What Teaching Hospitals Need to Know About Rebilling
Author: Ronald Hirsch, MD, FACP, CHCQM, Vice President, R1 Regulations and Education Group
The complexity of medical education financing
Financing medical education in the U.S. is complex, with significant federal contributions. Hospitals with graduate medical education programs receive Direct Graduate Medical Education (DGME) payments based on resident numbers and Indirect Medical Education (IME) payments based on inpatient admissions. As Medicare Advantage (MA) enrollment grows, payment for inpatient admissions shifts to MA plans, with rates determined by contracts between hospitals and MA plans. However, hospitals also submit “shadow claims” to CMS for payments like disproportionate share hospital (DSH), IME, DGME and nursing/allied health (N&AH).
How IME payments work
Each shadow claim results in a payment from CMS, but the payment mechanisms differ. DSH, DGME and N&AH payments are reconciled at year-end, while IME is paid strictly per inpatient admission, including those for both traditional Medicare and MA beneficiaries. More inpatient admissions mean more IME payments.
The challenge of MA admission denials
Increasingly, MA plans aggressively deny inpatient admissions, even with new regulations requiring them to follow the two-midnight rule. When an MA inpatient admission is denied and appeals fail, hospitals refund the MA payment. Many MA plans allow hospitals to rebill the care as outpatient, and some even permit rebilling as observation, sometimes without a provider order for observation services. This creates a dilemma: must the hospital retract the shadow claim and refund the IME payment?
Retaining IME payments: When is it possible?
A clear answer from CMS is elusive, but my interpretation argues that in some circumstances, the IME payment can be retained. When an inpatient admission for a traditional Medicare patient is submitted, it’s a 111 claim (inpatient part A). If denied and rebilled, the hospital breaks the stay into two claims: services before inpatient admission are billed as a 131 claim (outpatient part B), and services after admission as a 121 claim (inpatient part B). For MA plans, the claim types are the same, but these are paid as “part C” payments. The 121 claim can establish that an inpatient admission occurred, potentially justifying retention of the IME payment. CMS guidance (87 FR 50921) supports this, stating that a self-denied inpatient admission of three or more days still qualifies the patient for the part A skilled nursing facility benefit, which requires a valid inpatient admission.
Observation status: Financial and compliance implications
If the MA plan allows rebilling as observation, however, complexities arise. Medicare rules let MA plans set their own billing procedures. The Medicare Managed Care Manual (chapter 4, section 10.2) states that MA plans may create their own billing and payment procedures, as long as providers are paid accurately and with an audit trail. If the MA plan allows a hospital to convert inpatient days to observation hours, they may do so without a physician order or medical record change—this is simply a change in claim preparation.
The claim editing system does not allow billing observation services (revenue code 0762, HCPCS G0378) on a 111 or 121 claim. Thus, if an inpatient claim is rebilled with observation hours, it must be submitted as a single 131 claim (outpatient part B). There will be no inpatient claim, and the IME payment should be refunded.
Financial analysis: IME vs. observation payments
Financially, billing observation hours are often beneficial. For example, using the Medicare payment model, an observation stay is paid as Comprehensive Ambulatory Payment Classification (C-APC) 8011, with a 2025 base rate of $2,647.73. A rebilled inpatient admission using 131 and 121 claims pays a variable amount, often around $1,000 for a short medical stay. Billing as observation is clearly more lucrative in many cases.
However, the IME payment must be considered. Using DRG 293 (heart failure without CC/MCC) as an example, the IME payment could range from $100 to $2,000, depending on the teaching program’s size. Thus, a rebilled claim without observation hours could result in a total payment from $1,100 to $3,000, which may be more or less than the observation payment.
If the MA plan allows billing as observation, the contractual rate can vary. Many MA plans mimic CMS and pay a fixed rate as a C-APC, but some pay as a percent of charges or a variable rate based on diagnosis. Converting inpatient time to observation hours for a denied claim requires refunding the IME payment, as there is no valid inpatient admission.
Case example: Payment scenarios
For example, a 550-bed teaching hospital with multiple residency programs and a wage index just under 1.0, using MA payment rates equivalent to traditional Medicare, would receive about $5,600 for an inpatient admission for heart failure without CC/MCC (DRG 293): $4,800 from the MA plan plus a $800 shadow payment from CMS, of which $650 is IME. An outpatient stay with 8+ hours of observation would pay $2,650 from the MA plan, with no shadow claim or IME payment.
If the inpatient admission is denied and rebilled with observation hours, the hospital prepares a 131 claim, converting the time between the inpatient admission order and end of care into observation hours billed with HCPCS G0378, and is paid $2,650. The shadow payment is refunded. If rebilled as part B with 121 and 131 claims, the hospital might receive $600 for the 131 claim and $700 for the 121 claim, plus the $800 shadow payment, totaling about $2,100. For this hospital, it’s financially better to refund the IME and accept the observation .
However, there is no universal tactic. A hospital with a larger medical education program and higher weighted DRG may find that retaining the IME payment by rebilling as 121 and 131 claims is more advantageous.
Elective surgical admissions: A different approach
Denied elective surgical inpatient admissions, especially as CMS removes inpatient-only procedures, require a different approach. If an inpatient surgery claim is denied for incorrect admission status and appeals fail, the rebilled claim should be submitted as a 121 bill, not a 131. This ensures the inpatient admission remains in the Medicare payment system and the IME can be retained. The MA plan reprocesses the 121 claim with outpatient rates, resulting in a “part B” payment from the MA plan plus the IME payment from CMS, which closely approximates the DRG payment. As an “outpatient” payment, there are no negative adjustments for readmission penalties or other CMS quality programs.
Conclusion: Navigating a complex landscape
The increasing role of MA plans in Medicare has led to greater complexity for hospital billing. Careful analysis is required to ensure teaching hospitals with graduate medical education programs choose the right course of action when faced with denied admissions, balancing compliance and financial impact.
