Since the RAC Demonstration Program was launched in 2005 and the final RAC program was launched in 2008, Wachler & Associates, P.C. has been involved in the effort to secure full Medicare Part B outpatient reimbursement for hospitals when short-stay inpatient claims are denied for lack of medical necessity.

Andrew Wachler, along with the American Hospital Association (AHA) and other industry leaders, met with the Centers for Medicare & Medicaid Services (CMS) three times since 2009 for this very reason. Industry leaders hoped that the meetings would lead to a change to CMS’s policy and directions to contractors. In November 2011 CMS announced the implementation of the Part A-to-Part B Rebilling Demonstration Program (AB Rebilling Demo).

Although the AB Rebilling Demo introduces some of the changes industry leaders encouraged CMS to adopt, the program is limited, and participation in it comes at a very high price. Hospitals accepted into the program forfeit their right to appeal the short-stay inpatient claims denied by contractors for lack of medically necessity. Furthermore, although participating hospitals may re-bill a denied Part A claim for Part B reimbursement, they only receive 90 percent of the Part B reimbursement, not including payment for observation services. As representatives for hospitals nationwide, we were disappointed with the limited nature of the AB Rebilling Demo. We continued to utilize the Medicare appeals process to seek full Part B reimbursement for clients, including for observation services. However, even when a hospital received an Administrative Law Judge (ALJ) order for full Part B reimbursement, the process for effectuating that order was unclear. After recent developments, we believe that hospitals now have a more clearly defined process to follow in order to effectuate ALJ orders for full Part B reimbursement.   

In the midst of our efforts to effectuate an ALJ’s order for full Part B reimbursement to one of our clients, we received a memorandum dated July 13 from CMS. The memorandum was from a number of high-ranking CMS officials and was directed to “all fiscal intermediaries (FIs), carriers and Part A and Part B Medicare Administrative Contractors (A/B MACs).” The memorandum explained that there have been multiple ALJ decisions through which the ALJ has upheld contractors’ denials of the inpatient services as not reasonable and necessary, but then ordered the contractors to pay the hospitals full Medicare Part B outpatient reimbursement, including observation.

As a result of the volume of these ALJ orders, CMS issued mandatory instructions for claims administration contractors to follow in the event that an ALJ decision instructs CMS to make payments for Medicare Part B outpatient/observation services. Most importantly, the instructions require contractors to contact a provider to obtain a Part B claim within 30 calendar days of receipt of the effectuation notice from the Administrative QIC (AdQIC). The instructions note that an order for outpatient/observation services only is required if the ALJ does not specify payment for a listed observation level of care. In instances in which the ALJ specifies coverage of “observation level of care,” observation charges may be added to the replacement claim, as the ALJ specifically is substituting the order to admit for the order for observation. The provider must send the replacement claim to the contractor within 180 days from the date the contractor contacts the provider, or else the contractor must close the case and consider effectuation completed. 

It is important to emphasize the precise meaning of the above paragraph. The CMS memorandum articulates that, in the absence of a physician’s order for observation in the medical record, the ALJ’s order for Part B reimbursement must specify  “observation level of care” for the hospital to receive payment for observation. The memorandum states that, “(in) the absence of an order for observation, the observation charges should not be included if the ALJ only specified payment for outpatient care or services.” 

However, again, if the ALJ specifies “observation level of care” or “including observation care,” line-item charges for observation may be added if otherwise appropriate. A hospital with a claim filed without an order for observation in the medical record and without an ALJ’s specified order for reimbursement for observation will not receive reimbursement for such services. CMS’s clear explanation of this requirement underscores the importance of the notion that, during ALJ hearings, hospitals specifically request alternative relief in the form of full Part B reimbursement, including reimbursement for observation services and all underlying care.

While the CMS memorandum states that the Medicare manuals do not provide support for this position, ALJs are not bound by manual provisions, and CMS recognizes that many ALJs are issuing orders for full Part B reimbursement. As a result, again, CMS has directed claims administration contractors to effectuate adjusted payments to hospitals in accordance with these decisions.

This CMS memorandum represents an extremely important advancement in the effort to obtain full payment for hospitals when inpatient short-stay claims are denied for lack of medical necessity. Although there is still more work to be done to solidify hospitals’ capabilities to obtain full Part B reimbursement, this memo is the most clear indication from CMS that contractors now are required to effectuate ALJ orders for Part B reimbursement. Persuading an ALJ to order payment for observation and all underlying outpatient care represents a legal argument, not a clinical one, however. During appeals, it is essential that appellants employ legal arguments – and that authorities persuade judges to issue precise orders for Part B reimbursement, including observation services and underlying outpatient care. 

About the Authors

Andrew B. Wachler is the principal of Wachler & Associates, P.C.  He graduated Cum Laude from the University of Michigan in 1974 and was the recipient of the William J. Branstom Award. He graduated Cum Laude from Wayne State University Law School in 1978. Mr. Wachler has been practicing healthcare and business law for over 25 years and has been defending Medicare and other third party payor audits since 1980.  Mr. Wachler counsels healthcare providers and organizations nationwide in a variety of legal matters.  He writes and speaks nationally to professional organizations and other entities on a variety of healthcare legal topics.

Jennifer Colagiovanni is an attorney at Wachler & Associates, P.C.  Ms. Colagiovanni graduated with Distinction from the University of Michigan and Cum Laude from Wayne State University Law School.  Upon graduation, Ms. Colagiovanni was nominated to the Order of the Coif. Ms. Colagiovanni devotes a substantial portion of her practice to defending Medicare and other third party payer audits on behalf of providers and suppliers.  She is a member of the State Bar of Michigan Health Care Law Section.

Jessica Lange is an associate at Wachler & Associates, P.C.  Ms. Lange dedicates a considerable portion of her practice to defending healthcare providers and suppliers in the defense of RAC, Medicare, Medicaid and third party payer audits.  Her practice also includes the representation of clients in Stark, anti-kickback, and fraud and abuse matters.

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