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Recovery Audit Contractors (RACs) continue to uncover billing errors related to claims for services performed in the inpatient setting instead of, more appropriately, the outpatient observation setting. They reviewed the medical documentation on these cases to determine not only whether the services were medically necessary but also to substantiate the need for inpatient admissions.

The July 2012 issue of the Medicare Quarterly Provider Compliance Newsletter (published by the Centers for Medicare & Medicaid Services [CMS]) addresses the following MS-DRGs where RACs have discovered the above type of errors:

  • MS-DRG 296—Cardiac arrest, unexplained with MCC
  • MS-DRG 640—Miscellaneous disorders of nutrition, metabolism, fluids/electrolytes w MCC
  • MS-DRG 068–074, 103, 312—Neurological disorders with and without MCC
  • MS-DRG 393—Other digestive system diagnoses with MCC

In the July newsletter, CMS provides the RACs’ findings on the above, including case studies, as well as Medicare guidelines for correct billing. Examples of when patients were admitted as inpatients but did not meet criteria for inpatient status include the following:

Example 1: An end-stage renal disease (ESRD) patient missed dialysis and was symptomatic with only a mildly elevated potassium level. She was stable, and her symptoms would be expected to resolve after routine dialysis—an outpatient service. The use of a brief time period to determine if a potentially dangerous condition will resolve is defined as an outpatient observation service.

Example 2:  This patient had a chronic history of high potassium levels that were routinely monitored and treated. She was asymptomatic, in no acute distress on admission, and stable, and the treatment provided would not be expected to require a prolonged stay. Like the above example, the use of a brief time period to determine if a potentially dangerous condition will resolve is defined as outpatient observation services.

Example 3: A male patient came to the emergency department (ED) with unilateral inguinal hernia but no acute distress. The signs and symptoms documented were not significant or severe enough to warrant the need for immediate surgery and inpatient medical care. The RAC determined that the physician could have medically evaluated the patient in an observation setting.

Snapshot of the Medicare Rules

In explaining how providers can avoid the above problems, CMS extracted regulatory guidelines from several Medicare manuals. (See Resources for links.) Highlights for this guidance include the following.

From the Medicare Program Integrity Manual, Chapter 6, Sections 6.5.2 and 6.5.2.A: Inpatient care rather than outpatient care is required only “if the patient’s medical condition, safety, or health would be significantly and directly threatened if care was provided in a less intensive setting” (such as outpatient observation).

When making the decision to admit, the provider should consider, in his/her review of the medical record, any pre-existing medical problems or extenuating circumstances that make the beneficiary’s admission medically necessary. “Factors that may result in an inconvenience to a beneficiary or family do not, by themselves, justify inpatient admission. When such factors affect the beneficiary’s health, consider them in determining whether inpatient hospitalization was appropriate.”

From the Medicare Benefit Policy Manual (Chapter 1, Section 10, and Chapter 6, Section 20.6): “An inpatient is a person who has been admitted to a hospital for bed occupancy for purposes of receiving inpatient hospital services.”

Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or whether they can be discharged from the hospital.

Usually, observation services are ordered for patients who present to the ED and who then require a significant period of treatment or monitoring to make a decision concerning their admission or discharge. Thus, a patient receiving observation services may improve and be released, or be admitted as an inpatient. When a physician orders observation care, the patient’s status is that of an outpatient.

Things to Consider Before Admitting

The Medicare guidelines state that the decision to admit a patient is a “complex medical judgment” that physicians can make only after they consider a number of factors, including the following:

  • Patient’s medical history, current medical needs and severity of signs and symptoms
  • Types of facilities available to inpatients and to outpatients, and the relative appropriateness of treatment in each setting
  • Hospital’s by-laws and admissions policies
  • The medical predictability of something adverse happening to the patient
  • The need for diagnostic studies that are appropriately outpatient services (i.e., their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more) to assist in assessing whether the patient should be admitted
  • The availability of diagnostic procedures at the time when and at the location where the patient presents.

About the Author

Janis Oppelt is editorial director for MedLearn Publishing, a division of Panacea Healthcare Solutions, Inc., St. Paul MN.

Contact the Author


To comment on this article please go to editor@racmonitor.com


CMS and Contractor Audit Survival Calls for a Strong Offensive Team


Janis Oppelt

Janis Oppelt was the former editorial director for MedLearn Publishing.

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