Every dollar hospitals spend on inaccurate Medicare audits and appeals are dollars lost that should have been used to care for seniors. We are here to discuss the problems facing hospitals today, but also to find solutions that bring sense to our Medicare program and improve care for America’s seniors.  
 
Today’s hearing will examine hospital issues—including those related to CMS’ two-midnights policy, as well as audits and appeals.  This is a bipartisan concern shared by many different stakeholders, the Medicare program and lawmakers on this Committee.
 
In order to understand why CMS chose to pursue a two-midnights policy, we must first explore the events leading up to the policy.  After we review those events in today’s hearing, the Congress will be able to make an informed judgment about the merits of the policy and potentially pursue alternative solutions.

Our first panel will educate us on the different aspects of inpatient and outpatient payments and services for hospitals.  If we want behavior to change and improve outcomes, we need to change the incentives.

Our second panel will feature national experts commenting on how Federal laws affect everyday medical practice.  We will be hearing perspectives from across the spectrum: provider, auditor, researcher and beneficiary advocate.

As I have talked with stakeholders about current issues in the Medicare program, the two-midnights policy comes up over and over again.  In listening to a variety of different perspectives, I have come to understand the following:

There are misaligned incentives in CMS’ inpatient and outpatient payment systems.  But, hospitals are not doing anything wrong.  Hospitals are simply responding to the incentives.  No matter if a service is inpatient or outpatient, a hospital still uses the same equipment and the same medical staff to deliver care.  

Yet, there are two vastly different payment systems and the systems do not relate to each other in any way.  They are based on different coding rubrics and they pay-for different things.  

And often this is all decided after doctors have provided care.

Take for example reimbursement for medical education.  If a service is billed inpatient a hospital qualifies for an extra medical education payment.  However, if the same service is billed outpatient, the hospital does not receive any medical education money.  

So, if you are a large teaching hospital and you could bill under either payment system, why would you ever submit the bill for anything other than inpatient reimbursement?  It’s all about the underlying incentives.

Now, let’s examine the next piece in this puzzle—auditing.  I have heard from hospitals that audits are causing undue burden.  I have heard from Recovery Audit Contractors—or RACs that they are simply responding to what CMS has defined as improper payments.  Their emphasis on short hospital stays is due to—you guessed it, the underlying incentives.

RACs are able to keep a percentage of any improper overpayments they recoup.  Prior to the two-midnights standard, there were no definitive “rules” governing which payment system was correct for short stays.  RACs are an important program integrity tool.  They are focusing on a legitimate discrepancy of Medicare payment.  They are responding to the incentives.

Although an important tool, auditing also causes unintended behavior changes.  We will hear from several of our witnesses today that around the same time the RAC short stay audits were in full swing, there was also an unprecedented spike in outpatient observation services.  

Observation is meant to be a temporary tool allowing clinicians to closely monitor patients without using full blown inpatient hospital resources.  However, observation services are now being used as a tool to avoid certain adverse effects including RAC audits and in some cases avoiding readmission penalties.

The saga continues when we turn to the appeals process.  Hospitals disagree with RAC audit denials for short stays.  As a result, hospitals appeal the decision.  Hospitals have found a high level of success at overturning RAC denials at the Administrative Law Judge or ALJ level.  Same theme, responding to incentives—ALJ equals more likely to have an appeal overturned, so appeal every time.

So much activity at the ALJ level has led to an extensive backlog of appeals.  Earlier this year the Obama Administration suspended the assignment of new appeals at the ALJ level.  Again, we see unintended consequences—denying providers their basic due process rights— occurring as a result of poor incentives.

We intended to have a witness from the Department of Health and Human Services today to testify on behalf of the Medicare appeals process.  Unfortunately, Chief ALJ Nancy Griswold was unable to join us.  But, HHS has committed to briefing the Ways & Means members on this important topic.  

At the conclusion of today’s story lies the heart of the issue, the two-midnights policy.  In response to the inpatient/outpatient payment predicament, RAC audits, increase in observation stays and backlog of appeals, CMS took its best shot at a solution—two-midnights.  Today we will hear from all of our witnesses on whether the two-midnights solution is solving all or any of the various problems identified in this sordid tale.

I commend my colleagues on this Committee—members on both sides of the aisle—who have introduced bills that pursue different alternatives to the two-midnights policy.
 
My colleague Mr. Gerlach along with original co-sponsors Mr. Crowley, Mr. Reed, Mr. Roskam and Mr. Kind have offered a sound proposal for our Committee to work from.

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