On April 7, the Centers for Medicare & Medicaid Services (CMS) released an update to the State Operations Manual, Appendix W, which provides the survey protocol, regulations, updates for conditions of participation (CoP), and interpretive guidelines for critical access hospitals (CAHs) and swing beds in CAHs. The 89-page document is wide-reaching, including changes to bed number counting, use of observation services, hospice bed services, physician oversight of non-physician practitioners, drug storage and handling, and many more topics. And, as is its usual practice, CMS has established the effective date as the date of release, meaning CAHs are immediately required to be in compliance with all of the new provisions.

In some cases, CMS has cleared up confusion created by its own choice of words in previous versions of its guidelines. For example, in previous versions CMS indicated that “orders should be clear for the level of care intended, such as ‘admit to inpatient’ or ‘admit for observation.’” Using “admit” and “observation” in the same sentence is anything but clear, so CMS revised that section to note that “ orders should be clear for the level of care intended, such as ‘admit to inpatient’ or ‘place in observation.’”

But in the same section CMS notes that “the CAH must be able to document that it has specific clinical criteria for admission to, and discharge from, the observation service, and that these criteria are clearly distinguishable from those used for inpatient admission and discharge.” It is inexplicable why CAHs continue to need specific observation criteria; they are required to follow the two-midnight rule to make determinations of inpatient or outpatient with observation just as non-critical access hospitals, so this section should have been deleted.

The CoP also indicate that “observation services begin and end with an order by a physician or other qualified licensed practitioner of the CAH.” This is in direct contradiction with the Medicare Claims Processing Manual, Chapter 4, section 290.2.2, which reads that “observation time ends when all medically necessary services related to observation care are completed … (and) alternatively, the end time of observation services may coincide with the time the patient is actually discharged from the hospital or admitted as an inpatient. Observation time may include medically necessary services and follow-up care provided after the time that the physician writes the discharge order, but before the patient is discharged.”

It is not uncommon for a physician to write a discharge order and the patient to continue to receive medically necessary observation for several hours. In these cases, if the hospital follows the CoP, it will be providing unreimbursed care (but if it follows the claims manual, it will risk a citation from a surveyor).

CMS also attempted but failed to clarify what hospitals should do when state law differs from federal law. Specifically, the agency indicated that “some states may have more stringent limits in their licensure or other regulatory requirements on the length of observation services, e.g., 24 hours. In such cases, the state’s more stringent limit on the length of an observation stay applies to Medicare beneficiaries as well, but is not enforced through the federal survey process unless the state has taken a final enforcement action.”

When a state has a 24-hour limit on observation and a patient requires hospital care that will exceed 24 hours but not pass the second midnight, the hospital has the choice of violating the two-midnight federal regulation and admitting the patient as an inpatient or violating state law by keeping the patient in observation until or unless the patient requires a second midnight. This modification means that the hospital will not be cited for violating CoP if it ignores state law and keeps the patient as observation, but the hospital is not immune to state action. And if it chooses to follow state law, it will be intentionally violating federal statute and risk a payment denial and other punitive action.

CMS also had the opportunity to clarify that federal statutes regarding the admission decisions of Medicare recipients do not apply to patients whose care is paid for by managed care organizations (MCOs). But instead the agency doubled down on this, noting that “CMS expects a CAH to employ the same type of clinical criteria for observation versus inpatient status for all patients, regardless of their payor status.”

“For example, if a CAH were routinely placing only Medicare beneficiaries in its dedicated observation unit, then this could suggest that non-clinical criteria were being used in the decision to admit versus place in observation status,” the guidance reads. “This would not only call the observation bed status into question, but could also violate the CAH’s provider agreement requirement that prohibits differential treatment of Medicare beneficiaries.” (Italics indicate new CoP guidance.)

This should be deeply troubling for CAHs, as it is clear that many MCOs use guidelines for the admission versus observation decision that are drastically different than Medicare regulations. Requiring CAHs to ignore the payor’s determination will result in a claim that will be denied, with no recourse for the hospital. In fact, this statement contradicts CMS’s own assertion in the two-midnight rule that there has always been only one level of hospital care, and the difference between inpatient and observation is purely a difference in payment. So even if a Medicare beneficiary is placed in an observation bed in an observation unit at a CAH, he or she would not be receiving differential treatment.

Hospitals take updates to the CoP seriously and are aware that violations can lead to sanctions and loss of Medicare certification. There have recently been significant changes to Medicare regulations, such as the two-midnight rule, individual states’ efforts to limit the use of observation, and increasingly aggressive attempts by MCOs to deny payments to hospitals. This revision to the CoP for CAHs was a perfect opportunity for CMS to clarify many of these inconsistencies, but CAHs are still stuck having to decide which is the lesser of the evils presented to them when these situations arise.

About the Author

Ronald Hirsch, MD, FACP, CHCQM is vice president of the Regulations and Education Group at Accretive Physician Advisory Services at Accretive Health. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the American Case Management Association and a Fellow of the American College of Physicians.

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