Senate Aging Committee Tackles Hospital ‘Observation Status’ Crisis

Senators Question CMS Actions and Logic, Call for Simplicity

Committee Chair Senator Collins called the hearing at the request of Ranking Member Senator McCaskill

Committee Chair Senator Collins called the hearing at the request of Ranking Member Senator McCaskill

The U.S. Senate Committee on Aging held a hearing with two panels on Wednesday, May 20, considering the causes and possible solutions to the increased use of Observation services in hospitals, and the burdens placed on Medicare beneficiaries, in co-payments and loss of Medicare coverage for post-acute care. The hearing was attended by several Senators who have authored or co-sponsored several pieces of legislation now being considered by the Senate and the House.

Without directly saying so, the session effectively relayed the Senators’ conclusion that the two-midnight rule was likely increasing rather than reducing healthcare costs, especially when the impact of the 3-day rule is considered. Data mentioned suggests the 3-day rule actually costs more than having no such rule, and CMS evidently has NO data to show that the two-midnight rule has done anything but confuse patients and providers alike, raise costs to both beneficiaries and hospitals, and perpetuate this illogical status decision of Inpatient versus Outpatient, which makes no sense except as a way to merely *appear* to hold down costs of care.

Challenging CMS

The title for the hearing was very appropriate, as the Senators both verbally and visually challenged CMS.

The title for the hearing was very appropriate, as the Senators both verbally and visually challenged CMS.

The hearing was called by the Committee Chair, Senator Susan Collins (R-ME), at the request of the committee’s Ranking Member, Senator Claire McCaskill (D-MO), who explained that the impetus for the hearing was the result of a recent swing through her home state, where these issues came up at every stop, which is apparently a very rare occurrence. From their opening remarks, it was clear from the beginning that Senator Collins was most concerned about the 3-day Rule (requires a 3-midnight stay as inpatient status to qualify for 100-days of post-acute care coverage, such as provided by a Skilled Nursing Facility or SNF), while Senator McCaskill was most concerned with the definition and value of so-called “observation” care in the first place.

Two panels of witnesses testified. The first panel included Sean Cavanaugh, Deputy Administrator and Director, for the Centers for Medicare and Medicaid Services (CMS); and Mark E. Miller, Ph.D., Executive Director for the Medicare Payment Advisory Commission (MedPAC). The second panel included Dr. Jyotirmaya Nanda, speaking on behalf of the American Hospital Association (AHA); Spencer Young, Senior VP of Clinical Operations for Health Data Insights (HDI, the Region D Medicare Recovery Audit Contractor or RAC); and Tori Gaetani, Director of Care Coordination for Beacon Health, a hospital in Brewer, Maine.

Links to the PDFs of the witness’ testimony appear at the end of this article.

CMS Goes On Defense

Mr. Cavanaugh was given the task of delivering a statement open to interpretation, perhaps not the interpretation meant by CMS.

Mr. Cavanaugh was given the task of delivering a statement open to interpretation, perhaps not the interpretation meant by CMS.

Mr. Cavanaugh began his testimony with a statement that offers huge and plain insight into the thinking of CMS: “When a patient arrives at a hospital needing care, one of the critical decisions that physicians or other qualified clinicians must make is whether to admit the patient for inpatient care. This decision is often a complex medical judgement, taking into account the patient’s history, comorbidities and other factors. However, because of statutory requirements, Medicare pays hospitals different rates for inpatient and outpatient services. Therefore the decision whether to admit a patient for inpatient care has implications for provider payment and beneficiary cost sharing.”

I submit that there are several telling phrases in those few sentences. First, CMS does seem to understand that people go to hospitals when (not if) they need medical care. This, despite the fact that they will not pay for said care, even if it is needed, if specific words or phrases are left out of the reams of documentation that physicians write (for themselves and other physicians) about the care of the patient. Second, note that there is not a single word about delivering care to the patient; there is only concern with payment rates. And third, the rather passive-aggressive “however” clause effectively lays the blame for all of this on “statutory requirements” – created by, guess who, you folks, Congress.

Perhaps the Senators noted this, as the Senators make short work of Mr. Cavanaugh, forthwith.

