April 9, 2012

The Ins and Outs of Observation Status
By Mike Bassett
For The Record
Vol. 24 No. 7 P. 10

Choosing whether to designate a patient as inpatient or outpatient has significant reimbursement and compliance ramifications.

In 2011, the Centers for Medicare & Medicaid Services (CMS) reported improper Medicare payments of nearly $30 billion, an error rate of 8.6%.

During a conference call with reporters at the end of last year, George Mills, Jr, director of the Provider Compliance Group in the CMS’ Office of Financial Management, said the agency’s Comprehensive Error Rate Testing (CERT) Report showed that a major cause of these errors involved short hospital stays.

For example, CERT found that errors occurred because claims were incorrectly coded with the wrong diagnostic-related group, emergency department patients were admitted into inpatient status rather than observation status, or patients underwent elective surgery on a short-day stay rather than outpatient status.

As a result of these findings, the CMS has made it clear that the error rate related to patient status remains a consistent problem and has serious implications. What is causing this continued confusion and what can be done about it?

Inpatient vs. Observation
According to Day Egusquiza, president of AR Systems, Inc, the difference between inpatient and observation should not be especially difficult for hospitals to figure out. Medical necessity screening tools, such as McKesson’s InterQual, are used by hospitals as guidelines and by payers such as Medicare and Medicaid as a reference.

According to InterQual, observation should be considered when the patient is hemodynamically stable, doesn’t meet acute care criteria, and if one of the following applies:

• Stabilization and discharge are expected within 24 hours.

• More than six hours of treatment will be required.

• Clinical diagnosis is unclear and may be determined in less than 24 hours.

• There’s a procedure requiring more than six hours of observation.

• There are complications of ambulatory surgery/procedure.

• Symptoms are unresponsive at least four hours after emergency department treatment.

Egusquiza says observation status is “an outpatient in a bed” where it still needs to be determined whether he or she is ill enough to be admitted as an inpatient or can be sent home safely.

However the term is defined, commercial payers will authorize observation only up to 23 hours, while Medicare allows for more than 24 hours if necessary. According to Egusquiza, a 24-hour observation period serves as a kind of artificial deadline for physicians to make a decision about how long it will take to resolve a patient’s condition.

“There’s nothing that prohibits a patient under observation from using a bed overnight,” she says. “It just has to be medically appropriate for every hour they are using that bed.”

And observation doesn’t have to be in a dedicated section of the hospital, says Brian Clare, MD, FACEP, T-System vice president of revenue cycle management. “Some hospitals do have observation areas, and some will use beds that aren’t really for observation. But what is important is that the status of the patient has to be declared.”

According to Karen Kostick, RHIT, CCS, CCS-P, director of professional practice resources for AHIMA, a decision to admit the patient into inpatient status depends on the severity of illness and the intensity of service provided.

“He or she should be inpatient when a formal documented decision is made to admit the patient, generally with an expectation of an overnight stay,” Kostick says. “That decision involves factors such as patient history, the seriousness of the illness or injury, hospital policy, and the relative appropriateness of each available treatment setting.”

Wrong or Right?
What happens when a hospital incorrectly designates a patient’s status?

“It’s called an audit, which we are all living with right now, and we really have all the payers auditing now because they somewhat believe they’ve found a bonanza here,” Egusquiza explains.

Indeed, business does seem to be booming for Medicare recovery audit contractors (RACs). Last April, a CMS report on overpayment recoveries revealed that auditors returned $237.8 million to the federal government in the first six months of fiscal year 2011.

“And that’s just the RAC audit,” Egusquiza says, pointing out that Medicaid is now auditing for inpatient status because it believes the records are too weak to support what is being billed. She also predicts that commercial payers will follow suit.

All this means that hospital errors regarding inpatient/observation designations can cost hospitals big bucks. Errors can result in a hospital either losing a payment or incurring costs it never recovers, Egusquiza says. “So it means there’s a significant financial hit if you don’t get it right,” she notes.

If a facility has incorrectly admitted a patient for inpatient care, “It’s not going to be paid for it,” Egusquiza says. “Let’s use Medicare as an example because that’s the big one. If they [auditors] determine that a patient never should have been admitted as an inpatient, the facility can rebill up until a year back, but the only services they’ll be able to rebill are ancillary services like labs and X-rays.”

According to Barbara Flynn, RHIA, CCS, vice president of HIM and denial management services for the Florida Hospital Association, this means the facility is on the hook for about 90% of the claim, which represents thousands of dollars. These are dollars the hospital has lost by providing an inpatient stay with the accompanying nursing and room costs but with little in the way of reimbursement.

