I recently conducted a live Webinar for RAC University, titled "Protecting Reimbursement from the RACs: How to Avoid Medical Necessity Errors for Cardiac Service One-day Stays."

We had many facilities and physicians ask good questions afterward, and some of them nicely illustrated a point I made during the Webinar: Often, a subjective interpretation from the physician's viewpoint of what meets criteria for inpatient status vs. observation or outpatient status ultimately creates a reimbursement dilemma for the hospital.

In today's RACMonitor Special Bulletin, I present another case study to show how such a dilemma can arise. Unfortunately, it is exactly this issue that RACs will exploit to the detriment of practices and hospitals large and small.

Clinical vs. Payment Decisions

Providers are faced with making many types of decisions, some of which are not even clinical. Two types of decisions that may seem fairly straightforward are, in fact, very complicated: first, physicians' clinical decisions regarding the care a patient needs; second, hospitals' and physicians' joint decisions on what setting in which those services are provided - inpatient, outpatient or observation.

Reimbursements are significantly different for each status, which only makes sense since more resources are needed to care for a patient with a serious condition requiring a stay of several days versus someone who is in the hospital for less than 24 hours.

Lucrative Denials for the RAC

Decisions about medical necessity may be questioned by a RAC, and this is not a new practice. But the RACs are being paid to look closer at Medicare claims than anyone has looked before. They can deny a claim simply based on a lack of sufficient documentation to justify the setting in which services were rendered. Plus, when RACs make this kind of denial, they likely are going to recoup the entire claim, not simply the difference between the correct versus the incorrect setting. RACs can reap many denials and subsequent commissions for them.

Criteria as Guidelines

While CMS does not require a hospital to use any specific set of criteria for judging status designation, it does require a hospital to be consistent and to use criteria consistently. Unfortunately, the consistent use of such criteria is not necessarily a remedy for this headache. CMS, and more specifically RACs, may decide that they don't agree with how a hospital has applied criteria on a case-by-case basis. There just are no guarantees.

Essentially, the criteria are meant to be used as guidelines, not rules: they are intended to reflect clinical interpretations and analyses, not resolve ambiguities or provide the sole basis for making decisions regarding medical appropriateness. They are not meant for final clinical or payment determinations; nevertheless, they must be used.

Why the Dilemma?

What is the difference between the different status designations and why can choosing between them represent a dilemma? As mentioned before, there are three different designations we are concerned with: Inpatient, Observation and Outpatient. Most readers probably could define these types of patients easily -- so, why is it a problem?

To begin to understand, take a look at these brief descriptions of the terms, pulled straight from CMS guidelines:

Inpatient: The status used to describe a patient who has been admitted to a hospital for bed occupancy, for the purposes of receiving inpatient hospital services, with the expectation that the patient will remain at least overnight and occupy a bed, even though it may later develop that the patient can be discharged or transferred to another facility and not actually use the hospital bed overnight. This kind of stay usually but does not always involves a multi-day stay.

Observation: The status used to describe a patient receiving hospital outpatient services to monitor and assess the patient for determination of a hospital admission or discharge. These services are those furnished by a hospital on the hospital premises, including the use of a bed, and at least periodic monitoring by nursing or other hospital staff, which are reasonable and necessary to evaluate an outpatient's condition, or determine a need for a possible admission to the hospital as an inpatient.

Outpatient: The status used to describe a patient who has not been admitted to a hospital as an inpatient, but is registered on the hospital records as an outpatient, and receives services, rather than supplies alone, from the hospital or Critical Access Hospital. Where a hospital uses the category "Day Patient" for example - an individual who receives hospital services during the day and is not expected to be housed in the hospital at midnight - that individual is considered an Outpatient.

You likely would agree that all this is about as clear as mud. Nevertheless, assigning the correct status designation to cases is critical to reimbursement, especially for Medicare.