Updated on: February 6, 2014

Inpatient or Observation? Decision Must Follow Medicare Rules, not Patient Requests

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Original story posted on: February 3, 2014

On the Jan. 9 broadcast of NBC Nightly News with Brian Williams, Kate Snow presented a report on the increasing trend of physicians ordering observation when their patients require short hospital stays.

When observation is ordered, patients are classified as outpatients even though they occupy a hospital bed and often stay overnight. Under Medicare rules, payment for outpatient care is issued under Part B whether the care is provided in a doctor’s office, a diagnostic center, or an outpatient hospital bed.

When Medicare beneficiaries are placed in observation, they become responsible for their Part B deductible (which is $147 a year), 20 percent of the Medicare allowable charge for diagnostic tests other than lab tests, and the cost of “self-administered” medications that the hospital provides during the outpatient stay. Self-administered medications include all pills, capsules, liquids, creams and drops – the types of medications people take on their own at home and buy from their local pharmacies. For safety reasons, hospitals generally don’t allow patients to bring their own medications and keep them at their bedside. But Part B doesn’t cover these medications, and hospital pharmacies don’t participate in Medicare Part D drug plans. When the hospital administers them, it is required to bill outpatients the same amount it would charge inpatients. As a result, patients in observation often face high medication charges, sometimes many times what they would pay if they brought their medications from home.

In contrast, the inpatient deductible under Medicare Part A is $1,216. This covers the costs of all hospital services for the first 60 days of hospitalization, including all medications. Under Medicare Part A, Medicare pays hospitals more for inpatient care than it would if the same services were provided to outpatients under Part B, so hospitals have no financial incentive to increase use of observation. Yet the opposite is the case.

There is another important difference between inpatient and outpatient (observation) care. After a Medicare beneficiary has spent three nights in a hospital as an inpatient, he or she qualifies for Medicare coverage for treatment at a skilled nursing facility. Of course, in order to be eligible for that benefit, the patient has to require skilled care from nurses and/or therapists, not just help with getting around and general wellness. Any nights spent in the hospital as an outpatient receiving observation care don’t count toward the three-night requirement.

The bottom line is that there are significant benefits to be gained by Medicare patients from being admitted as an inpatient in a hospital, rather than as an outpatient. This situation is not new; it has existed since the Medicare program was founded in 1965. However, complex new Medicare admission policies make almost any Medicare patient spending less than two nights in a hospital an outpatient, unless they are having complex surgery or a procedure that must be performed under inpatient status, according to Medicare rules. Coupled with aggressive auditors who review hospital bills and take payment back if a hospital bills for inpatient care when the auditor thinks the patient should have been treated as an outpatient, the regulations encourage hospitals to place more patients in observation. In doing this, they are following Medicare guidelines and trying to avoid having auditors take back payments they have already received – sometimes for services provided up to four to five years earlier.

So when Kate Snow reported that “advocates say patients who end up in the hospital need to make sure they're admitted as inpatients, and not just ‘under observation’ – and if all else fails, ask to challenge the decision with Medicare,” she was actually misleading her viewers. The decision to make a patient an inpatient is not an arbitrary decision. Patient status is determined according to federal laws and regulations that define who is an inpatient and who is an outpatient. Hospitals expend a great deal of effort and deploy expensive resources to be compliant with these rules. The physician has the ultimate responsibility to order admission, but the hospital is held accountable for proper billing. On top of that, Medicare respects the physician’s ability (with hospital guidance) to make the decision to order observation – and they do not allow beneficiaries to appeal.

So recommending that patients ask to be admitted as inpatients, and appeal to Medicare if their request isn’t granted, is like advising drivers who are stopped for speeding to ask the police officer to raise the speed limit and to write to lawmakers to complain that they were stopped. In this democracy, citizens are encouraged to contact their elected representatives when they have complaints about laws and regulations. It’s up to their representatives to make the changes that would improve the system and protect their interests. But until Congress changes the law or the Center for Medicare & Medicaid Services (CMS) changes Medicare regulations, hospitals must comply with the rules as they are.

Let’s give hospitals a break here. Medicare makes the rules; hospitals must comply. Patients don’t always like the results. Yet it’s not the hospital’s fault, and the hospital can’t do a thing to fix it.

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®.

Contact the Author

SMeyerson@accretivehealth.com

To comment on this article please go to editor@racmonitor.com

Steven J. Meyerson, MD, CHCQM-PHYADV

Steven Meyerson, MD, CHCQM-PHYADV, is the founder of Steven Meyerson Consulting. Dr. Meyerson is a nationally recognized expert and consultant in the physician advisor role, case management, and hospital Medicare compliance. He is board certified in internal medicine and geriatrics and serves on the board of the American College of Physician Advisors (ACPA). He edits and writes for the ACPA online blog.

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