Policy in Clinical Practice: Medicare Advantage and Observation Hospitalizations

There are a number of areas of uncertainty regarding the specifics of how Medicare Advantage plans work, including Medicare Advantage programs’ use of outpatient (observation) stays. CMS has tried to provide guidance to healthcare organizations and clinicians regarding the appropriate use of inpatient hospitalizations for patients with Traditional Medicare, including the implementation of the Two-Midnight Rule in 2013. According to the rule, clinicians should place inpatient admission orders when they reasonably expect a patient’s care to extend across two midnights.⁸ Such admission decisions are subject to review by Medicare contractors and Quality Improvement Organizations.

In contrast, Medicare Advantage plans which enter into contracts with specific healthcare systems are not required to abide by CMS’ guidelines for the Two-Midnight Rule.⁹ When Medicare Advantage firms negotiate contracts with individual hospitals and healthcare organizations, CMS has been clear that such contracts are not required to include the Two-Midnight Rule when it comes to making hospitalization status decisions.¹⁰ Instead, in these instances, Medicare Advantage plans often use proprietary decision tools containing clinical criteria, such as Milliman Care Guidelines or InterQual, and/or their own plan’s internal criteria as part of the decision-making process to grant inpatient or outpatient (observation) status. More importantly, CMS has stated that for hospitals and healthcare systems that do not contract with Medicare Advantage programs, the Two-Midnight Rule should apply when it comes to making hospitalization status decisions.¹⁰

Implications for Patients

Currently, there are no data available to compare between Medicare Advantage enrollees and traditional medicine beneficiaries in terms of the frequency of observation use and out-of-pocket cost for observation stays. As alluded to in the patient’s case, the use of outpatient (observation) status has implications for a patient’s posthospitalization SNF benefit. Under Traditional Medicare, patients must be hospitalized for three consecutive inpatient midnights in order to qualify for the SNF benefit. Time spent under outpatient (observation) status does not count toward this three-day requirement. Interestingly, some Medicare Advantage programs have demonstrated innovation in this area, waiving the three inpatient midnight requirement for their beneficiaries;¹¹ there is evidence, however, that compared with their Traditional Medicare counterparts, Medicare Advantage beneficiaries are admitted to lower quality SNFs.¹² The posthospitalization consequences of an inpatient versus outpatient (observation) status determination for a Medicare Advantage beneficiary is thus unclear, further complicating the decision-making process for patients when it comes to choosing a Medicare policy, and for providers when it comes to choosing an admission status.

Implications for Clinicians and Healthcare Systems

After performing an initial history and physical exam, if a healthcare provider determines that a patient requires hospitalization, an order is placed to classify the stay as inpatient or outpatient (observation). For beneficiaries with Traditional Medicare or a Medicare Advantage plan that has not contracted with the hospital, clinicians should follow the Two-Midnight Rule for making this determination. For contracted Medicare Advantage, the rules are variable. Under Medicare’s Conditions of Participation, hospitals and healthcare organizations are required to have utilization management (UM) programs to assist physicians in making appropriate admission decisions. UM reviews can happen at any point during or after a patient’s stay, however, and physicians may have to make decisions using their best judgment at the time of admission without real-time input from UM teams.