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Observation v. inpatient? Amid audits, hospitals struggle to decide

Hospital can lose full Medicare payment when auditors disagree with patient status

Topics: RAC and Other Post-Payment Audits, Revenue Cycle, Finance, Billing and Collections, Medicare, Reimbursement, Payer and Regulatory Policy, Market Trends, Strategy

August 09, 2012

More hospitals are choosing to classify patients under low-paying observation status rather than take the risk of receiving no payment at all if an inpatient status later is deemed inappropriate, CNN Money reports.

Audits push more patients into observation status despite Medicare guidelines

Seeking to eliminate fraud and overpayments, CMS has ramped up claims audit activity. Since 2009, four recovery firms have reviewed bills from hospitals and physicians nationwide and recuperated $1.9 billion in overpayments.

To do so, auditors have focused on the "gray zone" between inpatient stays and less-expensive observation stays.

In a June study in Health Affairs, Brown University researchers reported a 25% increase in observation stays from 2007 to 2009. Half of those stays lasted more than 24 hours, and one in seven lasted more than 48 hours.

The trend appears to contradict Medicare guidelines, which recommend that observation stays be no longer than 24 hours and only "in rare and exceptional cases" extend past 48 hours.

Observation stays cost patients more

 Many patients are never informed of their hospital status, and physicians say the care provided does not depend on status. However, the status change can have a major impact on patient costs:

  • Hospital stay costs: Medicare pays significantly more for inpatient stays—which fall under Part A of the federal program—than for observation stays—which fall under Part B. As such, much of the cost of a Part B hospital stay fall to the patient.
  • Post-discharge care costs: Medicare does not cover post-discharge care for Part B observation stays. As such, a patient who is placed on observation status for a broken bone will have to pay the full cost of rehabilitation. In comparison, Medicare pays for skilled nursing care following an inpatient stay that lasted at least three consecutive days. However, patients who are shifted into inpatient status after spending days in observation status must spend three full days in inpatient status to receive the benefit (the time spent in observation status does not count toward the three-day requirement).

Patient and consumer advocates say the practices unfairly shift costs onto patients. Late last year, a group of Medicare patients filed a lawsuit challenging Medicare's observation stay practices and pressing for an immediate appeals process for claims.

Hospitals risk losing Medicare payments over status choices

When an auditor determines that a hospital inpatient stay should have been classified as an observation stay, the hospital generally loses the full Medicare payment for the stay. The losses can add up quickly; one hospital in Washington, D.C. lost $597,927 over "misclassifications."

However, hospital officials say the decision between observation and inpatient status is not always clear. "Two different sets of eyes looking at the same data may make different calls," says Eric Coleman, director of the University of Colorado care transitions program.

To avoid losing the full payments, many hospitals err on the side of caution, according to Coleman. "Hospitals are taking the observation payment, even though it's lower, instead of rolling the dice to see if they get the full inpatient fee," he says.

According to CNN Money, many hospitals now are using the same screening programs that auditors use to determine patients' status. These programs are developed by private firms and use an algorithm to assess each case (Gengler, CNN Money, 8/7).

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