“We’ll take that under consideration”

The only real surprise for me in the prepared testimony of Mr. Cavanaugh was his statement that CMS is “considering feedback carefully, as well as recent MedPAC recommendations and expect to include a further discussion of the broader set of issues related to inpatient stays, long outpatient stays with observation services, and the related IPPS payment adjustments, in the calendar year 2016 Outpatient Prospective Payment System Proposed Rule that will be published this summer.” I say it was a surprise because he is speaking to U.S. Senators, and I easily recognize the statement as the typical, rather flippant boiler-plate statement seen so often by providers, quite similar to letters and emails sent to providers as CMS’ reply to suggestions, comments, and/or complaints about payment or contractor issues.

MedPAC Recommendations

Mr. Miller spoke next and gave a good overview of the MedPAC recommendations already submitted in this year’s report, and there’s no need to repeat them here. But Senator McCaskill then asked a great question that truly set the tone for the rest of the hearing:

“Why can’t we do those immediately?”

When Mr. Miller couldn’t answer, she asked Mr. Cavanaugh to answer. His answer was basically that CMS is already doing something similar, referring to the changes the CMS posted to their website over the past few months. But the changes he refers to here have at least two issues.

First, he mentioned that the RACs need to focus on more than the just denials that earn the most money, and in fact will be instructed to focus more on the providers with the highest denial rates. This is, however, in direct conflict with the Statement of Work – or at least any that we’ve seen to date. The RACs are required to perform their analyses without regard for who the provider is, and only know (supposedly) who the provider is once the RAC determines it needs to issue an automatic denial or get the medical records to conduct a complex audit. So, how will this happen? Will the RAC have a list of “who’s been good and who’s been bad” as a lookup tool, for use once they identify an issue? And what do they do with the issue they just found? Ignore it because the provider is on the “good” list? Or is the database being sorted according to the “good and bad” lists before the RACs go looking? There must be more to this process than we’re being told about.

Second, the idea of limiting the RAC look-back window to within six months of the claim submission is a good concept, but does not allow enough time for the provider to rebill if need be. If the RAC waits long enough to audit and deny, then the hospital may not even have time to get through a single level of appeal before they have to stop and rebill. Given the history of so few overturns at the first level compared to the third level, there’s little chance of doing anything but rebilling, thereby defeating the whole appeals process and any chance at due process.

“It’s their money, right?”

Senator McCaskill then asked about requiring hospitals to tell patients about their status, particularly if they get placed in Outpatient with Observation as opposed to admitted as an Inpatient. Cavanaugh could only respond that CMS is strongly encouraging this. The Senator replied, “I think the right to know is pretty important. I mean it’s their money, right?”

“Get after that”

After Sen. McCaskill next questioned the wisdom of using contingency fees with few real controls or direction, Mr. Cavanaugh rather softly agreed with her points, to which the Senator pointedly responded, “Yeah, you guys really need to get after that in the next contract.”

The Senator immediately went on to read from a CMS manual a phrase than many of my readers are well familiar with, and made perhaps my favorite phrase of the day.

“CMS describes Observation care as quote: a well-defined set of clinically appropriated services. I can’t find… that well-defined… set…  It doesn’t appear to me that it is well-defined.”

Cavanaugh could not answer. He could only explain that the purpose of Observation was not to take the place of Inpatient care, but to allow time to determine the need for inpatient care. The Senator responded that while the need for and purpose of Observation, even the 2 Midnight Rule might make sense, in the application of it all, there seem to be …”unintended consequences that I think we have to get after, now.

Senator Collins then took a turn at questions, asking Mr. Cavanaugh if there were anything that would bar CMS from requiring hospitals to notify patients of their status. When he replied that he knew of none, the Senator replied, “…I urge you to quickly do this.

That Old Pay-and-Chase Model

The Senator then noted how shocked she was to learn that the RAC Statement of Work in fact prohibits RACs from doing any education of providers, noting that the whole RAC model seemed to be based solely upon the pay-and-chase model, instead of a preventative model. She asked if the RACs “tell” the MACs when they see a large pattern of denial, so the MACs can perform education for the providers. Cavanaugh replied, “Yes, exactly…” and then offered the Probe and Education program as an example.

Senator Warren’s Sharp Questions

Senator Warren questions sounded a lot like a cross-examination from Law & Order.

Senator Warren’s questions for CMS and MedPAC sounded a lot like a cross-examination from an episode of Law & Order.

