Readers do not need to be reminded of the importance of the distinction between inpatient and outpatient status for hospital billing. Getting this distinction right is critical, not only for Medicare compliance but for the financial health and perhaps very existence of the facility.

Erring in the direction of using outpatient observation when inpatient admission is warranted will result in an excessive number of outpatient hospital stays, exposing patients unnecessarily to Part B costs (the annual deductible, 20 percent copayment, and the cost of “self-administered” medications, which can be the most costly of the three). This type of error can deprive patients of the three-day qualifying stay for SNF placement, and will hurt hospital revenues to boot. On the other hand, admitting when care can be safely provided in a “less intensive setting” can result in RAC recoveries and loss of revenue if billing is limited to Part B ancillaries after a Part A denial. While the HHS Office of the Inspector General (OIG) is investigating excessive use of observation in lieu of admission, the RACs are penalizing hospitals for admitting when they feel that the patient should have been treated as an outpatient. Hospitals, while trying to comply, are caught in the middle, and when they look to the regulations for guidance they find unsatisfying ambiguity.

So why is it so hard to determine whether a patient qualifies for inpatient admission under Medicare rules? One reason is that the regulations depend on physician judgment. It may seem strange for a physician to be saying that the reliance on physician judgment is a problem, but the reason will be clear after looking at how CMS defines this process.

For those not familiar with CMS language on this subject, allow me to quote from the Medicare Benefit Policy Manual, Chapter 1, Section 10, which states: “The decision to admit a patient is a complex medical judgment (italics added) which can be made only after the physician has considered a number of factors, including the patient’s medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital’s by-laws and admissions policies, and the relative appropriateness of treatment in each setting. Factors to be considered when making the decision to admit include such things as: The severity of the signs and symptoms exhibited by the patient, the medical predictability of something adverse happening to the patient, the need for diagnostic studies that appropriately are outpatient services (i.e., their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more) to assist in assessing whether the patient should be admitted; and the availability of diagnostic procedures at the time when and at the location where the patient presents.”

What’s wrong with this picture? Well, physicians are trained to make complex medical judgments, all right, but those judgments are all about patient care, not about the billing classifications used by hospitals. Physicians certainly consider “the severity of the signs and symptoms exhibited by the patient, [and] the medical predictability of something adverse happening to the patient,” but they use this information to determine the need for hospital admission and to plan treatment, not to fit the patient into billing categories that they don’t understand (and may not be interested in learning.)

To a physician, until the RACs started retrospective enforcement of the inpatient/outpatient distinction, admission meant, loosely, “treat in a hospital bed” as opposed to treating at home. Even the outdated but commonly used term “23-hour admission” confused physicians because it said admission but meant observation. Distinguishing inpatient from outpatient status is confusing and seems irrelevant, in fact an annoyance, to physicians who are focusing on making sure their patients obtain the medical care they require.

Some of the RAC’s success in recovering from hospitals has been due to the fact that historically (i.e., prior to CPOE), unless a hospital mandated preprinted admission orders, physicians used inconsistent language of their choosing to order admission. Everyone at the hospital may have either understood the order or been able to easily get it clarified verbally but to an outsider, such as a Medicare auditor, the orders might be ambiguous or confusing. While such a system might work fairly well in a small community hospital with stable staff and close communication, it would be dangerous in a large hospital and would be inconsistent with Medicare regulations requiring a clear level of care admission order as well. A RAC could target such a facility for an audit and potentially recover payments for cases lacking a clear admission order.

According to WPS Medicare, (LCD L32222) “In many institutions there is no difference between the actual medical services provided in inpatient and outpatient observation settings; in those cases the designation still serves to assign patients to an appropriate billing category.”  When a Medicare contractor can’t define the difference between inpatient and outpatient care, how can physicians be expected to do so? Doctors often throw up their hands and tell case managers “do whatever you want” for level of care determination. This was not part of their training; they have trained to make complex medical judgments, but not about “the availability of diagnostic procedures at the time when and at the location where the patient presents.” In fact, they have never heard of such a rule and would be unlikely to care about it if they had. How is it a medical judgment at all? What does it even mean?

In summary, Medicare has made physicians responsible for determining level of care, even though they lack training in the regulations and have little interest in their application. The decision to admit is nonetheless the linchpin of hospital reimbursement.  It is no wonder, then, that hospitals have developed procedures to guide physicians through the gray areas of Medicare regulations and help them, without interfering with the medical care they are providing, to make complex non-treatment related judgments about billing status that they are ill-equipped to make unassisted.

Coming to the rescue of treating physicians who are struggling with Medicare compliance are case managers and physician advisors knowledgeable in the application of Medicare regulations. According to the Medicare Conditions of Participation (Code of Federal Regulations CFR 42, Volume 3, Sec. 482.30), hospitals must have a Utilization Review Committee comprised of at least two of their medical staff M.D. or D.O. physicians. Ideally, these local physicians are supported by an external physician advisory service manned by licensed physicians specially trained in Medicare regulations who are available 365 days a year to review medical records, interpret the patient’s clinical condition, and recommend the appropriate level of care.

A partnership between on-site and remote physician advisors is the ideal way to assure that each patient is assigned to the proper admission status and that the treating physician has the resources available to negotiate the maze of Medicare hospital admission regulations.

About the Author

Steven J. Meyerson, MD, is a Vice President of Accretive Physician Advisory Services®. He is Board Certified in Internal Medicine and Geriatrics. He has recently been the medical director of care management and a compliance leader of a large multi hospital system in Florida. He has distinguished himself by creating innovative service lines and managing education for Accretive PAS®.

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