Policy in Clinical Practice: Medicare Advantage and Observation Hospitalizations

Outpatient (observation) care and the challenges surrounding appropriate status orders have complicated the admission decision. In one study of 2014 Traditional Medicare claims, almost half of outpatient (observation) stays contained a status change.¹³ Based on a recent survey of hospitalist physicians, about two-thirds of hospitalists report at least monthly requests from patients to change their status.¹⁴ Hospital medicine physicians report that these requests “can severely damage the therapeutic bond”¹⁴ between provider and patient because the provider must assign status based on CMS rules, not patient request.

CMS could improve the current system in one of two ways. First, CMS could require that all Medicare Advantage plans follow the same polices as Traditional Medicare policies regarding the Two- and Three-Midnight Rules. This would eliminate the need for both hospitals and healthcare organizations to dedicate time and resources to negotiating with each Medicare Advantage program and to managing each Medicare Advantage patient admission based on a specific contract. Ideally, CMS could completely eliminate its outpatient (observation) policy so that all hospitalizations are treated exactly the same, classified under the same billing status and with beneficiaries having the same postacute benefit. This would be consistent with the sentiment behind the recent Office of Inspector General’s (OIG) report suggesting that CMS consider counting outpatient midnights toward the three-midnight requirement for postacute SNF care “so that beneficiaries receiving similar hospital care have similar access to these services.”¹⁵

The physician in the example above should tell their patient that they will be admitted as an inpatient given her expectation that the patient will need hospitalization for oxygen support, parenteral antibiotics, and evaluation by physical therapy to determine a medically appropriate discharge plan. The physician should document the medical necessity for the admission, specifically her expectation that the patient will require at least two midnights of medically necessary hospital care. If the patient has Traditional Medicare, this documentation, along with the inpatient status order, will fulfill the requirements for an inpatient stay. If the patient has a Medicare Advantage plan, the physician can advise the patient that the plan administrators will ultimately determine if an inpatient stay will be covered or denied.

In the proposed clinical scenario, the rules determining the patient’s hospitalization status depend on whether the hospital contracts with the patient’s Medicare Advantage plan, and if so, what the contracted criteria are in determining inpatient and outpatient (observation) status. The physician could consider real-time input from the hospital’s UM team, if available. Regardless of UM input, if the physician hospitalizes the patient as an inpatient, the Medicare Advantage plan administrators will make a determination regarding the appropriateness of the admission status, as well as whether the patient qualifies for posthospitalization Medicare SNF benefits (if requested) and, additionally, which SNFs will be covered. If denied, the hospitalist will have the option of a peer-to-peer discussion with the insurance company to overturn the denial. Given the confusion, complexity, and implications presented by this admission status decision-making process, standardization across Traditional Medicare and Medicare Advantage plans, or a budget-neutral plan to eliminate status distinction altogether, is certainly warranted.