The distinction between inpatient and observation care is murky.

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 February 2007 | Back to Table of Contents


A Maddening Medicare Rule

Inpatient or observation care? It's up to the physician to make the call. But hospitals pay the price when they get it wrong.

An 85-year-old Medicare patient with high blood pressure and diabetes arrives in the emergency room complaining of chest pain that resembled the pain he felt when he had an earlier heart attack. The physician’s course of action is clear: admit the patient to observe him. But lurking in the back of the doctor’s mind is a thorny question, How will we bill Medicare? Should the patient be admitted as an inpatient or for observation care?
Welcome to the Twilight Zone of Medicare regulations.

Determining whether to code for inpatient care or observation care is such a sticky wicket that Medicare wonks can debate the distinctions like philosophers discussing the meaning of truth. However, whereas the meaning of truth is largely an academic topic, getting this call wrong can result in either charges of Medicare fraud or a nearly $5,000 loss per admission to a hospital. “This is terribly confusing to Minnesota’s providers,” says Jane Pederson, M.D., director of medical affairs for Stratis Health, Minnesota’s Medicare Quality Improvement Organization (QIO), which reviews claims on behalf of Medicare. “It really does start to twist your brain in knots.”

So what’s the distinction between observation care and inpatient care? Once again, there is no easy answer.

First, one needs to realize that Medicare considers observation care outpatient care, even though it takes place in a hospital because, in theory, a doctor doesn’t need the hospital’s resources to simply watch the patient.

So the issue then becomes whether the patient who needs to be observed is an inpatient or an outpatient.

The Medicare Benefit Policy Manual says that physicians should use a 24-hour period as a benchmark to distinguish between inpatient and outpatient status, meaning if a patient needs to stay more than 24 hours, then he or she likely qualifies as an inpatient. However, it also says the distinction is not solely based on the time the patient actually spends in the hospital.

So, if at the time of the order, the physician thinks the patient will be hospitalized for two days, Medicare will pay the inpatient rate, even if the patient goes home in a few hours. The Medicare manual also says the decision to admit a patient is a “complex medical judgment” and that physicians need to assess the severity of the patient’s symptoms, the likelihood of a bad outcome, and the availability of diagnostic tests and resources before making their decision.

This befuddling guidance has resulted in physicians in Minnesota and elsewhere in the country incorrectly categorizing patients. So what is a physician to do?

An Outsider’s View
If you admit a patient for observation care at a Fairview hospital, you might end up sorting out the admission with a physician in Newtown Square, Pennsylvania.

Last summer, Fairview Health Services started using the Pennsylvania-based firm Executive Health Resources (EHR) to help it determine whether patients need inpatient or observation care.

Executive Health Resources employs 45 specially trained physicians who can advise other doctors about Medicare rules at the time of hospital care. Although the firm’s expertise is Medicare, it also helps physicians interpret private insurers’ coding conventions for observation care. “It is an incredibly complex area, and we’re trying to implement practices that are consistent across Fairview,” says Dan Fromm, Fairview’s vice president of finance.

Fromm says Fairview didn’t hire EHR to optimize revenue. But sources say Medicare coding is a significant bottom-line issue for hospitals. Medicare reimburses hospitals about $5,100, on average, for an inpatient admission but only about $400 for an observation care admission, says Robert Corrato, M.D., M.B.A., president and CEO of EHR. Incorrectly coding one patient a day could cost a hospital more than $1.9 million a year in lost revenues and put a hospital out of compliance with Medicare regulations. Corrato says hospitals with solid, consistent claim reviews code between 2 percent and 12 percent of admissions as observation care and that physicians and hospital staff with less-accurate coding guidelines miscode such admissions as often as one-third to two-thirds of the time.

Physicians Make the Call
Only physicians can decide whether a patient should be admitted as an inpatient or for observation, but they tend to view the problem as a claims issue rather than one that’s critical to patient care. They are also less motivated to learn the rules because Medicare basically pays doctors the same, regardless of a patient’s inpatient or observation status.

“Physicians are at the epicenter of this decision,” says Corrato. “But at the same time, they have no idea what is the appropriate definition of these terms [inpatient versus observation]. So you have a morass.”

In an effort to avoid lost revenue and trouble with the feds, hospitals hire utilization reviewers who use formal admission criteria to double-check whether a patient’s status conforms to Medicare’s rules.

If there’s a discrepancy, the utilization reviewer may ask physicians to reconsider their order. Executive Health Resources gives the utilization reviewer the option of relinquishing tough cases to physician advisors who will consult with the attending physician. At the end of the process, the physician advisor writes a summary that includes the rationale for the decision.

An Inpatient or Not?
Stratis Health has been trying to provide physicians with more guidance on admissions coding—particularly in regard to chest pain, which causes the most confusion. It has developed its own admissions guidelines based on those of the American Heart Association and the American College of Cardiology.

Pederson says it may sound oversimplified, but if a patient comes in with chest pain that abates, and has an unchanged EKG and negative biomarkers, he or she should be admitted for observation care.

So if the 85-year-old described earlier in the story wasn’t currently having chest pain, Pederson would consider him observation status. However, if he had another bout of chest pain or his biomarkers turned positive while in the hospital, she’d change his status to inpatient. Pederson says physicians should use observation status as the default. Medicare is more lenient on code changes from observation to inpatient, rather than vice versa. However, Corrato, who has experience as a QIO medical director, has a different opinion.

Medicare considers observation status valid when the physician determines that the patient is stable, that his or her outcome is relatively predictable, and that his or her care could be delivered in an outpatient setting, he explains. Inpatient status hinges on the physician’s certainty of the diagnosis and the probability of an adverse outcome, Corrato says. For example, if a doctor really suspects the patient is having a heart attack, he can order inpatient care.

In the case of the 85-year-old patient, Corrato would take into consideration his age, history of heart disease, and duration and severity of signs and symptoms when deciding whether to admit him as an inpatient because those factors make it more likely that he’s actually having a cardiac event. “If you read the regulations, Medicare really respects the impression of the physician and is really concerned with what the physician thinks is going on,” Corrato says.

So who to believe? Stratis Health, as Minnesota’s Medicare reviewer, has the power to accept or reject a claim. But Corrato says QIOs can get confused on this issue and do not have the definitive word because hospitals can appeal QIO decisions to higher levels.

One thing he and Pederson agree on is that in order to avoid problems, hospitals and physicians need to have a consistent, well-documented process for making such admission decisions. Good luck!—Scott D. Smith


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