• District court upholds perversity of Medicare

    The following is a guest post by Nicholas Bagley, University of Michigan Assistant Professor of Law.

    So here’s a sad story about medicine and the law. Sarah Mulcahy was 96 years old when she suffered a bad fall. The pain was so severe that she became incontinent and nauseous. After going to the emergency room, she was hospitalized and spent three nights at Manchester Memorial Hospital in Connecticut. While there, she was X-rayed, CT scanned, hooked up to an IV, treated with an incentive spirometer, and given compression cuffs to prevent deep vein thrombosis. After being discharged, she went to a skilled nursing facility (SNF) to recuperate. She stayed there for more than three months at a price tag of about $30,000.

    Fortunately, Medicare covers the costs of SNF care for patients who first spend at least three days as a hospital inpatient. (This is known in the lingo as the “three-midnight rule.”) Unfortunately for Ms. Mulcahy, however, she was never technically admitted as an inpatient to Manchester Memorial. Instead, the hospital had put her on “observation status,” an ill-defined halfway house for a patient who’s too sick to go home but who might not be sick enough to need the full range of hospital services. Because Ms. Mulcahy wasn’t ever an inpatient, Medicare wouldn’t cover her subsequent SNF stay.

    From Ms. Mulcahy’s perspective, this was perverse. Observation status or not, she was in fact admitted to the hospital for three days. What basis could Medicare possibly have for saying she was never an inpatient? So Ms. Mulcahy, together with a bunch of elderly people with the same sort of problem, sued the Centers for Medicare and Medicaid Services (CMS).

    This past Monday, a district court in Connecticut issued a careful opinion dismissing the case. In the court’s view, CMS was perfectly within its rights to defer to the hospital’s judgment about whether Ms. Mulcahy had been admitted. If Manchester Memorial said she was on observation status, well, she wasn’t an inpatient. And if she was never an inpatient, then the Medicare statute says the program can’t pay for her stint at the SNF. Q.E.D.

    Strictly as a legal matter, this is probably right. When it comes to dispensing government money, Medicare defers left and right to the medical judgments of physicians and hospitals. That said, it bears noting that hospitals have unusually wide discretion in choosing whether to assign a patient to observation status. That’s particularly so because a patient’s technical status won’t much affect the sort of care she receives. At the margins—and maybe more than at the margins—financial incentives will shape how hospitals exercise that discretion.

    The bad news for Ms. Mulcahy is that financial incentives have recently been pushing hospitals to put more and more patients on observation status. In one of its perennial efforts to weed out waste and fraud in the Medicare program, Congress in 2006 called on CMS to hire Recovery Audit Contractors (RACs) to police Medicare billing. Since then, the RACs have focused considerable attention on short-term hospital inpatient admissions that could perhaps have been treated on an outpatient basis. A hospital concerned about RAC scrutiny might well prefer to err on the side of caution by putting a borderline patient on observation status (technically an outpatient  designation).

    CMS has recently issued regulations to reduce the prevalence of extended, inappropriate observation care. There’s some debate about whether those regulations will work, but in any event, they’re not much consolation to Ms. Mulcahy. No matter how you cut it, she got screwed. (That’s the technical legal term.) But it’s important to see that Ms. Mulcahy got screwed not just because CMS deferred to the hospital’s judgment not to classify her as an inpatient. She got screwed because Congress made SNF payments contingent upon spending three days in a hospital. Why on earth did it do such a thing? If Ms. Mulcahy needed care at a skilled nursing facility, she needed care at a skilled nursing facility. Whether she’d just been discharged from the hospital is irrelevant.

    The case serves as a reminder of the unintended consequences—consequences that still matter today—of the decision almost fifty years ago to model Medicare on the employer-sponsored indemnity insurance plans then offered through Blue Cross and Blue Shield. These plans were designed to help workers back onto their feet after an acute illness, not to support those with chronic, debilitating conditions. That’s why Medicare doesn’t cover round-the-clock nursing care for the elderly (we leave that to Medicaid once Ms. Mulcahy paupers herself). Yet it’s precisely these sorts of chronic conditions that disproportionately afflict the elderly. There’s thus a mismatch, reflected here and elsewhere in Medicare, between the needs of the patients who depend on the program and the type of care that Medicare will cover. Poor Ms. Mulcahy just got caught in a bureaucratic snare arising out of one of those mismatches.

