Recovery Audit Contractor Program

The American Hospital Association (AHA) filed a friend-of-the-court brief April 27 in a federal lawsuit brought by Medicare beneficiaries challenging the Centers for Medicare & Medicaid Services’ (CMS) use of “observation status.” The brief does not seek to support either party in the case, but instead provides the court with another perspective on why this is a difficult issue for hospitals and beneficiaries. Adding to the difficulty, the brief points out, is the fact that the government does not speak with one voice. Hospitals face criticism from patients and CMS over the perceived use of observation status as a substitute for inpatient admissions, but risk penalties from CMS auditors and prosecutors when auditing admissions of short inpatient stays. This is further complicated by inconsistent state laws that do not align with the federal requirements regarding observation status. This issue continues to be significant to CHA member hospitals because California law defines inpatient and outpatient status by the length of stay. By federal law, however, observation status and the decision to admit a patient is driven by medical necessity. California hospitals continue to report significant Recovery Audit Contractor and Medicare Administrative Contractor audits and denials of observation services and short stays. CHA supports AHA efforts in calling for additional clarity at the federal level and continues to advocate for changes in state definitions.