Most of the discussion about whether a patient should be classified as an inpatient or an outpatient has focused on Recovery Audit Contractor/Medicare Administrative Contractor (RAC/MAC) audits and the risk that a hospital will face liability from the government for admitting patients incorrectly.

However, it is important to note that improperly applying outpatient status can have important negative consequences for patients as well. Patients treated on an outpatient basis can face higher out-of-pocket costs, and if the decision to admit in this fashion prevents the patient from reaching a three-day inpatient stay, it may leave the patient liable for the cost of skilled nursing facility (SNF) care, since Medicare requires a three-day stay.

A recent case in federal district court in Connecticut highlights this situation. Fourteen plaintiffs who had been hospitalized for between three and seven days sued Kathleen Sebelius in her capacity as the head of the Centers for Medicare & Medicaid Services (CMS), asserting that CMS policy on inpatient admission was unconstitutional and inconsistent with a variety of federal laws. There are at least two very important lessons that can be learned from the case.

First, the judge emphasized that the policy regarding admission status is terribly complex. He concluded, however, that the decision of the physician upon admission is key. It seems quite likely that if the plaintiff patients had been admitted as inpatients, and someone was challenging that admission decision, the judge would have deferred to the admitting physician’s judgment. This deference to the treating physician is a principle connected to many Medicare cases; courts refer to this as the “treating physician rule.” The premise of the policy is that a treating physician is uniquely qualified to evaluate a patient’s needs. From a practical standpoint, it means that if a physician admits a patient and explains his or her rationale in the record, there is a very high likelihood that the decision will withstand any challenge by a RAC or MAC. 

A utilization review process is served well by recognizing this idea. In a close case, the physician’s judgment should carry the day. Under the new “two-midnight” rule, if a physician expects the patient to require hospitalization over the course of two midnights, inpatient admission is appropriate regardless of what actually transpires. Under the prior policy, the Medicare manuals suggested that the physician’s expectation still controlled things. While the Connecticut case involved patients classified as outpatients, the judge was focused on the physician’s judgment.

The second lesson is more subtle. The plaintiffs chose to sue CMS. But a creative plaintiff’s lawyer should seriously consider suing the hospital or the admitting physician in situations in which a patient feels that the hospital improperly categorized him or her as an outpatient. Hospitals and physicians have a duty to patients to make sure that their admission status is correct. When a patient is spending three to seven days in the hospital, there is a compelling argument that the patient should be admitted. (In fact, under the two-midnight rule, there is really no situation in which a patient should be an outpatient as soon as it is clear that the patient will spend a second night in the hospital.) Such a patient can present a well-reasoned argument that the hospital should be responsible for costs that would not have been incurred if the patient was admitted. 

RACs have focused most of their reviews on “short stays,” looking for patients they believe should not have been admitted. But hospitals shouldn’t conclude that it is “safe” to use outpatient status. The Connecticut case should serve as a reminder that physicians and hospitals must take the time to assign the proper status to patients, and that ultimately, the physician is responsible for making the determination.

Fortunately, under the new two-midnight rule, the test is easy to articulate. If at any point a physician expects that a patient will be in the hospital for two midnights, the patient should be admitted as an inpatient.

By focusing on that rule, hospitals and physicians should be on strong footing, whether challenged by CMS or by patients.

About the Author

David Glaser is a shareholder in Fredrikson & Byron’s Health Law Group and helped establish its Health Care Fraud & Compliance Group. David helps healthcare entities negotiate the maze of healthcare regulations, providing advice about risk management, reimbursement and business planning issues. He has considerable experience in healthcare regulation and litigation, including compliance, criminal and civil fraud investigations, and reimbursement disputes.

Contact the Author

To comment on this article please go to

Share This Article