What Is the 3-Day Payment Rule?
On June 25, 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 was signed into law and implemented the 3-day payment window.[4] The “3 days” refers to the three days prior to a Medicare beneficiary’s admission to an inpatient hospital or a hospital’s wholly owned or operated Part B entity. All diagnoses, procedures, and charges for outpatient diagnostic services and admission-related outpatient nondiagnostic services that have been furnished to the beneficiary in those three days must be billed together with a beneficiary’s inpatient stay. In short, hospitals must bundle the technical component (TC) of all outpatient diagnostic services and related nondiagnostic services with the inpatient stay claim. On the other hand, if the hospital or hospital-owned entity is not paid under the Inpatient Prospective Payment System (IPPS), the required period is one day prior to the beneficiary’s admission, rather than three. Thus, this rule has effectively become the 3-day or 1-day payment window rules.
This rule can be complicated to comply with when hospitals and hospitals’ wholly owned or wholly operated Part B entities are compiling their billings. There are two main compliance issues with this rule: (1) understanding the differences between billing as a hospital versus a hospital’s wholly owned or wholly operated Part B entity; and (2) understanding common pitfalls with interpretation of the rule, which also leads to poor billing practices. The Centers for Medicare & Medicaid Services (CMS) has released numerous policy statements to educate billers on best practices to comply with the 3-day payment window rule.
Risk Area Governance
The primary risk of failure to comply with the rule is a Medicare audit. The laws that govern the Medicare appeals process regarding an audit for an overpayment or underpayment determination are contained in the Social Security Act, as well as various provisions in the Code of Federal Regulations.[5][6]42 U.S.C. § 1320a-7k is an important provision of the Social Security Act, as it discusses the Medicare and Medicaid program integrity provisions. It essentially explains the consequences of participating in federal healthcare fraud and how to respond when one has received an overpayment. Section 1320a-7k is tangentially related to 42 U.S.C. § 1395ddd , which further explains the Medicare Integrity Program. 42 U.S.C. § 1395ff is pertinent because it explains how determinations are made and the subsequent appeals process—a process many providers go through if they have received an overpayment or have otherwise billed incorrectly. The Code of Federal Regulations holds most of its relevant provisions in 42 C.F.R. § 405 et seq. This chapter of the Code contains 10 active subparts, all of which explain different terms and conditions to participating in Medicare. The last relevant provision of the Code is 42 C.F.R. § 424.535 . This provision details revocation of enrollment in the Medicare program; it is considered a highly important provision that all providers who bill Medicare should be aware of.
There are also potential risks for a civil monetary penalty.[7] A civil monetary penalty can be imposed for a variety of prohibited conduct, including, but not limited to: improper drug price reporting, false and fraudulent claims to any federal healthcare program or other contract or grant, illegal kickbacks pursuant to the Anti-Kickback Statute, and violations of the Physician Self-Referral Statute (the Stark Law).
Common Compliance Risks
The 3-day and 1-day payment windows are both codified in the Code of Federal Regulations.[8] Because this rule is centered around billing procedures, it is important to understand the payment methodology that goes into the rule. As is the case normally, when Medicare billing is involved, there are several compliance risks. CMS and the Office of Inspector General (OIG) are watchful for instances of noncompliance, especially overpayments.
Wrongfully Calculating 3-Day Payment Window Services
Often, the services covered under the 3-day payment window are wrongfully calculated into the inpatient claim, which results in a double payment to the hospitals. If there is an overpayment determination, the provider that made the error must go through the lengthy appeals process. Additionally, 42 C.F.R. § 424.535 allows CMS to revoke a provider’s Medicare enrollment for many reasons, including abuse of billing privileges, failure to meet documentation requirements, and noncompliance with enrollment requirements.
Other Billing Issues
There are two main billing issues that providers often find challenging. First are the slight billing differences between hospitals and hospitals’ wholly owned or wholly operated Part B entities. Second, six common areas of the rule are often misunderstood by qualifying providers, also leading to incorrect billing practices. These include:
-
Understanding what clinically related services are;
-
Knowing which services are “non-diagnostic”;
-
Knowing the definition of “diagnostic”;
-
Understanding how critical access hospitals (CAHs) are affected;
-
Knowing when the 3-day payment window actually begins; and
-
Understanding what a “wholly owned or wholly operated entity” is.
Addressing Compliance Risks
Billing Differences between Hospitals and Hospitals’ Wholly Owned or Wholly Operated Part B Entities
The billing process itself is often the most challenging aspect of the 3-day and 1-day payment window rules. Hospitals and hospitals’ wholly owned or wholly operated Part B entities have different and specific billing directives. Generally, under the 3-day rule, outpatient services performed in the hospital within the three days preceding admission must be billed with the inpatient stay.
