A Need for Medicare Appeals Process Reform in Hospital Observation Care

By Ann Sheehy, MD, MS, FHM |  April 12, 2017 | 

By Ann M. Sheehy, MD, MS, FHM

Concern has existed regarding Recovery Auditor enforcement of outpatient (observation) and inpatient status determinations. Scrutiny of the contingency fee-based Recovery Auditors, often called Recovery Audit Contractors (“RACs”), has prompted Congressional attention and Centers for Medicare & Medicaid Services (CMS) reforms. Although the impact of these changes is not fully known, there is bipartisan support for reform of the initial auditing step in the Medicare audit and appeals process.

Congress and CMS must now turn their attention to reforming the 5-Level Medicare administrative appeals process that follows an initial audit and denial. Last year, the US Government Accountability Office (GAO) report Medicare Fee-for-Service: Opportunities Remain to Improve Appeals Process cited a 2000% increase in Level 3 inpatient appeals from 2010-2014. In response, CMS issued appeals reforms, including allowing senior attorneys to hear some Level 3 appeals and permitting the Medicare Appeals Council to set precedents for similar cases. CMS also recently offered a settlement to hospitals willing to reconcile all of their outstanding appeals for partial payment, paying approximately $1.5 billion dollars to one-third of eligible hospitals accepting the settlement. A second settlement offer is in process.

But with 650,000 claims awaiting Level 3 adjudication compared to current Administrative Law Judge (ALJ) capacity to hear just 92,000 Level 3 appeals per year, appeals requests will likely continue to exceed adjudication capacity despite recent CMS efforts, because major systematic inefficiencies have not been addressed. A recent study at my hospital (University of Wisconsin Hospital), Johns Hopkins Hospital and the University of Utah included all appeals reaching Level 3 as of May 1, 2016, and highlights several areas of ongoing concern:

  1.  Time: At the three study hospitals, mean total time between date of service and Level 3 decision or May 1, 2016 (for cases still awaiting adjudication) was 1663 days, and 70% of appeals time was spent in the hands of the government.
  2. Overturn rate: Approximately 7 in 10 appeals reaching Level 3 were favorable to the three study hospitals.
  3. Quality concerns at Level 1 and Level 2: Almost all (95%) Level 1 and Level 2 denial letters cited standardized text referencing the historic Medicare Benefit Policy Manual benchmark that 24 hours be used to decide inpatient status, even though 70% of such denied appeals actually exceeded a 24-hour length of stay.
  4. Due process: Perhaps most importantly, although hospitals default an appeal if they miss a filing deadline, in this study, government contractors and Administrative Law Judges (ALJs) met statutory timeliness deadlines less than half (48%) of the time without default, with only 39% of Level 2 cases and 0% of Level 3 cases meeting time-based standards.

Why should hospitalists care about a process that may feel many steps removed from our daily work? Because a cumbersome, inaccurate and inefficient audit and appeals process wastes Medicare dollars, and may impact hospitalist inpatient and outpatient (observation) status determinations. Ultimately, this could adversely impact our patients financially, especially if they need skilled nursing facility care. In December of 2016, the Department of Health and Human Services Office of Inspector General (OIG) issued a report comparing the first year of observation hospitalizations under the 2-midnight rule (FY 2014) to the year prior (FY 2013). Despite the “2-midnight rule”, in FY 2014 there was a 6.1% increase in 3-midnight stays that would fail to qualify beneficiaries for post-hospitalization skilled nursing facility care should they need it, and there were still 748,337 long (>2 midnight) observation stays in the first year under the 2-midnight rule. Although cause and effect cannot be determined, risk of audit is almost certainly a factor behind these long observation stay statistics. Hospitalist physicians and advanced practice providers interested in observation reform can ask their hospital utilization review team if similar appeals delays exist at their institution and can contact their congressional representatives if they find similar prolonged appeals times.

What should CMS and Congress do? This high Level 3 overturn rate suggests that CMS should more carefully evaluate contractor Level 1 and 2 decisions to determine why appeals were not decided for the hospital at an earlier level. In particular, decision letters should be reviewed given that the majority of denial letters in this study cited criteria (24-hour length of stay) to deny an appeal even when this contemporaneous time-based standard was met. Improved quality at earlier levels could decrease the number of appeals reaching Level 3. Perhaps most importantly, to ensure the appeals backlog is eliminated and will not recur, Congress should mandate that government missed deadlines default the appeal in favor of the hospital, just as the hospital missing a deadline defaults to the government.

Current proposed appeals reforms will not fix the appeals backlog. Audits are necessary in the Medicare program, but due process must also exist in the appeals process. Congress and CMS should take additional steps to fix the Medicare appeals process and solve one major issue in observation hospital care.

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About the Author: Ann Sheehy, MD, MS, FHM

Ann Sheehy, MD, MS, FHM, is a physician and associate professor at the University of Wisconsin (UW) School of Medicine and Public Health. She received her MD and MS in Clinical Research from Mayo Medical School and Mayo Graduate School, respectively, in Rochester, Minnesota. She completed her residency in internal medicine at Johns Hopkins Hospital in Baltimore, Maryland in 2005. The same year, Dr. Sheehy joined the Division of Hospital Medicine as a Clinical Assistant Professor of Medicine at the University of Wisconsin School of Medicine and Public Health. In 2011, she became a Clinical Associate Professor of Medicine. Dr. Sheehy held the position of Interim Director, prior to being appointed Division of Hospital Medicine Director in 2012. Dr. Sheehy has a background in academic medicine, with emphasis on diabetes screening practices and care of inpatients with hyperglycemia, as well as health care disparities and the effect of health care policy on patient care in the hospital. Dr. Sheehy is a member of the Society of Hospital Medicine Public Policy committee, and serves as Vice President of the University of Wisconsin Hospital and Clinics (UWHC) Medical Board and is chair of the Credentials Committee. Dr. Sheehy is a two-time recipient of the Evans-Glassroth Department of Medicine Inpatient Teacher of the Year Award and has also been awarded the University of Wisconsin Internal Medicine Residency Professionalism Award. Dr. Sheehy is an active SHM member in the Public Policy Committee and has found herself on Capitol Hill multiple times, testifying before Congressional committees focused on the U.S. healthcare system, on behalf of hospitalists and SHM.


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