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    • This is a sad topic, and sadly the new CMS rule “clarifying” the presumption inpatient vs obs legitimacy will probably subject a lot more short stays to RAC audits… tough issue without a clear answer, but the 3 day rule probably needs to go — 1 vs 3 days in the hospital (inpatient or obs!) has little or nothing to do with whether post-acute care will be helpful

    • Of course, it’s not just seniors who suffer chronic conditions (I include old age as a chronic condition – there’s no cure for it), as there has been an explosion in the number of people with chronic conditions, from cancer to heart disease to diabetes. And, as Professor Bagley points out, health insurance isn’t designed to deal with chronic illnesses, it’s designed for injuries and curable illnesses. ACA will help, with the addition of caps for out of pocket expenses, but the caps will still leave most working Americans bankrupt (the caps are too high) and the caps don’t apply non-covered services. What’s confounding is that the crisis in health care spending is, in large part, attributable to the explosion in the number of people with chronic illnesses – including all those seniors who need long-term care.

    • Great post and a good warning to all. Bureaucracies do crazy things and I can recount numerous examples that make absolutely no sense, but cause pain to patients, doctors and hospitals with little ability to set things straight. I am afraid we will find even more of this type of action with the ACA and ACO’s (they will be determining the three day limit.)

      The basic fallacy is selection. Treat the healthy. Stay away from the sick where costs can skyrocket without comparable reimbursements. Our adjustments for risk are in their infancy so my guess is that these adjustments will not solve the problem.

    • SETH is completely right on this. A decision to admit (or obs) a patient is a determination of whether or not they are safe to go home that day. Whether or not they need SNF afterwards is not necessarily related.
      Alternatively, there are situations in which there is no medical reason why someone needs to be in the hospital but obviously they need to be put into some form of long-term care (progressive dementia in a previously independent person, etc.). Then we get put in the opposite problem of needing to put someone into a SNF without a medical reason to bring them into the hospital in the first place.

    • Was the rationale based on the potential for SNF abuse?

      This could be due to fraud, but it could also be due to pressure on the physician from family members, who would have to bear the responsibility or cost of post observation status care. I’ve experienced this pressure, and if not positive pressure, just empathetic pressure as family members are exhausted and an SNF provides a small respite from obligation.

      Perhaps there is some understanding of why this rule exists, as observation and discharge for most does not (or should not) require an SNF, whereas inpatient care would. The opportunity to advance level of care is up to the provider and can be done based on medical need.

      What is the monetary rationale for a physician or hospital to choose observation over inpatient care? Is it more profitable, or is it just optimizing resource allocation? The monetary rationale for choosing observation over discharge is obvious ( with malpractice being the obvious risk to overtreat) , and thus medicare is wise to review this practice.

      I have not read the decision yet, however if the patient, or family, is notified about the SNF not being paid for, then the choice and payment of SNF vs. home nurse vs. family care is up to the patient and family ( as long as there is at least a plausible reason for the physician or social worker to agree).

    • -“What is the monetary rationale for a physician or hospital to choose observation over inpatient care?” Electing observation status vs inpatient status decreases the likelihood that they’ll be subject to a substantial fine after an RAC audit.

      -I agree with you that the pressure that the patient’s family members put on front-line providers to admit patients for a variety of non-medical reasons (often they just can’t handle caring for their elderly relative at home anymore) so that they can be admitted to a nursing home or an equivalent is immense.

      Front-line providers see little or no personal upside from inpatient care that they don’t personally deliver, and when inpatient wards are busy/full (which is often) there’s a significant pushback against unnecessary/marginal admits from overwhelmed internists. Anyone arguing that the avarice of physicians was driving uneccessary admits and the SNF volume that followed should spend a few days in an ER and observe the dynamics that drive these decisions in person.

    • Having dealt with this issue for a family member, I am surprised the hospital did not make sure that the stay would qualify for getting the skilled nursing covered. The doctors I dealt with at the hospital were very open about making sure that the family member would qualify for medicare coverage for a rehabilitation period in the SNF.

    • Also, this result eventually appears as the number one contributer to individual bankrupcy proceedings. Bankrupcy must be the ultimate indignity of our nation’s healthcare industry.