Hospital Upcoding of Short Stay and Outpatient Encounters as DRG Inpatient Claims

As early as 1989 the Health and Human Services Office of the Inspector General (OIG) issued a warning on the Related Groups (DRG) Prospective Payment System.  The OIG warned that prospective payments:

…might induce physicians and hospitals to admit patients who do not need acute hospital care, in order to obtain payment for treatment that could have been given on an out-patient basis.  

The financial incentives proposed at that time still apply. For example, Medicare payments for short inpatient stays are 290 % higher than for the identical services and beneficiary burden of illness under observation (outpatient) level of care (CY 2012). Subsequent years are similar.

Further evidence for the financial incentive underlying the use of DRG billing over short-stay/observation was highlighted with a 2012 analysis from the Medicare Payment Advisory Commission.

Inpatient stays of 1 to 3 days, billed under the DRG system, resulted in hospital payments between 110 and 155 % greater than the hospital costs for managing these patients.  Furthermore, these “short stays” comprised 48 % of hospital discharges (2012).  This short-stay billing opportunity has resulted in a financial windfall to Part A facilities.  

Observation, outpatient services may be provided in any unit of an acute care hospital, including traditional inpatient units with intensive monitoring capability.   “Observation” is a term which may be misleading:  the services rendered are not passive, watchful waiting, but may incorporate diagnostic and/or therapeutic procedures for a broad range of patient medical need, in any hospital care unit, which are typically concluded in 48 hours or less.

As outlined in the Medicare Claims Processing Manual,

Observation care is a well-defined set of specific, clinically-appropriate services, which include ongoing, short-term treatment, assessment, and re-assessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.  Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge.

Part A facilities may adopt coding and billing practices to induce favorable inpatient claim adjudication over observation level of care, even though the latter may be both safe and appropriate for a given beneficiary’s medical need. The Medicare Program Integrity Manual is clear in assessing the appropriate complexity and intensity of services provided to beneficiaries:

Contractors shall consider a service to be reasonable and necessary if the contractor determines that the service is:

      1. Safe and effective;
      2. Not experimental or investigational;
      3. Appropriate, given the duration and frequency;
      4. Furnished in accordance with accepted medical practice;
      5. Furnished in a setting appropriate to the patient’s medical need;
      6. Ordered and furnished by qualified personnel;
      7. One that meets but does not exceed the patient’s medical need;
      8. At least as beneficial as an existing and available medically appropriate alternative.

Part A facilities are positioned to engage in Medicare fraud. The question is, which ones will cross that line?

REAL PEOPLE making real change Hospital Fraud Wins

Kathleen Hawkins

Dignity Health
$37 million

Kathleen Hawkins, RN MSN, had been employed by Defendant, Catholic Healthcare West (CHW) for approximately 6 years when she decided she had had enough of trying to change the hospital system from within.

CHW, a California not-for-profit corporation that operated hospitals in California, Arizona, and Nevada, was at the time the eighth largest hospital system in the nation and the largest not-for-profit hospital provider in California.

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Joe Strom

Johnson & Johnson
$184 Million

Joe Strom contacted us in 2005. We were very grateful that he did. We immediately formed an all-star legal team and a process to stop a very harmful pharmaceutical marketing strategy. It was this process we set into motion that ultimately returned hundreds of millions of dollars to the U.S. Treasury, and a portion of that, very well-deserved, into Joe’s bank account.

Joe told us a very troubling story about the off-label promotion of a pharmaceutical drug for patients who already suffered from chronic heart failure.

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Description
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“I collaborated with Nolan, Auerbach and White on a broad variety of cases where whistleblowers stepped forward to disclose tactics employed by large companies to influence physicians' medical decision-making in patient care. They and their medical consultants, have consistently leveraged biomedical research and best medical evidence to advance patient safety, optimize clinical outcomes, and control precious resource utilization.”

— Fred Polsky M.D.,, Former Medical Director, CMS Zone 7 Integrity Contractor

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