The next questions came from Senator Elizabeth Warren. She continued the sharp questions for the panel and seemed quite comfortable with the jargon and underlying question of how this all affects Medicare beneficiaries, right now. She began with the facts that beneficiaries pay a set amount for an inpatient stay, but for an outpatient stay, instead pay a percentage of outpatient charges, which can amount to much larger sums, especially for a long outpatient stay. Then she noted that Mr. Cavanaugh had begun by talking about protecting the beneficiaries, how that is a key part of what CMS is trying to do, so she asked (something I wish I had thought to ask on an Open Door Call):

“Has CMS evaluated how the changes in admission patterns caused by the two-midnight rule have affected out of pocket costs for beneficiaries?”

Mr. Cavanaugh tried to answer and was obviously uncomfortable, since he evidently could not answer the question… which Senator Warren actually called him on.

“I’m sorry Mr. Cavanaugh, that’s not answering my question.”

Mr. Cavanaugh had to field the toughest questions of the day.

Mr. Cavanaugh had to field the toughest questions of the day. Unfortunately for him, he had to answer that he either did not know or had no data to offer as an answer for Senators’ questions.

She repeated her question slowly, and asked if he had any data on how beneficiaries have been affected since the two-midnight rule was implemented.

His answer: “No I don’t.” Senator Warren may well have known the answer to that before she asked it, replying, “I think knowing the impact on beneficiaries costs is critical information for CMS to look at when we’re trying to evaluate the impact of the two-midnight policy.”

Potential Negative Impact on Beneficiaries from the 2MN Rule

Immediately, Senator Warren turned her focus to Mr. Miller, asking him a different question, “…[is there] any potential negative impact from the two-midnight rule on beneficiaries?”

Mr. Miller, trying to recall data he didn't bring to the hearing. Too bad, it might have been interesting to have.

Mr. Miller, trying to recall data he didn’t bring to the hearing. Too bad, it might have been interesting to have.

In a slightly rambling answer, Miller conceded that no one really has that answer, more or less asserting that the situation is too fluid, so to speak. He also indicated that the rule was not “fully in play.” [Uh… This reporter is not aware of how the rule could be any more “in play” than it is now, but then I’m no bureaucrat.]

The Truth is Out There                                                 [cue X-Files theme]

Senator Warren then focused on the 3-day stay rule to qualify for a SNF stay as a problem, saying, “… we have good data to suggest that there are better ways to do this.” Quoting some ACO program data that shows that even sending patients to a SNF with zero midnights in the hospital saved about $4000 per patient due to decreased hospital charges and better managed care, the Senator finally asked Mr. Miller what she probably wanted to hear from the start:

“How can risk-sharing payment models like Accountable Care Organizations help reduce the need for things like the 3-day or 2-midnight rule policies, and improve care for beneficiaries?”

Dr. Miller then noted that MedPAC has indeed made recommendations that if the providers will accept both upside and downside risk, then such programs would not need policies like the 3-day and 2-midnight rules.

CMS Needs to “Step Up”

Points made, Senator Warren then commits to working together with this committee and the Finance committee to change the laws as needed, but also asking “…that CMS step up here, with its regulatory authority to make the changes that MedPAC discussed today, and to make them as quickly as possible.” With that, she gave the floor back to the Chair, and at least Mr. Cavanaugh looked relieved.

Senator Thom Tillis (R-NC) next asked questions of the panelists, one for Mr. Cavanaugh about the number of appeals filed that succeeded in overturning denials. CMS evidently only has (or is only disclosing) figures for FY2013, which Cavanaugh happily trotted out, with the same answer that CMS gave last summer to Congress, saying only 9% are overturned. Unfortunately, the Senator asked the wrong question, or should have asked it differently: how many denials are overturned, withdrawn or sent back to a lower level by the ALJs? That figure, as we have shown before, is not just 9% but actually 72%, using CMS and OMHA figures.

Has CMS Looked at How Other Payors Handle This?

Before the first panel was dismissed, Senator McCaskill asked one more pointed question of Mr. Cavanaugh: Does CMS know or have they conducted a study of observation versus inpatient stays for non-Medicare patients, where the two-midnight rule does not apply? Of course, his answer was “No.” Once again, the Senator implies that this would be very easy to compile (the implication being, if someone wanted to know).

Mr. Miller than added that while MedPAC had no real detail, their impression was that Observation use did rise “a little” on the commercial side.

