Is it observation or inpatient?

The question of “observation or inpatient” has perplexed hospital physicians for some time, but it's recently acquired greater financial significance. Recovery audit contractors paid by Medicare will be looking at hospitals' one-day admissions to determine whether patients were appropriately admitted or should have been under observation status.

Two patients are in the hospital with chest pain. “They may literally be in the same room. They're being cared for by the same nursing staff. They're on the same cardiac monitor, being cared for perhaps by the same doctor and getting the same drugs,” said Thomas G. McCarter, FACP, chief clinical officer of Executive Health Resources.

But there's one difference between these hypothetical patients, a distinction that can cost a lot of money to hospitals and cause a lot of frustration for hospitalists. “How are we supposed to determine which one is an inpatient and which one is an observation patient?” asked Dr. McCarter.


The question of “observation or inpatient” has perplexed hospital physicians for some time, but it's recently acquired greater financial significance. “Physicians may have made this decision in the past, but the likelihood of Medicare looking at that decision might not have been as high as it is today,” said Dr. McCarter. Recovery audit contractors paid by Medicare will be looking at hospitals' one-day admissions to determine whether patients were appropriately admitted or should have been under observation status.

Experience from demonstration projects indicates that Medicare will be aggressive about retracting payments if auditors find that patients were not classified correctly, and the difference in reimbursement between inpatient and observation can be thousands of dollars, Dr. McCarter noted.

The pressure for hospitals to get this right is trickling down to hospitalists, according to Vernon Giang, ACP Member, a hospitalist in San Francisco. “We're a private group that has to negotiate with the hospital for a stipend and always have to prove our worth to the hospital. … Our hospital, like others in California, has been scrutinized closely by insurers, so they've asked for our group to help them in decreasing inappropriate one-day admissions.”

Even if they're willing to help with the effort, hospitalists may have difficulty. The distinction between inpatient and observation certainly isn't part of the medical school or residency curricula, and the advice supplied by Medicare is neither clear nor comprehensive (see this month's Coding Corner) , although it covers the factors that physicians should consider in making a decision. “Medicare really has not provided a lot of disease state-specific guidance regarding how that decision should be made,” said Dr. McCarter.

In the absence of such guidance, physicians—who are charged by Medicare with making these admission choices—have had to find their own solutions. Here are three very different pathways to improving decision-making.

1. Do it yourself. At California Pacific Medical Center, where Dr. Giang practices, some physicians had been using some very basic criteria. “If you think [the patient is] going to be here 24 hours or less, it's going to be observation,” he said.

But Dr. Giang wasn't satisfied. “That's way too simple as a rule, because observation can be extended into the 48-, sometimes 72-hour range. A lot of patients that stay 24 hours or less are not even right for an observation status.”

Sharing his concern, the hospital's coding and compliance staff enlisted Dr. Giang when a physician needed some education about observation status. “They wanted me to speak with one of the physicians who was admitting a lot of the total joint replacements into observation.” That correction was easily made—total joints are always inpatient and a change to the physician's electronic pathway fixed the problem—but Dr. Giang's interest was piqued.

“I was researching on my own what observation status really meant, and it's quite confusing,” he said. “If there was just a child's guide or something that was simplified, physicians would actually understand what patients would be appropriate.”

Using CMS resources and input from his hospital's coding department, Dr. Giang developed his “child's guide,” a two-sided sheet of paper with tips on whether a patient should be observed or admitted. The guide offers definitions, procedures and some exclusion criteria for observation, plus some key points (“Standing orders for observation are NOT appropriate”) and example diagnoses that could go under observation.

Of course, the solution wasn't quite that simple. “We presented it to our hospitalist group and there were more questions that came out of it, so now we have to figure out how to answer these questions,” said Dr. Giang. Physicians had additional diagnoses to add to the guide's list, conditions that could likely be dealt with in 24 to 48 hours and could fit under observation.

