Inpatient vs. observation: Get it right the first time

Decision affects reimbursement, patients' out-of-pocket expenses

Helping your hospital optimize reimbursement and avoid losing money in today's healthcare audit environment starts with ensuring that the patient is in the right level of care from the beginning — and this means making sure that observation services are ordered only when they are appropriate.

It's often a balancing act to determine if a patient should be admitted to the hospital or receive observation services as an outpatient, but it' s more important than ever for hospitals to get it right the first time. The decision can have implications for hospital reimbursement as well as patients'out-of-pocket expenses.

"Hospitals are being hit from all sides in terms of audits and second-guessing. The Recovery Audit Contractors (RACs), Medicare Administrative Contractors (MACs) and the Comprehensive Error Rate Testing (CERT) contractors all are scrutinizing records to determine if patients meet inpatient criteria," says Deborah Hale, CCS, CCDS, president and chief executive officer of Administrative Consultant Service, a healthcare consulting firm based in Shawnee, OK.

If the admitting physician orders observation services when the patient should be admitted as an inpatient, the hospital will receive much less reimbursement for the case than it would for an inpatient admission, Hale points out.

For instance, if the physician orders observation services for a patient experiencing syncope and the patient receives tests and treatment on an outpatient basis, the best-case scenario for reimbursement is about $700, with ancillary services bringing the total to about $1,000, Hale says. If the case warrants an inpatient admission, the geometric mean length of stay is 2.3 days and the hospital stands to receive around $4,300, Hale says.

On the other hand, if patients are admitted when they should receive observation services, Medicare auditors can deny the claim, in which case the hospital not only loses the reimbursement but has the added cost of appealing the denial, says Linda Sallee, MS, RN, CMAC, ACM, IQCI, director for Huron Healthcare with headquarters in Chicago.

Patients who receive observation services are outpatients and have to pay their co-insurance for outpatient services, which can total more than the inpatient deductible. In addition, patients in observation have to pay for all self-administered drugs. "This can be very expensive for some patients, such as those who need anticoagulation or inhalers. Even if the nurse administers it, it's considered a self-administered drug," she says.

If a patient receives observation services, then is admitted as an inpatient, the time spent in observation does not count toward the requirement that patients be in the inpatient setting for three midnights to qualify for a nursing home stay that is paid for by Medicare. If these patients don't have three midnights as an inpatient and need to go to a lower level of care, they' ll have to pay for it out of pocket.

Be aware that rules for assigning observation services vary among payers, Hale says. Medicare has one set of rules for patients covered under Medicare fee-for-service, which is the traditional Medicare program. Medicare Advantage payers have a separate contract with hospitals and are not bound by Medicare fee-for-service rules, and commercial payers may have their own set of rules, she says. In addition, Medicaid and Medicaid HMOs all have different rules, which may vary depending on which state is providing the Medicaid coverage.

"Hospitals frequently are accused of misusing observation," Hale says.

She cites a 2010 letter in which Marilyn Tavenner, acting administrator of the Centers for Medicare & Medicaid Services (CMS) wrote to the American Hospital Association and other trade organizations, expressing concern that the number of observation hours being billed by hospitals has been steadily increasing to well over 48 to 60 hours.

"Level of care determinations are a balancing act, and it's hard for physicians to get a clear understanding of the rules. It's not the intent of CMS for physicians to order observation services for all patients coming into the hospital. CMS wants the determination to be made and the patient informed and the hospital to get it right the first time," adds Kathleen Miodonski, RN, BSN, CMAC, manager for The Camden Group, a national healthcare consulting firm based in Los Angeles.

Case managers should work with physicians to help them in the decision-making process as they determine the appropriate level of care. The admitting physician must make the final decision on the patient's level of care and write the orders, but case managers can work with them to help in the decision-making process, Miodonski says. (For tips on working with physicians, see related article, below..)

Auditors are paid based on reimbursement, which incentivizes them to focus on cases that are most likely to be unnecessary. They are focusing on one-day, two-day, and three-day stays, Hale says. DRG 312 is assigned to patients admitted with syncope/collapse, presyncope, and orthostatic hypotension. Cases assigned to this DRG are often denied by the RACs, Hale says. Chest pain and transient ischemic attack with neurological deficit ruled out are also high on the list of denied DRGs, she adds.

Cases that are least likely to be targeted for medical necessity and denied are those in which patients have major complications and comorbidities (MCCs). That's why it' s important for documentation to fully capture the severity of illness, Hale says.

Keep in mind that a one-day stay can be appropriate based on what the physician knows at the time the decision is made.

Make sure the physician is considering the risk for the patient and don't be afraid to admit patients in inpatient status if they meet criteria, advises Elizabeth Lamkin, MHA, chief executive officer and partner in PACE Healthcare Consulting, LLC, based in Hilton Head Island, SC.

Observation is appropriate for patients who can be treated within 24 hours and sent home or those who need diagnostic tests to determine if they can go home or need inpatient care, Sallee says.

Observation is not a status; it's a service ordered by a physician who has privileges to order outpatient services, Hale says. "It's up to the physician to order observation services, but just because the services are ordered, it doesn't mean they are covered," she adds.

