Focus on Observation

Don't observe yourself out of business

But payers favor `doing the right thing'

If you haven't yet looked at the observation coding changes made effective Jan. 1, do so before more time goes by. Familiarize yourself with them because there's more to be concerned about than just using the right numbers: The new codes may be hazardous to your facility's fiscal health.

They could substantially impact your bottom line, warns Jack Diamond, JD, a health care attorney in Akron, OH. Diamond's warning is based on the premise that because new payment formulas in some cases nearly double what physicians received last year for a first-day stay, doctors may transfer more patients to observation now than ever before, substantially affecting your short-term DRG payments.

"Hospitals may see a decline in bottom-line profits," he cautions. "To determine just how damaging the financial impact will be, regularly monitor changes in patient status designations." (See related article on balancing revenue and cost on p. 67.)

He tempers his statement by saying that rather than mourning the loss of inpatient DRGs, hospitals should look at the long-term strategy of best product/best price. "That idea makes most CEOs' heads hurt," says Diamond. "It's a complicated model. You have to go through the calculation and correlate losing the inpatient cases and the short-term reimbursements. Strategic planners think that way, but most hospitals are busy putting out fires."

Some others say, yes, the new 99234, 99235, and 99236 codes may change physicians' patient management behavior, but they see the coding change as one more step toward the inevitable - operating hospitals in ways that are more and more cost-effective. "Up until now, lower reimbursement has been a disincentive for physicians to do observations," says Louis Graff, MD, director of emergency medicine at New Britain (CT) Hospital, "and observation improves quality of care."

Codes help physicians

"Physicians won't change their behavior unless they get a good enough financial kick to do so," Diamond notes. And now, it seems, they may have it. The projected effect of the 1998 coding changes is a substantial increase in physician reimbursement for observation status. Physicians may use observation instead of inpatient status more than previously, says Diamond. The change will be subtle - patients who used to be admitted from the emergency department will now be transferred to observation instead, and hospitals may see a decrease in inpatient cases as a result.

Peter Sawchuk, MD, a consultant working with MedAmerica, a physician practice management firm in Livingston, NJ, agrees that a global view is warranted here. "You have to look at the whole picture. Observation is now recognized as a higher-value service," he says. Sure, if a hospital is surviving on its per diem, eliminated admissions could hurt. But a more global look at this situation reveals that managed care payers direct patients to those hospitals with the most efficient services. Companies look for the most cost-effective provision of services and try to eliminate unnecessary admissions.

Payers have historically encouraged observation because it saves them money, continues Sawchuk, who is the American College of Emergency Physicians' (ACEP) representative to the advisory panel of the AMA's relative value update committee. The problem was, physicians were providing significant service to patients - observation requires two-and-a-half times the work of a regular admission - but were not being sufficiently paid for their extra work.

"In the past, physicians had a disincentive to transfer to observation," says Sawchuk. "There was no reason in the world for them to keep patients out of the hospital because they weren't going to be paid enough for the extra effort required of observation." That is disappearing now.

Observation means lower cost, more work

Graff too supports the new codes. "When you put a chest pain patient in observation, the benefit for the payer is that charges and costs are about half those of an admission." But observation entails a rapid evaluation, so there's significantly more work for physicians and nurses. Under the old coding system, only if an additional calendar day was involved was there a discharge code that provided extra reimbursement.

"The new reimbursement is much more appropriate to the extra work involved," says Graff. "There will no longer be an incentive for a physician to say, `Well, I'm having to do all this extra work - why not just put the patient in the hospital?'"

A survey by Dallas-based ACEP and the Elk Grove Village, IL-based American Academy of Pediatrics quantified the amount of work involved in observation, and that was used in testimony to the AMA's coding committee.

"The coding committee's goal," he says, "is to adequately reimburse physicians so more observation services are available to patients who need them. There should be no financial disincentive for physicians to transfer to observation. If managed care companies are going to do more than manage risk and do business - if they're concerned with patient care and the rational use of resources - they need this tool."

Upcoding has always been a dangerous area, no matter what the RVUs are, says Allan P. DeKaye, MBA, FHFMA, president of DEKAYE Consulting in Oceanside, NY. "The record has to support the code. The documentation has to be there. If managed care companies - particularly Medicare managed care companies - see patients are being moved to the wrong level or wrong code, they'll pick up on it. Do it right, keep it simple, and document what you've got."

"The premise that the new codes may affect admission patterns in hospitals is interesting, but I'm not sure I agree," says Rita Scichilone, MHSA, RRA, CCS, CCS-P, health information management consultant and coding and reimbursement specialist at Omaha, NE-based Professional Management Midwest.

"Yes, the new codes seem to be an incentive for transfer to observation since the new physician work RVU factor is greater than last year's initial hospitalization code. But I'm not sure the new system would color a physician's intentions," Scichilone says. Why? Because he wouldn't know the outcome when he makes the decision to transfer to observation or admit.

"I find it hard to believe that he'd go so far as to anticipate, and then bank on, a patient's outcome. The physician would have to be certain that the patient would be discharged on the same calendar date. Otherwise, he'd have to go back to last year's observation code," she continues.

Educate, monitor, communicate

There has been a lot of misinformation and confusion regarding appropriate observation bed use. Deborah Hale, president of Administrative Consultant Service in Shawnee, OK, says, "I still hear erroneous comments such as:

· "I thought I had to keep the patient in observation 72 hours before changing them to acute care."

· "The PRO reviews 100% of all admissions for TIA and gastroenteritis and denies payment."

· "Chest pain is not a valid reason for inpatient admission unless it's known to be cardiac in origin."

· "Laparoscopic cholecystectomy is required as an outpatient procedure for Medicare patients."

· "Admitting a patient to observation will save them money."

The key to appropriate use of observation status is staff education and concurrent work by interactive case managers or utilization managers who review records and communicate with physicians and nurses regarding level-of-care criteria. Discharge planning for appropriate observation bed patients begins immediately upon admission.