Walking the tightrope of medical necessity

Our columnist discusses key elements of deciding the appropriate level of care for a given patient (inpatient versus outpatient or outpatient with observation).

An alphabet soup list of auditors (RAC, MAC, ZPIC, MIC, CERT) is set to identify improper Medicare and Medicaid payments made to health care providers and return them to the Medicare Beneficiary Trust Fund. The 2010 agenda for these audits has created understandable anxiety, considering the $1 billion recouped during the 2005-2007 Recovery Audit Contractor (RAC) demonstration project in California, Florida and New York.

Most hospitals have invested significant resources in screening for admission necessity criteria by case management and utilization review nurses. However, the final decision to admit a patient as an inpatient is left to the physician responsible for the patient's care. This column discusses key elements of the process for deciding the appropriate level of care (inpatient versus outpatient or outpatient with observation).


Generally, a patient is considered an inpatient if formally admitted as such with the expectation that he or she will remain at least overnight and occupy a bed. This is true even if the patient is discharged or transferred to another hospital and does not actually use a hospital bed overnight.

The physician or other clinician responsible for a patient's care at the hospital is also responsible for deciding whether the patient should be admitted as an inpatient. Physicians should use a 24-hour period as a benchmark (i.e., they should order admission for patients who are expected to need hospital care for ≥24 hours) and should treat other patients on an outpatient basis. However, admissions are not covered solely on the basis of the length of time the patient actually spends in the hospital. Therefore, the physician should not write an order to retrospectively change the admission level of care from inpatient to observation when the Medicare patient improves more quickly than expected and is stable for discharge in less than 24 hours.

Case managers may approve admissions when they meet admission screening criteria. However, nonphysicians may not make a final determination that a patient's stay is not medically necessary or appropriate.

The decision to admit to inpatient status is a complex medical judgment that can be made only after the physician has considered a number of factors, including the patient's medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital's bylaws and admissions policies, and the relative appropriateness of treatment in each setting. Factors to be considered when making the decision to admit include

  • the severity of the signs and symptoms exhibited by the patient,
  • the medical predictability of something adverse happening to the patient,
  • the need for diagnostic studies that appropriately are outpatient services (i.e., their performance does not ordinarily require the patient to remain at the hospital for ≥24 hours) to help assess whether the patient should be admitted, and
  • the availability of diagnostic procedures when and where the patient presents.

A patient should be admitted as an inpatient when the physician determines that he or she has an acute condition requiring treatment that can only be provided in an acute inpatient hospital and is unlikely to be ready for discharge within 24 hours. The physician should document his or her decision in the medical record when the decision to admit is made. Inpatient admission orders should specify the intended level of care (inpatient) and be timed, dated and signed by the admitting physician.

Outpatient observation should be ordered when the physician determines that additional time is required to evaluate the need for inpatient admission or the patient is expected to improve within 24 hours. The physician should document his or her decision in the medical record when the decision is made. (See last month's Coding Corner for more on observation services.)

If a physician orders inpatient admission but during the hospital stay it is determined that the patient did not require inpatient care, the status can be changed if the hospital follows the required steps for making the correction

  1. 1. The utilization review/case management screening process determines that the documentation of the patient's condition and treatment plan do not meet the hospital's admission screening criteria.
  2. 2. The utilization review committee or the hospital's physician advisor(s) determine the admission to be medically unnecessary.
  3. 3. The provider of record concurs with the physician advisor or utilization review committee's decision.
  4. 4. The physician's concurrence with the utilization review committee's decision is documented in the patient's medical record.

This change in status must be fully documented in the medical record, complete with orders and notes that indicate why the change was made, the care that was furnished to the beneficiary, and who participated in the decision to change the patient's status.

If this change in patient status from inpatient to outpatient is made before discharge or release, the hospital may bill the entire episode of care as an outpatient service while the beneficiary is still a patient of the hospital as long as the hospital has not submitted a claim to Medicare for the inpatient admission. The patient has a right to know the financial impact of the utilization review decision. This change is billed as a “Condition Code 44” claim.

When the patient has been discharged at the time the utilization review is performed, the hospital will be permitted to bill for a limited number of services that were provided. Examples of such services include, but are not limited to: diagnostic X-rays, diagnostic laboratory tests, surgical dressings and splints, prosthetic devices, and certain other services. The Medicare Benefit Policy Manual includes a complete list of the payable “Part B Only” services.