Inpatient vs. Outpatient/Observation Hospital Status

In an effort to detect and reduce Medicare waste, fraud and abuse, The Centers for Medicare & Medicaid Services (CMS), as well as many insurance providers, have increased scrutiny on the medical necessity of a one-day length of stay for inpatient admissions to hospitals.

In response to this, hospitals are now screening inpatient admissions for Medical necessity, and educating providers, nurses, administration and other staff on the medical necessity requirements for inpatient status.

The result has been an increase in the number of outpatient observation patients and an increase in confusion on what the differences are between inpatient vs. outpatient (observation) status.

I recently attended a presentation by a south central Pennsylvania area hospital COO who said outpatient observation status admissions at their hospital totaled ~2500 in 2007 whereas in 2010 they totaled >5000 (100% increase).

To see an example of how these guidelines are being used by the Blues in level of care audit reviews go to: https://www.bcbsnd.com/docs/providers/29306598_4.pdf

Below are a series of questions and answers on CMS’s guidelines for inpatient vs. outpatient (observation) status, which will hopefully help you become more familiar with this decision making process since this criteria is also being used by the health insurance industry as a cost containment strategy.

What does a Medicare patient pay as an “inpatient”?

Medicare Part A (hospital insurance) covers inpatient hospital services. Generally, this means you pay a one-time deductible for all of your hospital services for the first 60 days you’re in the hospital. If you are hospitalized again after 60 days Medicare may apply another deductible.

Medicare Part B (medical insurance) covers most of your physician services when you’re an “inpatient”. You pay 20% of the Medicare-approved amount for physician services after paying the annual Part B deductible.

What is “inpatient” status?

Physicians and hospitals follow a specific set of clinical criteria (severity of illness and intensity of service needed to diagnose and treat) that assists in determining whether a patient meets medical necessity for an “inpatient” status in the hospital. The Centers for Medicare & Medicaid Services (CMS) has specific guidelines (medical necessity) on whether a patient should be Inpatient or Outpatient/Observation — depending on how severe the patient’s symptoms/condition is and how

What is “outpatient” status?

“Outpatient” status is commonly referred to patients who typically go to an outpatient department such laboratory, radiology or to the Emergency Department for diagnostic services. Your physician may write an order for you to be admitted as an outpatient/observation patient at Austin Medical Center. The observation stay is intended for short term diagnostic testing and monitoring, which are reasonable to evaluate your condition. This is done in order to determine your need to be admitted to the hospital as a hospital patient or be discharged to go home.

Why is it important to know if a patient is an “inpatient” vs. “outpatient/observation” status no matter if they are on Medicare or not?

If you or a family member is in the hospital more than a few hours, always ask the physician or hospital staff if you’re an “inpatient” or “outpatient/observation” because it WILL affect how you are billed and what you will have to pay for out-of-pocket.

Can a patient be an “outpatient” anywhere in the hospital, even if they were told they were being admitted to the hospital?

Yes. A patent can be receiving any service anywhere in the hospital (Radiology, Emergency Department, or nursing floor) and still be considered an “outpatient” according to CMS guidelines. The term “outpatient” is used by Medicare and other insurance companies for billing status only, not patient care status.

Who reviews a patient’s health admission information to determine the criteria?
 Your health care team, which includes physicians, nursing staff, and hospital case management staff (Utilization Management), reviews the medical record for the clinical information and applies the research-based clinical criteria utilized by CMS that provides a recommendation for either “outpatient” or “inpatient” status.
Your physician determines the final status however, if Medicare does not agree with the determination, Medicare will not reimburse the hospital for costs incurred. The hospital costs may then be billed to the patient.

Why am I an “outpatient/observation” patient instead of an inpatient?

Specific criteria (based on severity of illness and intensity of service) must be met in order to admit a patient to the hospital. In some cases it is not immediately clear whether you are well enough to go home or if hospitalization is needed until further testing/evaluation is completed.

If a patient has been in the hospital over 24-hours, do they get changed from “outpatient/observation” to “inpatient” status?

No. A patient status is only changed if they meet full “inpatient” medical necessity/severity of illness criteria.

What does a Medicare patient pay as an “outpatient” or “outpatient/observation”?

Medicare Part B covers outpatient hospital and physician services. Generally, this means you pay a copayment for each individual outpatient hospital service. This amount may vary by service.

For more detailed information on how Medicare covers hospital services, including premiums, deductibles, and copayments, visit www.medicare.gov/Publications/Pubs/pdf/10050.pdf to view the Medicare & You Handbook, or call 1-800-MEDICARE (1-800-633-4227).

How does “inpatient” vs. “outpatient observation” status in the hospital affect the way that Medicare covers care for the patient in a skilled nursing facility (or nursing home)?

Medicare requires a “qualifying hospital stay” in order for Medicare A to cover care within a skilled nursing facility. A qualifying hospital stay is defined as a hospital “inpatient” for a minimum of three (3) days in a row — counting the day you were admitted as an inpatient, but not counting the day of your discharge.

For example, a physician may have determined that a patient be on “outpatient observation” status to help decide whether the patient needs to be admitted to the hospital as an “inpatient” or whether they should be discharged. During this time, the patient is still considered an “outpatient” even while receiving hospital services, which may include staying overnight multiple nights.

If you are still on an “outpatient observation” status even if you have a 3-day stay in the hospital, Medicare will not count this time toward the required 3-day minimum hospital stay for your stay in Skilled Nursing Facility. If you are ready for discharge, you may need to either pay part of your stay at a Skilled Nursing Facility or ask for other options for payment. The hospital discharge planner or Social Worker can assist you and your family with these decisions.

About the Author

Jim is employed as Sr Consultant Talent Management at the Manufacturers’ Association of South Central Pennsylvania and a member of the Society for Human Resource Management. He is certified as Senior Professional Human Resources (SPHR); past president of MASCPA affiliated Employee Relations Council; past president of Hanover Area Management Association; past president of Hanover Area Human Resource Association; Past president of York Personnel Association, and past chair of Baltimore Industry (OFCCP) Liaison Group. A graduate of York College of Pennsylvania with a Bachelor of Science degree in Accounting, Jim earned his Masters of Administrative Science from Johns Hopkins University. Jim can be reached by emailing jbaker@mascpa.org