Last week at its monthly meeting, the Medicare Payment Advisory Commission (MedPAC) discussed current issues with hospital short-stay policies. Specifically, MedPAC discussed the possibility of reducing the incentive to admit patients for short stays by paying one-day inpatient stays at a rate similar to outpatient observation services, as well as new instructions to Recovery Audit Contractors (RACs) to focus their efforts on those hospitals that account for a substantial portion of all Medicare one-day stays.

MedPAC noted that inpatient admission criteria are ambiguous and can be interpreted in a variety of ways. Because one-day inpatient stays are paid significantly more than similar outpatient stays, RACs often focus their audits on the appropriateness of one-day inpatient stays. As a result, hospitals have increased their use of outpatient observation status. Hospitals hesitant to admit patients for fear of a RAC denial may allow a patient to remain in observation for an extended period of time. Extended observation periods may jeopardize coverage of a beneficiary's subsequent skilled nursing care because time spent in observation status does not count toward the three-day inpatient stay requirement for such post-acute care services.

To address these problems, MedPAC discussed the possibility of proposing changes to reduce the payment difference between a one-day inpatient stay and outpatient observation services. Specifically, MedPAC considered the creation of diagnostic related groups for one-day stays with payment rates similar to outpatient observation services. Payment rates for two-day stays would increase. Though MedPAC notes that the payment difference between outpatient observation and one-day stays could not be eliminated entirely, under this proposal, RACs would have less incentive to audit one-day inpatient admissions because the payment amount would be similar to outpatient status and hospitals could more confidently admit patients requiring inpatient care. MedPAC's simulation revealed that only hospitals with an above-average number of one-day stays would see a revenue decrease.

MedPAC also considered changes to the RAC audit and rebilling process. MedPAC is considering whether to recommend refocusing RAC audits on the top ten percent of hospitals accounting for the most one-day stay payments in 2012. However, MedPAC notes that this proposal, if adopted by CMS, would increase program spending and result in lower aggregate recoveries. Alternatively, MedPAC considered recommending a policy to allow hospitals to rebill denied inpatient claims as outpatient claims within a certain window after a RAC denial. MedPAC plans to further address these options at its upcoming meeting on December 18, 2014.

Additional information regarding last week's MedPAC meeting is available here. The transcript is available here.