid programs. Specific determination of the appropriate level of care provided to a patient, hospitals must comply with the following:
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Title XVIII of Social Security Act § 1862(a)(1)(A)
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NOTICE Act, H.R. 876
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Condition of participation: Utilization review, 42 C.F.R. § 482.30
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Two-Midnight Rule Coordination and Improvement Act of 2014, S. 2082, 113th Cong., Final Rule CMS-1599-F
Addressing compliance risks:
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Continuously assess the UR function to improve processes.
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Educate physicians.
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Implement a robust monitoring program that includes denial analysis, key metrics, and education.
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Provide proper documentation to avoid QIO/MAC/RAC audits.
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Utilize tools to evaluate medical necessity.
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Monitor for cloning/overdocumentation.