Inpatient Admission v. Outpatient Observation

When a patient presents at an emergency department of a hospital, they are evaluated by a ER physician to determine whether they should be admitted as inpatient or outpatient observation. An inpatient admission occurs when a person is admitted to a hospital for bed occupancy for purposes of receiving inpatient hospital services. The criteria when evaluating for a patient to be inpatient or outpatient are, but not limited to:

1. The severity of the signs and symptoms exhibited by the patient 2. The medical predictability of something adverse happening to the patient 3. The need for further diagnostic studies to assist in assessing whether the patient should be admitted 4. The availability of diagnostic procedures at the time and location that the patient presents
Sometimes, it may be too difficult to determine an inpatient admission within the first few hours the patient presents with their condition. At which point, the physician and caregivers can elect to utilize observation status. Observation status is used for patients who are presenting with an unknown cause of condition, for further diagnostics or monitoring, or if a patient has a complication from an outpatient procedure, or until the decision is made to admit the patient as inpatient.

Most inpatient admissions usually require a stay of 24-hours or longer, however, there is no specified time frame for a short-stay inpatient admission and inpatient claims are not covered solely on the basis of the length of time that the patient spent as an inpatient. The physician must write an order that describes the reason for the admission.
The change in a patient’s status from observation to inpatient is based on the change in clinical status. This change in status must be documented before the patient’s discharge and billing submission. Several scenerios may occur:

1. When changing inpatient status to outpatient (observation), services are billed with a condition code 44 on a 13X bill type 2. When changing outpatient status to inpatient, services performed prior to the admission decision are billed as outpatient, while services billed post-inpatient decision are billed as inpatient 3. In the event that an inpatient procedure claim is denied for failure to meet inpatient criteria, and no appeal is planned, the provider may bill professional services using a 12X bill type
“The National Government Services Mobile Medical Review Team, along with other agencies such as the recovery audit contractors (RAC), are currently reviewing inpatient admissions with one day stays with the objective of determining if claims are paid correctly as inpatient admissions (versus observation outpatient claims). Findings are similar throughout the RAC and the Mobile Medical Review Team. Notably, that the majority of one day inpatient stays reviewed do not qualify for inpatient admissions per Medicare guidelines.”

According to the CMS IOM Publication 100-08, Medicare Program Integrity Manual, Chapter 6, Section 6.5.2.A:
“Inpatient care rather than outpatient care is required only if the patient’s medical condition, safety, or health would otherwise be significantly and directly threatened if care was provided in a less intensive setting.”

Providers should clearly document all contributing factors that impacted the decision to admit a patient as an inpatient. Factors such as comorbidities, surgical history, current medical needs (including medications), abnormal vital signs, presenting or persistent symptoms, availability of diagnostic procedures, and the safety of the patient should all be taken into consideration during the provider’s decision making period. It is also critical that these decisions be clearly documented in the medical record.

Significantly, although RACs and NGS routinely take the position that “the majority of one day inpatient stays reviewed do not qualify for inpatient admissions per Medicare guidelines,” this is not a position supported by Medicare guidelines. In fact, Medicare guidelines expressly indicate that patients expected to need 24 hours or more of care ought to be admitted as an inpatient. Pursuant to the Medicare Benefit Policy Manual, CMS Pub. 100-02, Chapter 1, Section 10, “Generally, a patient is considered an inpatient if formally admitted as inpatient with the expectation that he or she will remain at least overnight and occupy a bed even though it later develops that the patient can be discharged or transferred to another hospital and not actually use a hospital bed overnight. The physician or other practitioner 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 or more, and treat other patients on an outpatient basis… Admissions of particular patients are not covered or noncovered solely on the basis of the length of time the patient actually spends in the hospital…”

Furthermore, it should be noted that hospitals appealing short stay inpatient denials have experienced success. That is, the Administrative Law Judges (“ALJs”) that review these types of cases have not agreed that “the majority of one day inpatient stays reviewed do not qualify for inpatient admissions per Medicare guidelines.” During the RAC demonstration program, of those claims reviewed, 64.4 percent of appealed claims were decided in the provider’s favor.

For more information on this topic, please contact Abby Pendleton or Jessica Gustafson at 248-996-2810 or visit The Health Law Partners at

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