However, where outpatient services within the 3-day window are performed at a hospital’s wholly owned or wholly operated Part B entity, rather than at the hospital itself, CMS requires use of the modifier “PD.”[9] Where the modifier is used, CMS will pay the professional component (PC) for codes with a professional/technical component (PC/TC) split, and the facility rate for codes without such a split. For example, if a wholly owned Part B practice performed an outpatient electrocardiogram (EKG) in the three days prior to admission, the modifier PD would be appended to the Current Procedural Terminology (CPT) code for that service (CPT code 93000). The usage of this modifier would indicate that CMS pays the facility rate, because code 93000 does not have a PC/TC split.
Diagnostic services unrelated to inpatient admission are still subject to the 3-day and 1-day payment window rules as applied to the TC of the billing. However, wholly owned or wholly operated Part B entities should only bill for the PC of the diagnostic service while also appending modifiers -26 and PD to the Healthcare Common Procedure Coding System (HCPCS) code. They should not bill for the TC, because that is already included in the billing of a diagnostic service.
Hospitals have different billing instructions than wholly owned or wholly operated Part B entities when the service was furnished in the outpatient department of a hospital.[10] Outpatient services performed in the hospital within the three days preceding admission must be billed with the inpatient stay, pursuant to the 3-day rule. On the other hand, condition code 51 should be used by hospitals when billing unrelated outpatient nondiagnostic services claims.
Other Misunderstood Areas of the 3-Day Payment Window Rule
The other big obstacle for hospitals and hospitals’ wholly owned or wholly operated Part B entities is understanding some very specific terms and applications of concepts—where these terms are not properly understood, billing errors may occur.
Clinically Related
The first area of confusion is what it means to be clinically related. It is common for qualifying providers to misinterpret what outpatient nondiagnostic services are clinically related to the inpatient admission. Providers should have a dedicated inpatient coder who would make the determination that the services were clinically related to the inpatient admission after the patient has been discharged and complete documentation is available. In order to have proper documentation of how the inpatient determination was made, coders should ensure that the patient’s record reflects which encounters were combined, the reasons for combining them, and who was in charge of coding. These measures can significantly reduce instances of improper claims or overpayments.
Non-Diagnostic Services
The second area that if misunderstood can cause compliance issues is knowing what nondiagnostic services are. The definition of nondiagnostic services is much broader than it was prior to the codification of the 3-day payment window rule. CMS states that nondiagnostic services subject to the payment window now include “any non-diagnostic service that is clinically related to the reason for a patient’s inpatient admission, regardless of whether the inpatient and outpatient diagnoses are the same.”[11]
Diagnostic
The third area that that if misunderstood can cause compliance issues is what diagnostic means. The definition of diagnostic is also broad. Pursuant to chapter 6, section 20.4.1 of the Medicare Benefit Policy Manual, a service is diagnostic if it is “an examination or procedure to which the patient is subjected, or which is performed on materials derived from a hospital outpatient, to obtain information to aid in the assessment of a medical condition. . . . .”[12][13] Furthermore, even if the diagnostic service is unrelated to the inpatient admission, the TC of each diagnostic service that falls within the 3-day window is still subject to the rule. However, a Part B entity should not separately bill for the TC of a diagnostic service subject to the payment window. This is because the modifier PD cannot apply to the TC, and the TC is considered included on the bill for the inpatient stay already.
Critical Access Hospitals
The fourth area that raises confusion for compliance is how CAHs are affected by the rule. CAHs generally are not subject to the 3-day payment window rule; however, a CAH is subject to the 3-day rule if the admitting hospital is a short-stay acute hospital paid under IPPS, or, although not paid under IPPS, a psychiatric hospital, inpatient rehabilitation hospital, long-term care hospital, children’s hospital, or cancer hospital.
When the 3-Day Window Begins
The fifth area of confusion is knowing when the 3-day payment window actually begins. The 3-day payment window applies to services provided on the date of admission and the three days preceding the date of admission, which may cause the 3-day period to be more than 72 hours long.
Wholly Owned or Wholly Operated Entity
The sixth and last area that raises confusion is understanding what a wholly owned or wholly operated entity is. A wholly owned or wholly operated entity is one wherein a hospital is the sole owner of the entity or has exclusive responsibility for overseeing the entity.[14] Physicians and other Part B providers should use modifier PD on any HCPCS code that is thought to be subject to the payment window. It is worth noting that failure to append modifier PD to a code serves as an attestation that the hospital that wholly owns or wholly operates the physician practice believes that the nondiagnostic services were unrelated to the hospital admission.
Create a Compliance Plan
Overall, the best way to remain compliant with this rule is to create a compliance plan. Hospitals and hospitals’ wholly owned or wholly operated Part B entities should work with their lawyers to create a policy that clearly explains the requirements of the rule and how to implement those requirements into their daily procedure. Once this compliance plan is in place, hospital administrators and counsel should work on educating the staff on this plan.
