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Hospitals Caught Between a Rock and a Hard Place Over 'Observation'

Cheryl Clark, for HealthLeaders Media, September 15, 2010

Like thousands of acute care facilities across the country, Immanuel St. Joseph's, a Mayo system hospital staffed for 161 beds in Mankato, a small town 80 miles southwest of Minneapolis, is caught between a rock and a hard place.

On one side, administrators and physicians are required by Medicare's strict billing criteria to place certain patients in "observation" status rather than admit them as regular inpatients, explains ISJ chief financial officer Jim Tarasovitch.

That means ISJ can submit claims for only one-third of what the facility would be reimbursed if the patients were officially admitted, or the difference between $4,500 per day and $1,500 "even though the care of the patient and the expenditures we do on that patient are exactly the same," he says.

If they admit these borderline patients and bill Medicare accordingly, he confides, the hospital might face recovery audit contractor (RAC) investigations and a possible interpolation of an error rate across a larger swath of its claims. It could mean a lot of headache and worse, a huge loss of federal reimbursement dollars. 

No matter what, hospitals like ISJ can't win.

Though they follow the rules, they hear the wrath from patients and family members. One who is extremely frustrated is Sandi Lubrant, whose 82-year-old mother, a resident of Mankato, has been denied Medicare reimbursement for $19,000 so far for two separate nursing home stays plus the cost of drugs she subsequently needs.

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11 comments on "Hospitals Caught Between a Rock and a Hard Place Over 'Observation'"


Priscilla T. Bassett (2/8/2012 at 6:01 PM)
a fair presentation of the hospital side

Kay F. (9/21/2010 at 11:45 PM)
I know Medicare expects the beneficiary to ask a hospital whether they are inpatient or observation. Medicare even publishes a brochure explaining the difference. But also according to Medicare if she was admitted as Inpatient and then changed to observation then it was then this hospitals responsibility to notify her of the change. Did it really take 5 days for them to notify her? And why would a hospital keep a patient past 48 hours if they are not sick enough to be an "inpatient"? It seems like a real financial loss for the hosptial.

sobrien (9/21/2010 at 5:04 PM)
When a physician makes the decision to keep a patient in the hospital, one of the first decisions he/she must make (usually with the guidance of a Utilization Review Nurse) is whether the patient should be admitted as an 'Inpatient', or made 'Observation'. The criteria that is used to guide this decision is spelled out in the InterQual or Millimen criteria. With each years update in the criteria guidelines, Inpatient criteria has become increasingly harder to meet. The new criteria, which became active as of August 1st, makes it especially difficult to justify an 'Inpatient' admission. The patients aren't any less sick, but the criteria points us toward an 'Observation' stay. Though CMS guidelines recognize that the decision to admit a patient is a "complex medical decision", the hospital is at risk of being denied payment if the patient is admitted to 'Inpatient', yet does not clearly meet this criteria. The changes this year will likely show an even bigger jump in the use of 'Observation' stays, with the resulting burden begin placed on both the hospitals, as well as the patients and their families.