How Do Patients Respond to Observation “status”?

The final question put to this first panel was from Senator Collins, who expressed concern about beneficiary responses to being told that they are only in Observation, and not admitted as an Inpatient. She suggested that many in her state may choose leave against medical advice to avoid the huge costs, and that they might then miss the care and diagnoses that they truly need. Neither of the panelists had any data to offer as an answer.

The Second Panel: A New Viewpoint is Revealed

The second panel’s testimony began with Dr. Nanda. His very first statement indicates the huge gap between how CMS sees the world and how healthcare providers like Dr. Nanda see it. “Hospitals seek to deliver the right care, at the right time, in the right setting.” His second statement goes on to speak about quality of care, and regulatory standards that hospitals adhere to.

A Clinical versus Payment Distinction

While Dr. Nanda did make the point that the difference between inpatient and observation services is not a clinical distinction, but instead is a payment distinction created by CMS, ultimately, despite this distinction, the care delivered to the patient in a hospital is often indistinguishable from inpatient care. This easily causes confusion for the patients, despite the efforts made to explain to them the difference.

The Difference in Care Delivered is Indistinguishable

One could say that this is a case of “a distinction without a difference,” but the logical fallacy only holds up until the bill arrives.

Physician Advisors Spend 80% of Their Time on This Distinction

Further proving the point that hospitals are truly adhering to regulatory requirements, Dr. Nanda offered this alarming statistic: “We have dedicated physician advisors in each of our hospitals. Eighty percent of their time is spent determining whether the patient meets requirements for inpatient admission.” [The SSM Health system has 19 hospitals in four states. One should also note that SSM Health became the first health care winner of the prestigious Malcom Baldrige National Quality Award in 2002.]

How Does This Reduce Cost?

Let’s do the math. Depending on what you count, there are about 3,500 to 5,000 hospitals in the U.S. Let’s use the conservative figure, 3,500. If each hospital employed a dedicated physician advisor to spend 80% of their time not caring for patients, and that physician could otherwise typically treat 40 patients per day, 5 days a week, then we get these figures:

(40 encounters per day) x (80% of each day) x (5 days/week) =

160 patients per week (who could otherwise be treated by this physician).

And now, if we annualize that figure:

(160 patients/week) x (48 weeks/year) x (3,500 physician advisors) =

24,640,000 patients per year.

While your “mileage” may be different, simply stick your own figures into the equations. You’ll still get a staggering figure out the back end.

Personally, I find it hard to believe that this “payment distinction” contributes to reducing the cost of healthcare in America. But again, I’m no bureaucrat.

Back to the RACs : Not Focused on Care

The next testimony was from Mr. Spencer Young, Senior VP of Operations for Health Data Insights (HDI), the Region D Medicare RAC, expressing how happy he was to testify about how HDI and the other RACs make a “positive impact on the resources dedicated for the care of American seniors.” Once again, we see a focus that differs from the focus of providers. The RAC is focused on their impact on “resources” without regard for how their activities actually impact the care they say they are protecting.

Testimony from a Successful ACO, Beacon Health

Ms. Tori Gaetani testified on behalf of Pioneer ACO EMHS Beacon Health, from Brewer, Maine. EMHS is one of only 32 ACOs across the nation.

Ms. Tori Gaetani testified on behalf of Pioneer ACO EMHS Beacon Health, from Brewer, Maine. EMHS is one of only 32 ACOs across the nation.

Ms. Tori Gaetani, Director of Care Coordination for EMHS Beacon Health, began her testimony about her organization’s experience under the Pioneer ACO waiver of the requirement that Medicare beneficiaries have a 3-night stay as an inpatient before they can access coverage for a subsequent Skilled Nursing Facility (SNF) stay – commonly known as the 3-Day Stay Rule. Beacon Health is in their fourth year of a five year contract, and accepts both the upside and the downside risk for the program. That is, they accepted the fact that they might experience both good and bad financial outcomes for such encounters.

Waiver of the 3-Day Stay Rule Saves Money

The program at Beacon can be shown to not only benefit many patients in the care they receive, but it also saves significant money for Medicare, perhaps as much as $5,500 in charges for a 3-day inpatient stay. One wonders then, what keeps such a program from being implemented more widely?

What Does This Mean for Beneficiaries?