Conduct Internal Audits
Hospitals should regularly conduct internal audits to make sure that the staff are, in fact, complying with the compliance plan—this also ensures no surprises if your hospital is selected for an audit.
Possible Penalties
Where a provider has been overpaid on a Medicare claim, an overpayment demand is likely. If a Medicare overpayment is discovered and was not addressed by the provider, the Medicare Administrative Contractor (MAC) will begin the overpayment recovery process. If a provider disagrees with a claim denial and believes that it was not overpaid, it can initiate the five-step Medicare appeals process.
When a provider has been audited for overpayment, the provider may go through as many as five levels of appeal:
-
Redetermination by a MAC[15]
-
Reconsideration by a Qualified Independent Contractor (QIC)[16]
-
An Administrative Law Judge (ALJ) hearing[17]
-
A hearing before the Medicare Appeals Council[18]
-
Judicial review in a federal district court[19]
Though recoupment can be stayed during the first two levels of appeal, CMS may begin recouping monies during the waiting period for the ALJ hearing.[20] Recoupment is the recovery by CMS of any outstanding Medicare debt—in this instance, debt caused by overpayments to providers—by reducing Medicare payments and applying the amount withheld to the amount the provider has in debt.[21]
Aside from going through the Medicare appeals process and facing recoupment by CMS, providers who fail to comply with the 3-day payment window rule also face potential for a civil monetary penalty. The U.S. Department of Health & Human Services secretary can generally impose a civil monetary penalty of $10,000 to $50,000 per false claim or statement to any provider who knowingly presents a claim for a medical item or service that was provided but covered under another claim, not properly coded, or not supported by the medical record.[22] Furthermore, any provider whose conduct does not meet the standards set forth in 42 C.F.R. § 424.535 , which could be triggered by repetitive improper billing, may be revoked from participating in the Medicare program for a period of up to 10 years.[23]
Compliance Resources
Centers for Medicare & Medicaid Services
CMS is extremely familiar with the confusion surrounding this rule. In response, CMS has published numerous documents to help clarify the rule. Although these resources were all published in 2011 and 2012, they remain relevant to this day. No great strides have been made to discuss this area ever since, nor have there been great enforcement efforts by CMS to uphold this rule. However, this should not mean that providers and hospitals should cease to remain diligent on these issues. These resources include the following.
Medicare Claims Processing Manual, Chapter 12: Physicians/Nonphysician Practitioners
Change Request 7502, “Bundling of Payments for Services Provided to Outpatients Who Later Are Admitted as Inpatients: 3-Day Payment Window Policy and the Impact on Wholly Owned or Wholly Operated Physician Practices,” was initially rescinded but later reissued to remove controversial instructions, finalize the CMS payment modifier, and finalize the policy.[24] This change request was later adopted as chapter 12, sections 90.7 and 90.7.1 of the Medicare Claims Processing Manual, Publication 100-04.
https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c12.pdf
MLN Matters SE 1232
Frequently Asked Questions (FAQs) on the 3-Day Payment Window for Services Provided to Outpatients Who Later Are Admitted as Inpatients
This MLN Matters notice explained what the 3-day payment window is, what services are considered diagnostic, what types of hospital inpatient admissions would be subject to the more allusive 1-day payment window, and so on.[25]
https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/SE1232.pdf
FAQs for Change Request 7502
This was slightly different than the MLN Matters notice listed previously, but it covered mostly the same information. This took the new provisions enunciated in change request 7502 and fleshed them out more so that providers and other entities could better understand the inner workings of this rule.[26]
Change Request 7142
Clarification of Payment Window for Outpatient Services Treated as Inpatient Services
This change request contains instructions for hospitals (as opposed to wholly owned and wholly operated Part B entities) as it relates to the 3-day and 1-day payment window rules.[27]
https://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/downloads/R796OTN.pdf
Risk Takeaways
Main points of interest:
-
Watch for tricky coding errors.
-
Recall the proper time to append modifier PD, the difference between diagnostic and nondiagnostic services, and the difference between billing as a hospital and billing as a wholly operated or wholly owned Part B entity.
Areas to watch: Medicare audits are especially common when it comes to making billing errors, which is the crux of the 3-day and 1-day payment windows. Providers should always bill properly and conduct internal audits to prevent a Medicare audit from occurring.
Laws that apply:
-
Social Security Act, 42 U.S.C. § 1320a-7k, 42 U.S.C. § 1395ff, 42 C.F.R. § 405
-
Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a
Addressing compliance risks:
-
The biggest risk is an audit by the Centers for Medicare & Medicaid Services. Audits often lead to steep payments that can often hinder a provider’s business, even leading to bankruptcy.
-
Where an alleged overpayment is large enough, it may also trigger civil monetary penalties, as well as revocation of Medicare enrollment.
-
Create a compliance plan.
-
Understand key terms to prevent billing errors.
-
Know the billing differences between hospitals and hospitals’ wholly owned or wholly operated Part B entities.