Observation should not be used as a way to reduce throughput time in the emergency department just because tests have not been completed. In those cases, patients should stay in the emergency department and not go to the unit with observation services, Hale says.

Observation services are not appropriate for outpatient surgical patients unless unexpected clinical issues arise, such as the need for additional treatment to manage a complication such as uncontrolled blood pressure, Hale says. "Observation has to be medically necessary, and it's seldom appropriate for post-surgery. Payment for the standard recovery period following surgery and routine preparation for surgery is built into the outpatient APC payment structure," she adds. Physicians cannot order observation services before outpatient surgery in any situation.

Observation should not be billed concurrently with another Medicare Part B service when active monitoring is part of the procedure, such as during a colonoscopy, blood transfusion or chemotherapy, she says.

Observation hours start after the physician has written the order and the nursing notes indicate that the patient is receiving observation care. In most cases, observation ends when the physician writes the order to discharge the patient or admit as an inpatient. In some cases, observation ends when care is finished after the physician writes the discharge order. For example, if the patient received the final IV antibiotic two hours after the discharge order is written, observation ends after the antibiotic is delivered. However, the time a patient waits for a ride home and other delays in discharge don't count, Hale says.

Recovery Auditors and Medicare Administrative Contractors can deny a case even it meets screening criteria, since the auditors do not typically subscribe to any one criteria, Lamkin says.

"This points out the necessity for case managers to complete a good assessment and have a second-level review if there are any questions. What we see is that hospitals that use good clinical judgment and thoroughly document the record are in a good defensive position if they have to appeal," Lamkin says.

Educate physicians on level of care, documentation

Staff access points during peak hours

Physicians don't want patients to be burdened inappropriately and want the hospital to do well financially, but they may not understand the difference between an inpatient admission and outpatient services, says Kathleen Miodonski, RN, BSN, CMAC, manager for The Camden Group, a national healthcare consulting firm based in Los Angeles.

As they work with physicians, case managers should make sure physicians understand the implications of getting the patient level of care incorrect and to document fully and appropriately, Miodonski suggests.

Case managers can apply criteria, but they can't make the final decision. If there are any questions about whether the patient should be admitted or receive observation services, case managers should ask their physician advisor to review the case, adds Elizabeth Lamkin, MHA, chief executive officer and partner in PACE Healthcare Consulting, LLC, based in Hilton Head Island, SC.

A second level of review before an order for observation is issued is always a good idea for patients who are older or who have multiple comorbidities, Lamkin says. "If there is a question in the care manager's mind about a patient' s medical necessity for a level of care setting, the physician advisor can use his or her clinical judgment to determine if there are risks for the patient," she says.

Since it may not be practical for all hospitals to have the case management staff work 24-7, there has to be a mechanism for staffing up to a certain point, then catch up the next morning, Lamkin says. "If you don't get it right in the first 24 hours, it's difficult to get it right," she adds.

The areas to target may be unique to each hospital depending on the practice patterns of physicians, she says.

Hospitals should look at their own patterns of denials and determine the best places to have a case manager reviewing admissions. For instance, if there are a lot of issues with surgical admissions, a case manager in surgery scheduling may be indicated.

Analyze your peak hours for admission and have a case manager on staff to support physician decision-making during that time, Miodonski suggests.

It takes someone with expertise and training to review the cases and make sure they meet medical necessity, adds Linda Sallee, MS, RN, CMAC, ACM, IQCI, director for Huron Healthcare with headquarters in Chicago.

Medical necessity criteria are updated every year, and physicians don't have the time or inclination to keep up with it, she says. Physicians are going to do the same for their patients regardless of the level of care.

"This year InterQual has made a lot of changes, and some of the criteria are very different from what it was in the past. Case managers need to stay up to date and review the cases, if not at the point of admission, within a short time later," Sallee says.

Regardless of the level of care, case managers should make sure physicians document completely so the medical record accurately shows the patient's condition and services received. "Healthcare seems to have trended toward minimal documentation, but auditors have to go by what documentation is in the medical record, and if severity of illness is not documented, they are likely to deny the payment," Miodonski says.

Physicians have to learn how to describe their decision-making, what they are concerned about, what are the implications for the patient's condition, and why the acute care setting is appropriate, she says. "Help them learn how to paint the complete picture," she adds.

A good education tool is to analyze denials by physician service and share the information with the physicians. At one hospital, Miodonski gave physicians the audit detail form from the Recovery Auditor Contractors to show them how the RACs scrutinize the chart. "It was an eye-opener for the physicians and a great educational tool. They wanted to go back and review the charts to see what could have been improved," she says.

Case management directors also need to make sure that the case management staff understand the difference between observation services and an inpatient admission, Miodonski says. "I find that different case managers often have different ideas," she says.

Miodonski suggests that case management directors give case managers patient scenarios and ask if inpatient admissions or observation services are appropriate. Use the information to determine gaps in knowledge among staff members and to tailor your educational efforts.

Every care management department should regularly conduct inter-rater reliability testing, Lamkin adds. This is normally part of the Milliman or InterQual software for determining medical necessity, she adds.