Ms. Gaetani didn’t stop with the hypothetical financial example. She went on to describe a case where Beacon was able to achieve what the industry calls, “achieving the Triple Aim” – never admitted to the hospital, still got the appropriate level of care, and is now at home, able to live independently. Beacon Health simply sees it as, “doing what is right for our patients.

Who Can You Trust to Know What Level of Care is Needed?

She ends her testimony with the request that the Senators, “Trust us to know what is best for our patients, and allow us to provide them with the level of care that they need to get back to living their lives.”

The Best Question of the Day

Senator McCaskill now gets to the heart of the matter with a long exchange with Dr. Nanda (who responded very well, in my book), but you really should watch this 7-minute clip, if you watch no other. It includes the best question of the day about the decision for observation versus admission: “[since this is really not a clinical decision and it doesn’t change the care itself,…] Why does a doctor get involved at all?

The Senator also directs a question at Mr. Young, “Why can’t this be done on a prepayment basis?” Mr. Young admits that it could be, CMS could do so, since the technology is readily available and HDI does this for commercial payors, today.

Her last question, “Can’t we make this simpler?” even includes the statement that “…it’s almost like somebody over there decided that ‘I’m in charge of making this as complex and confusing as possible.’”

Can’t We Make This More Efficient if We “Ding” You When You’re Wrong?

Surprisingly, Senator McCaskill even gets Mr. Young to agree that if the contingency fee system included financial penalties for improper denials, the whole process could be better and more efficient.

The 3-Day Stay Rule Needs to Go Away

Senator Collins next addressed the 3-day Stay Rule, making the case for eliminating the rule, replacing it with a program like the one Ms. Gaetani described at Beacon Health. She especially makes the point that Ms. Gaetani’s anecdote is a good example of the best outcome, where the patient gets the right care and is able to go home and live independently. As for the cost of all that, three factors – perhaps more SNF stays but not many, medical necessity is still a factor, and the savings of fewer inpatient days – seem to point to an acceptable cost, especially given the improvement in care that can be delivered.

Does the Source of Payment Influence the Decision to Admit?

Another good exchange answered by Dr. Nanda occurred with Senator Collins, when she asked if the decision to admit is affected by the source of payment. As most of my readers know, the order to admit or place in observation must be signed by the attending physician, but the recommendation of the Utilization or Case Manager (or other staffer) certainly influences the decision, since they are the one, not the attending physician, who knows who the payor is for the patient.

The Difference in Payments Makes Little Sense

Senator Whitehouse is the next to chime in with the statement that all this difference in payments makes little sense. He asks Dr. Nanda if care changes based upon patient status. Of course, Dr. Nanda answered “No” – there is no change in care.

He ends his comments by noting that “everything [Dr. Nanda] said was about care,” again showing that the Senators understand the difference in viewpoint and focus between the providers and CMS.

Many Changes Do Have to Be Made, MedPAC’s Suggestions Sound Good

Senator McCaskill concluded by asking hospitals to consider and suggest to the Senate solutions that are “a little short of” legislation now being proposed to eliminate contingency fees altogether (but add “dinging” RACs for improper denials), plus any suggestions to streamline the appeals process, and comments about the changes being proposed by MedPAC, which she thinks are well thought out and sensible.

Finally, she suggested that the ACO model is perhaps our best hope for the future of the Medicare system.


Congressional hearings seem to have a tendency to just “end” without admitting to some kind of conclusion. This one was no exception. Nevertheless, the Senators were pretty forthright in their statements and obvious displeasure with the actions and logic used by CMS to deal with these issues.

Nevertheless, hats off to the staffers and providers and whomever else is advising these Senators. The word does seem to be getting through, despite the best efforts of powers that profit from the unrestrained errors and inappropriate denials of the RACs.

Someday, perhaps we’ll hear a RAC say that they do their work simply because it is “the right thing to do for patients.

Whether we believe them or not may be another story.

Witness Testimony in PDFs

  • Sean Cavanaugh
    Deputy Administrator and Director
    Centers for Medicare and Medicaid Services
  • Mark E. Miller, PhD
    Executive Director
    Medicare Payment Advisory Commission
  • Dr. “Jeetu” Nanda
    System Medical Director, Informatics and Physician Compliance
    SSM Health
  • Tori Gaetani
    Director of Care Coordination, Population Health
    Beacon Health
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