Last week, Dignity Health, a hospital system based in San Francisco, California, agreed to pay the United States US$37 million over a five-year period to settle allegations that it knowingly submitted false claims to Medicare and TRICARE in violation of the False Claims Act (FCA).

The DOJ claimed that Dignity Health, one of the five largest hospital systems in the country, provided inpatient care to patients who could have been treated on a less costly, outpatient basis.

Dignity Health released a statement emphasizing that the settlement reflects the organization’s desire “to resolve the investigation and avoid the expense of continued litigation” and noting that the settlement agreement “finds no improper conduct or admission of wrongdoing on the part of the health system.”

The government alleged that thirteen Dignity Health hospitals in Arizona, California, and Nevada billed Medicare and TRICARE for inpatient care, including elective cardiovascular procedures and kyphoplasty procedures, that should have been provided and billed as outpatient services.

Over the past few years, DOJ has continuously scrutinized providers for billing for inpatient services when outpatient care arguably would have been sufficient, primarily as a result of qui tam FCA suits.

At least two other multi-million-dollar-settlements have resulted from government claims that hinge on this same inpatient and outpatient distinction in the past 15 months. Additionally, the DOJ has recouped almost a US$100 million dollars from over 100 hospitals to settle similar claims of unnecessary overnight inpatient care provided for kyphoplasty patients over the past few years.

The Department of Health and Human Services attempted to address the issue by introducing the “two midnight” rule as part of the FY 2014 Inpatient Prospective Payment System (IPPS) final rule.

This rule “modifies and clarifies CMS’s longstanding policy on how Medicare contractors review hospital and critical access hospital inpatient admissions for payment purposes.”  The rule creates the presumption that hospital services occurring over the course of two or more midnights of a beneficiary’s inpatient admission are “reasonable and necessary for inpatient status,” as long as the stay at the hospital is itself medically necessary, and inpatient stays less than two midnights are presumed not reasonable and necessary.

Unsurprisingly, as part of its recently published Work Plan for FY 2015, HHS announced that it will be reviewing the impact of the two-midnight rule on hospital billing and Medicare payments.

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