Dr. Giang hasn't found the silver bullet for determining a patient's status. But even his hospitalists' discussion of the guide may represent progress. “The physician usually just picks a status and moves on,” he said. “I'm clearly not an expert in this area. I really do rely on our compliance officer and our coding experts to guide me. I just happen to be the person who gets to communicate with physicians.”

2. Bring in consultants. Effective lines of communication are the basis of the solution developed by FMQAI, a Florida-based health care quality improvement company. Although its efforts have since gone nationwide, FMQAI first got involved in observation status management through its work as a Medicare Quality Improvement Organization for Florida. “[Quality improvement organizations] across the country were asked to look at their claims data, analyze it, find out where there were mispaid claims and come up with some way to improve upon that,” said Ferdinand Richards, MD, FMQAI's medical director.

Not surprisingly, they found that short stays with symptom codes were a major problem. The FMQAI experts also realized that although Medicare requires physicians to make the final determination about inpatient versus observation, doctors weren't the hospital staff with the most knowledge of the issue.

“We felt that the way to make this happen in the best way possible was to get those who knew the most about it, who were typically case managers. They understood the criteria and they understood who paid what and how it was to be billed,” said Dr. Richards.

To make use of the case managers' expertise, FMQAI developed a case management assignment protocol for hospitals to use. “Through this process, the case manager would recommend the status determination and the physician would accept that determination by signing the order,” Dr. Richards explained.

The protocol was tested in some Florida hospitals that volunteered for a pilot. “For those facilities that truly embraced it, a 90% reduction in inappropriate admissions was achieved,” said Dr. Richards.

FMQAI has since expanded the program to any hospital willing to hire it as a consultant. The organization makes several site visits to the hospital, helping case managers determine their criteria and assisting administration with policy to implement the protocol. After implementation, FMQAI representatives are available by phone for help or questions.

“The case managers are really the experts. So it's really best to put that information in their hands and let the case managers help guide the physicians,” said Patricia A. Collier, RN, director of private review accounts for FMQAI.

The system works best with some physician expertise, too, however. FMQAI conducts a physician advisor boot camp to train hospitalists and other physicians to be the champions of the protocol at their hospitals. Physician advisors, who can be paid or voluntary, provide input when a decision can't be sorted out by the case manager and attending physician.

3. Call for help. If one physician advisor can help sort out which patients should go under observation, imagine a whole staff of them. That's the system at Executive Health Resources (EHR).

If a patient does not meet the conditions for an admission based on a case manager's application of first-level inpatient screening criteria, the case manager will contact EHR's physician advisors to conduct a second-level review of the case to determine whether a patient should be classified as an inpatient or observation, based upon medical necessity.

The physician advisor reviews the case and applies knowledge of existing guidance from Medicare and its contractors. “If we look at all those pieces of information and we still can't make a decision based upon medical necessity, we go to the published literature and discuss the case with the treating physician as required by Medicare regulations,” said Dr. McCarter.

Sometimes even that level of research is insufficient, Dr. McCarter said. “We have to go out and do a complete literature search to identify which signs and symptoms are best to predict an adverse event, and train our physician advisors to consider these factors when they make this decision.” EHR's physician advisors get three to six months of initial training.

The physician advisors are initially contacted by a hospital's case manager, but they also consult with the treating physician before making a determination, as Medicare's conditions of participation require that the admission determination be made in conjunction with the treating physician.

“We believe EHR's competency provides the foundation for the new physician specialty of physician advisement. In the future, physician advisement will be recognized as its own clinical subspecialty with its own very important and sophisticated domain knowledge,” said Robert R. Corrato, MD, MBA, president and CEO of EHR.

What the future holds for the observation status dilemma is anyone's guess, but it may come as some comfort for hospitalists to know that there are some potential solutions out there. “If hospitals implement a compliant, concurrent process for certifying patient status, they will achieve defensible determinations that maintain regulatory compliance and ensure that reimbursement received by hospitals and physicians will be correct and not subsequently lost on audit,” Dr. Corrato said.