What’s the Problem?
“It’s really about the documentation that supports the choice made,” says Clare. “What you see is that if you don’t have proper documentation to support the level of services provided, there’s going to be a discrepancy on what the payer—in most cases, Medicare—thinks was documented and what was charged.”

Physicians need to provide an admission order that clearly outlines their thinking when a patient is going to be treated in an inpatient bed, says Egusquiza.

“Unfortunately, most of the time the physicians are just writing the word ‘admit,’ and that’s all we are getting,” she says. “That’s not enough to support the rationale for an inpatient stay.”

Egusquiza adds that nurses’ failure to chart the intensity of service because of a lack of communication between admitting physicians and nurses exacerbates the problem. “So physicians are giving us weak orders, and nurses are compounding the problem by not understanding the level of documentation required for inpatient status,” she says.

Though she understands why they occur, Flynn agrees that poorly documented admission orders are the major problem. “The attending physician may not necessarily know the rules for determining inpatient status and may not care,” she says. “He or she just wants the patient put to bed in order to start receiving care.”

She also suggests that some physicians may be concerned about liability, particularly when they don’t entirely understand their authority to treat patients in an observation status.

“If a patient comes into the emergency room with chest pains, the physician might consider the possibility he could discharge a patient, have him leave the hospital, and run into a life-threatening event at home,” Flynn says. “That probably weighs heavily on a physician, so he admits the patient so he’ll get nursing care unaware he can put that patient in observation until tests come back positive or negative.”

According to Egusquiza, while physicians should write—with the best knowledge available to them at the time—the admission order, utilization management committees should be responsible for ensuring the correct decision has been made in the first place. She says best practices dictate that a utilization management staff member should see the medical record before the patient is given a bed, “which means we need to get them [utilization management] in the emergency room,” she says.

The alternative is time consuming and often unproductive, Flynn says. For example, a nurse reviewer believes, after admission, the inpatient status shown on the record is incorrect, so now the attending physician must be contacted and, hopefully, convinced to change the order. This process takes a significant amount of time, Flynn says. Since the length of a hospital stay may be only a couple days, “It doesn’t leave much time to get it right.”

Most frustrating is the fact that the problem can be fixed, according to Egusquiza. “We just have to get our hands around it,” she says. “We’ve got to get the physicians to understand what is needed. And it doesn’t take writing a novel—just a sentence, maybe two.”

Egusquiza says nurses also should be taught how to chart to the intensity of service. “You know that the care is being provided,” she says, “but when you see the records, you wonder why they got away from telling that patient’s story in the record the way we need it told in order to support that patient’s inpatient status.”

It’s also good to totally engage bedside nurses so they know the status of the patients they are charting, Egusquiza says. Utilization management should see those patient records on a daily basis. “If we get utilization management up on the floors with the nurses and the physicians, then we’ll have much more aggressive monitoring of the patients’ status and not just of their care,” she says.

Egusquiza suggests there could be a technological component to documentation issues. “I really think that electronic medical record vendors are not asking the right questions,” she says. “There’s too much cookie-cutter documentation, and it’s not giving us the cues to chart to the intensity we need to.”

Physician Audits and Prepayment Reviews
While Flynn and Egusquiza say it’s important to aggressively train physicians about the importance of making accurate inpatient/observation decisions, it’s problematic when the financial liability for making wrong decisions lies entirely with the hospital.

In that sense, Egusquiza says it’s ironic that physicians are the key decision makers despite having no financial responsibility. “That makes it difficult to get everyone’s attention in order to effect change,” she says.

That could be changing. Egusquiza points out that some Medicare administrative contractors, such as First Coast Service Options (FCSO) in Florida, have given notice they will start reviewing physician claims. FCSO announced on its website that “effective Jan. 1, 2012, FCSO also will perform post-payment review of the admitting physician's and/or surgeon's [Medicare] Part B services related to inpatient admissions that are denied either because they do not meet the level of care criteria, as services performed could have been performed in a less intensive setting (ie, outpatient) or documentation did not support the medical necessity of the procedure."

While the Medicare RAC program successfully reduced erroneous payments, it hasn’t been working fast enough for the Obama Administration. Now a pilot program has been introduced that will allow Medicare RACs to conduct prepayment reviews of certain claims—including those involving inpatient claims—in 11 states.
Flynn says this is already having an impact in Florida. While visiting part of a five-hospital system, she learned the facility was ensuring all its documentation was in order before billing.

“This particular hospital had almost $2 million in unbilled claims that fit into these categories,” she says. “They’re trying to get the additional documentation they need from the physicians before they bill so it’s not denied. They’re trying to make sure on the front end that it won’t be denied on the back end.”

— Mike Bassett is a freelance writer based in Holliston, Massachusetts.

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