In a new report, the Department of Health and Human Services Office of Inspector General (“OIG”) concluded that hospitals are increasingly billing Medicare for inpatient stays at the highest, most expensive severity level despite many of these stays having only one qualifying diagnosis for payment at the highest severity level and others lasting only a relatively short amount of time. OIG suspects that the increase is caused by upcoding. Hospitals should prepare for potential follow-up enforcement activity and should conduct proactive audits of their own inpatient coding to address any potential overpayments before further escalation of this issue can occur.

The Severity Level of a Stay Depends on a Secondary Diagnosis

Under the Medicare Inpatient Prospective Payment System, the Centers for Medicare & Medicaid Services (“CMS”) pays hospitals a prospective rate for inpatient care. The rate is based not on the actual items and services that a hospital provides to a particular patient, but instead on the patient’s primary diagnosis and major procedures. These two factors help determine the patient’s medical severity diagnosis-related group (“MS-DRG”). Based on years of data, CMS has determined what it believes to be the average level of resources a hospital needs to treat beneficiaries assigned to each MS-DRG.

In addition to a primary diagnosis, a hospital can report up to 24 secondary diagnoses for each inpatient. If a patient has a secondary diagnosis that CMS considers to be a major complication, the patient is assigned to the highest severity DRG that relates to their primary diagnosis. Some secondary diagnoses are not considered “complications,” so they have no impact on the level of severity. OIG included the below graphic in its report to demonstrate how this system can affect a hospital’s payment.

What OIG Found

OIG reviewed inpatient claims information from 2014 through 2019, focusing on the overall claims submitted to CMS and drilling down to review claims at the individual hospital level. OIG found that over this time period, the number of claims submitted for inpatient stays at the highest severity level increased by 20% and that in 2019, almost half of all Medicare spending on hospital inpatient stays was for stays at that level. However, the average length of stay for high-severity cases decreased during this same time period. OIG observed that although the number of stays billed at the highest severity level implies that beneficiaries were sicker overall, the decrease in the average length of stays at the highest severity level undermines that potential explanation since it is not consistent with sicker beneficiaries.

OIG suspects that the increase in the number of claims at the highest severity level reflects upcoding, i.e., billing for a more expensive code than is warranted by the patient’s condition. OIG believes several factors, listed below, suggest that this upcoding occurred:

  • The average length of inpatient stay for claims with the highest severity level decreased by almost half a day over the time period. Additionally, almost 30% of stays billed at the highest severity level lasted “a particularly short period of time,” which OIG defined as at least 20% shorter than the mean length of stay for the assigned MS-DRG.
  • Over half of the inpatient stays billed at the highest severity level reached that level because of only one diagnosis. As described above, the severity of an inpatient stay depends on the patient’s secondary diagnoses. It takes only one secondary diagnosis that CMS considers a “major complication” to push the patient into the highest severity level. OIG determined that if this diagnosis were inaccurate or inappropriate, the higher severity level (and higher payment) would not be warranted.
  • Hospitals varied significantly in their billing of inpatient stays at the highest severity level, and OIG determined that some hospitals were outliers. OIG compared hospitals using three different metrics: percent of stays billed at the highest severity level; percent of stays at the highest level that are particularly short; and percent of stays at the highest severity level with one major complication. OIG focused on the top 5% of hospitals within each of these measures and concluded that those hospitals’ billing patterns may indicate upcoding.

OIG Recommended that CMS Investigate

Given the billions of dollars Medicare paid hospitals between 2014 and 2019, OIG recommended that CMS take a number of steps in response to its findings. These steps would include targeted reviews of MS-DRGs and stays that are vulnerable to upcoding, as well as reviews of the particular hospitals that frequently bill for them. OIG also recommended that CMS consider conducting more in-depth review of the medical record that looks for inconsistencies in the diagnosis that call into question the appropriateness of the coding and using the results of the reviews to recoup overpayments. In its response, CMS stated that it will share OIG’s findings with its Recovery Audit Contractors (“RACs”) for their consideration in updating MS-DRG review strategies. CMS will also continue to monitor for potential upcoding as part of its own ongoing program integrity strategy.

Practical Takeaways

  • It is likely that inpatient hospital claims will be subject to additional scrutiny by OIG, CMS’s Recovery Audit Contractors, and whistleblowers. We expect that enforcement action will very likely occur, and potentially very quickly on the heels of this OIG report. Hospitals should therefore consider conducting their own reviews of inpatient coding practices and take any repayment steps that may be necessary to help defuse this impending enforcement activity.
  • Hospitals should review and analyze data from their PEPPER Reports. Those hospitals that bill for a relatively high number of high-severity MS-DRGs should especially prioritize these audits. OIG examined individual hospitals’ claims in performing its review, and outliers should expect even more focused attention from enforcement agencies.
  • Hospitals should also consider including “two-midnight” audits in their Compliance Work Plans. OIG announced in November 2020 that it will once again audit individual hospitals for compliance with CMS’s Two-Midnight Rule and, where appropriate, will recommend overpayment collections.
  • Since the COVID-19 pandemic has placed a financial strain on the country’s health care resources, OIG, CMS and other governmental agencies will likely prioritize targeted reviews for inappropriate hospital billing practices. These reviews could cost hospitals millions of dollars as the government seeks to recoup potential overpayments. We recommend hospitals contact their compliance counsel for assistance in examining their data and evaluating next steps, which could include protections afforded by working with counsel under the attorney-client privilege.