Health Law News From Arnold & Porter

Health Law News From Arnold & Porter

May 20, 2013
2 min read

BLOG: Inpatient admission or observation services: Do we finally have some clarity?

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From international law firm Arnold & Porter LLP comes timely views on current regulatory and legislative topics that weigh on the minds of today’s physicians and health care executives.

To the Medicare program, observation services include short-term treatment and assessment for the purpose of determining whether a beneficiary can be discharged from a hospital or will require further treatment as an inpatient. For hospitals, a physician’s order for observation services will frequently create a compliance headache that can result in reimbursement denials, recovery audit contractor program (RAC) takebacks, or worse. For Medicare beneficiaries, observation services may look and feel just like an inpatient stay (until their bill arrives). For all parties involved, distinguishing between an inpatient admission and observation services can be a difficult and costly endeavor.


In its recent proposed payment rule for hospitals, CMS reports that the number of Medicare beneficiaries receiving observation services for more than 48 hours has increased from approximately 3% in 2006 to approximately 8% in 2011. This upward trend is of concern primarily because of the significant financial implications for Medicare beneficiaries. Beneficiaries who are treated for extended periods of time as outpatients receiving observation services may incur greater financial liability for Part B copayments, the cost of self-administered drugs that are not covered under Part B, and the cost of post-hospital skilled nursing facility care than if they were admitted as inpatients.

Hospitals, Medicare advocates, and beneficiaries have complained for years about the lack of guidance from CMS on these issues, even to the point of seeking judicial relief. To address these complaints, the agency is now proposing that inpatient admissions spanning at least two midnights (eg, at least more than one Medicare utilization day) will presumptively qualify as appropriate for payment under Medicare Part A. Admissions spanning less than two midnights, however, will presumptively be inappropriate for payment under Medicare Part A. Although this presumption may be overcome by “clear documentation in the medical record supporting the physician’s order and expectation” that an inpatient admission is indicated, the agency makes clear that “the physician order and the physician certification are not considered … to be conclusive evidence that an inpatient hospital admission or services was medically necessary” and that physicians are “required to clearly and completely document the clinical facts supporting the inpatient hospital admission.”

This policy change is estimated to increase Medicare expenditures for inpatient hospital services by $220 million in fiscal year 2014 due to “an expected net increase in hospital inpatient encounters … .” CMS is proposing to offset this increase through reductions in other components of its hospital reimbursement formula. Not surprisingly, the proposed observation policy (and potential payment reductions) drew a wary response from the American Hospital Association. Now, the whole industry has to wait and see what comes out in the final rule.

Ted Lotchin, JD, MPH, can be reached at Arnold & Porter LLP, 555 12th St. NW, Washington, DC 20004-1206; 202-942-5250; email: