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Inpatient vs. Observation How to Decide

Novitas Solutions, in collaboration with CMS (Centers for Medicare & Medicaid Services), is continuing to focus on lowering the CERT (Comprehensive Error Rate Testing) claims paid error rate. Currently, one area of concern identified in the CERT data is one-day inpatient admissions and outpatient observation services. Specifically, recent CERT errors have identified a significant issue related to the submission of claims for one day inpatient admissions. Review of the documentation for these services revealed that the patient required observation services and not an inpatient admission. These errors indicate observation services would have sufficed.

Inpatient Services defined

“An inpatient is a person who has been admitted to a hospital for bed occupancy for purposes of receiving inpatient hospital services. Generally, a patient is considered an inpatient if formally admitted as inpatient with the expectation that he or she will remain at least overnight and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a hospital bed overnight.” – CMS Benefit Policy Manual, Publication 100-02, Chapter 1, Section 10

CMS gives further guidance for inpatient

“Inpatient care rather than outpatient care is required only if the beneficiary's medical condition, safety, or health would be significantly and directly threatened if care was provided in a less intensive setting.” - CMS Program Integrity Manual, Publication 100-08, Chapter 6, Section 6.5.2(A)

Observation Services defined

“Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short term 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. Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge.

In only rare and exceptional cases do reasonable and necessary outpatient observation services span more than 48 hours. In the majority of cases, the decision whether to discharge a patient from the hospital following resolution of the reason for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours.” - CMS Claims Processing Manual, Publication 100-04, Chapter 4, section 290.1

In reviewing charts of recent Novitas CERT errors, two types of providers are identified as being able to prevent an inappropriate inpatient admission: Emergency Room providers and Attending providers.

Emergency Room Providers

In some cases, the Emergency Room provider is writing the order to admit to inpatient services. Review of the documentation has identified that this is often within the first 24 hours of the patient arriving in the Emergency Room and prior to any diagnostic testing being ordered, or if diagnostic testing is being ordered, the order for the inpatient admission is written prior to the results being obtained.

Emergency Room providers need to be aware that observation services are an option to assess the patients’ condition and provide sufficient time for diagnostic testing and receipt of the test results to be sure that an inpatient admission is warranted per CMS guidance.

Attending Providers

Once the attending provider has assessed the patient after admission from the emergency room and determines, based on results of the physical exam, patient signs and symptoms, including resolution of those signs and symptoms, and receipt of negative diagnostic testing results, the inpatient admission is not necessary, what can the provider do at this point?

When it is determined that a patient was admitted erroneously, the condition code 44 policy may be invoked. All the requirements set forth in the condition code 44 policy must be met in order to change the status from inpatient to outpatient. These requirements are included below:

The change in patient status from inpatient to outpatient is made prior to discharge or release, while the beneficiary is still a patient of the hospital;
The hospital has not submitted a claim to Medicare for the inpatient admission;
A physician concurs with the utilization review committee’s decision; and
The physician’s concurrence with the utilization.

The hospital may not bill observation charges retroactively to cover the time the patient was admitted as an inpatient in the hospital. Medicare does not permit retroactive orders or inference of physician orders. If observation is ordered upon the determination that the patient should no longer receive inpatient treatment, Medicare coverage begins when observation services are initiated in accordance with the physician’s order. In condition code 44 situations, as for all other hospital outpatient encounters, hospitals may include charges on the outpatient claim for the costs of all hospital resources utilized in the care of the patient during the entire encounter.

Regardless of what point the provider encounters the patient, whether it is the emergency room provider performing the initial exam and treatment or the attending provider, the provider needs to be sure that an inpatient admission is the most appropriate level of care following CMS guidelines. Observation care should be utilized until it is determined that the patient can either be discharged or admitted as an inpatient.


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Last modified:  08/05/2016