s-meyersonWith all the auditing of medical necessity for hospital inpatient admissions that has been going on, we have heard very little about medical necessity for observation. That may be changing now that the U.S. Department of Health and Human Services (HHS) Office of the Inspector General (OIG) has put review of observation on its 2012 Work Plan:

Observation Services During Outpatient Visits

“We will review Medicare payments for observation services provided by hospital outpatient departments to assess the appropriateness of the services and their effect on Medicare beneficiaries’ out-of-pocket expenses for health care services … observation care includes certain short-term services such as treatment, assessment, and reassessment that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. (CMS’s Medicare Claims Processing Manual, Pub. 100-04, ch. 4, § 290.) Improper use of observation services may subject beneficiaries to high cost sharing.”

So on the one hand, the RACs, MACs, CERT and other Medicare auditors are demanding repayment for underutilization of observation when they determine a patient was admitted instead of being placed in observation. On the other hand, the OIG is investigating  overutilization of observation and its effect on beneficiary out-of-pocket costs, matters involving exposure to Part B deductibles and copayments, the cost of self-administered drugs, and failure to qualify for SNF coverage when some portion of the required three-day hospital stay is in observation instead of inpatient status.

This is the classic “caught between a rock and a hard place” predicament (or is it caught between a RAC and a hard place?)

Medicare does not provide a lot of guidance on medical necessity “appropriateness” for observation.  The Medicare Benefit Policy Manual, Section 70.4.A, states that “observation services are those services furnished by a hospital on the hospital’s premises including use of a bed and periodic monitoring by a hospital’s nursing or other staffwhich are reasonable and necessary to evaluate an outpatient’s condition or determine the need for a possible admission to the hospital as an inpatient.”

The Medicare Claims Processing Manual, Section 290.5.1, adds that “the medical record must include documentation that the physician explicitly assessed patient risk to determine that the beneficiary would benefit from observation care.”

Hospitals need to be aware that their use of observation may come under scrutiny – and that they must be sure their physicians not only have placed patients into the proper level of care, but that the documentation supports medical necessity for both admission and observation, whichever has been ordered. The role of the physician advisor in obtaining and providing this documentation early in the stay, preferably at the point of admission, is more critical than ever.

There are some proactive steps hospitals can take now. Physician education always has been and remains the cornerstone of compliance. Hospitals need to emphasize the importance of physician documentation of medical necessity for the services they order, regardless of type of service or level of care. Observation orders and physician notes must communicate clearly the reasons hospital observation is required (the risk assessment) and treatment plans for services that require a hospital setting. Merely restating the patients’ chief complaint (chest pain, abdominal pain, dizziness, etc.) will not be sufficient to establish risk. Adding a provisional diagnosis (such as an “R/O” diagnosis) and mention of a potential adverse outcome would help satisfy this requirement. The record should show why this particular patient can’t be sent home and have an outpatient workup or treatment rendered there.

While CMS doesn’t necessarily follow any one set of guidelines, the case manager documenting that the patient met InterQual or Milliman observation criteria will help justify the use of observation. However, it’s the physician’s role to “explicitly assess risk,” so if there is evidence of communication on this subject between the case manager and the physician, it will show that objective criteria were used to assess risk.

Because it has been so easy to order observation rather than release patients, and because there has been so little oversight, observation has been widely overutilized. Now the OIG has joined the chase and may be looking at both overutilization and underutilization of observation. While this hasn’t been a focus for enforcement yet, hospitals should not be complacent about the need for documentation of medical necessity for observation.

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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