Payments for hospital admissions for Medicare beneficiaries are subject to an “Inpatient Prospective Payment System” ( IPPS), which compensates facilities for inpatient services. Section 1886(d) of the Social Security Act provides payment for the operating costs of acute care hospital inpatient stays under Medicare Part A based on prospectively set rates.  Under the IPPS, each case is categorized into a diagnosis-related group (DRG). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. In the DRG system the costs of services during an admission are based on a “pre-payment” assignment of value.  A DRG is actually a patient classification scheme which relates the “case mix” of patients treated at a hospital to the costs incurred by the hospital.  
Section 1886(a)(4) of the Act defines the operating costs of inpatient hospital services to include certain outpatient services furnished prior to an inpatient admission. Specifically, the statute requires that the operating costs of inpatient hospital services include diagnostic services or other services related to the admission furnished by the hospital to the patient during the 3 days preceding the date of the patient’s admission to a hospital subject to the IPPS.
A refinement to the IPPS became effective June 25, 2010, as Section 102 of Public Law 111-192. This statute bundled payments for outpatient services during the three calendar days immediately preceding the date of admission into the payment for the inpatient care, without increasing the overall payment. This policy recognizes that most medical problems and services provided close to a date of admission are usually closely related to the principal diagnosis for the admission. Section 1886(a)(4) of the Act defines the operating costs related to inpatient hospital services to include certain outpatient services, both diagnostic and treatment-related. Thus, the DRG-based payment is strongly believed to properly cover these problems, even though they slightly pre-date the actual admission.  
Under the “3-day payment window policy”, all outpatient procedures – both diagnostic and treatment services – furnished in the 3-days immediately prior to admission are considered to be medically-related components of the ensuing admission and the principal diagnosis for that admission, leading to inclusion of these services in the DRG payment. Thus, Medicare decided to expand the services paid by an in-patient DRG to include all services rendered during the three days pre-admission. This rule extends the DRG period of service “bundling” to cover pre-admission services without increasing the payment under the DRG. The 3-day payment window policy affects only facility payments, not physician service payments.
This Medicare regulation does allow for separate payment for medical services during the 3-day window, but compelling, truthful, and accurate justification for such increased payment must be submitted. This justification must establish that such services are clearly unrelated to the imminent DRG admission. When such justification is provided, and the medical record is subjected to audit, Medicare may deem such clinical services within the 3-day window as separately payable. The resulting approved payment is made by the Part B system, in contrast to the Part A program liability for the IPPS admission.
In order to secure additional payment for services rendered within the 3-day pre-admission window, a facility must establish that such services are clinically distinct and clearly unrelated to the reasons for the ensuing admission. For example, a planned hospital admission for gall bladder surgery may be preceded by an unplanned emergency visit to the same hospital for an allergic reaction to poison ivy. In this case the emergency (out-patient) services are based on a clear and distinct, separate medical issue and the 3-day policy does not affect the emergency visit.
Medicare fraud may occur when – during the 3-day pre-admission window – a hospital system claims that services are clearly distinct and unrelated to the ensuing Part A admission when this is not the case. Intentional use of claim modifiers which attempt to bypass program limitations and edits, with the intent to mislead Medicare payment rules, constitutes fraud against the Medicare program.