Hospital Finances Inpatient Practice

Avoiding The “Observation Status” Trap For Surgical Admissions

Some surgical procedures require a patient to be in what is called “inpatient status” or else Medicare will not pay for the surgery. These are so-called Medicare inpatient only procedures. But Medicare specifies that many other surgeries can only be done as an outpatient, unless there are extenuating circumstances. In my last post, I discussed how surgeries done as an outpatient or “observation status” result in the cost of hospitalization being transferred to the patient rather than being paid for by Medicare or insurance companies. The differences are summarized in the table below:

From this table, you can see that Medicare (or the commercial insurance company) is highly motivated to have patients classified as being in outpatient or observation status since Medicare will not have to cover as much of the cost of hospitalization. Instead, either the patient has to cover the rest of the costs or the hospital just does not get paid for those costs. For surgical procedures such as a knee replacement, this has enormous implications for the patient: first, the patient is going to have a huge out of pocket cost and second, the patient is not able to go to a nursing facility for rehabilitation after the surgery. Knee replacement surgery was considered an inpatient surgical procedure in the past but now, it is considered an outpatient procedure unless there are other conditions that would require it to be done as an inpatient.

For patients who are otherwise healthy, it is very possible for the knee replacement to be done as an outpatient with perhaps a 1-night stay in the hospital for observation. These patients will have to pay more out of pocket but can still be cared for safely without being formally admitted to the hospital. But for other patients, particularly those with compounding medical conditions, it is unsafe to perform knee replacement as an outpatient and instead, these patients should be admitted to the hospital. The problem is that Medicare requires the decision about whether the surgery will be done as an outpatient or inpatient procedure to be made before the surgery, or at the latest, before the patient leaves the operating room. And if the surgeon decides that the surgery needs to be done as an inpatient and then Medicare audits the patient’s medical record after the fact and determines that the surgery could have been done as an outpatient, then Medicare can deny the charges and the hospital takes a huge financial loss on that surgery. In order to justify a surgery being done as an inpatient versus an outpatient, the surgeon and the hospital have two layers of defense: (1) the pre-admission testing evaluation and (2) the hospital’s “physician advisors”.

The pre-admission testing evaluation is typically done by an internist or anesthesiologist. Increasingly, nurse practitioners or physician assistants are employed in this setting, generally with back-up by a physician. Patients are sent to the pre-admission testing area after the decision to perform a surgery (such as a knee replacement) so that all of the patient’s medical conditions can be identified and post-operative complications can be anticipated. Some medical problems will be determined to be “optimized” and not pose a barrier to doing surgery, other medical problems will be determined to require subspecialty consultation for optimization before surgery, and other medical problems may be determined to be dangerous enough that surgery cannot be safely performed. This preoperative medical evaluation is beneficial to the surgeon who is often not trained or as experienced in the management of complex chronic medical conditions and is beneficial to the patient by making their care safer. During the pre-admission testing process, medical conditions may be identified that would make performing the surgery as an outpatient unsafe and documenting these co-morbid conditions can justify doing the surgery as an inpatient. Some of the more important to identify include:

  1. Known or suspected obstructive sleep apnea. These patients can develop worsened apnea after surgery due to the effects of opioid medications used to control post-operative pain. In some situations, this can be life-threatening. These patients often need to stay in the hospital for more than just one night for telemetry and/or oxygen saturation monitoring while sleeping. Often they may also require non-invasive ventilation (eg, BiPAP) in the post-operative period.
  2. Heart failure. These patients can worsen due to the effects of intravenous fluids used during surgery and anesthesia and often need titration of diuretics in the post-operative period requiring them to be in the hospital for more than 1 night.
  3. COPD. There are several reasons why patients with chronic obstructive pulmonary disease may need to spend more than 1 night in the hospital after surgery: they may require additional bronchodilators due to post-operative bronchospasm, they may require “pulmonary toilet” and incentive spirometry by a respiratory therapist, and they can develop potentially life-threatening carbon dioxide retention from opioid medications used to control post-operative pain.
  4. Diabetes. If a patient has difficult to control diabetes (for example, a pre-operative hemoglobin A1C of > 8.5) or requires insulin to control their diabetes, there can be wide swings in their blood sugar levels post-operatively due to going all day without eating on the day of surgery, having nausea/vomiting after surgery, or having their blood sugars fluctuate due to the physiologic stress of the surgery.
  5. Morbid obesity. These patients often have reduced mobility and may require additional physical therapy before they can be safely discharged home.
  6. Old age. Older patients are often more susceptible to medications and need lower doses and more careful dose titration after surgery. This can often require additional days in the hospital. There is not a fixed age before which the risk is low and above which the risk suddenly goes up but a 90-year old is at higher risk than an 80-year old who in turn is at higher risk than a 70-year old.
  7. Chronic kidney disease. These patients can require longer hospitalization because medication doses may need to be more carefully adjusted, they are more prone to fluid retention from the fluids given during surgery, and they are at higher risk of their kidney function worsening due to surgery or medications. This is especially true for patients on dialysis.
  8. Chronic liver disease. These patients are analogous to the patients with chronic kidney disease.
  9. Previous complications from anesthesia. If patients had post-operative complications from anesthesia in the past, they are at risk for having them in the future and this can result in longer hospital stays.
  10. Risks for excessive bleeding. This could be because of the requirement for long-term anticoagulation or because the patient has a disease that results in easy bleeding.
  11. Anemia. Even the best surgeon will have some blood loss during surgery and if a patient has baseline anemia, then they are at higher risk for requiring post-operative blood transfusion which can prolong the hospital stay. Anemia is an independent risk factor for re-admission to the hospital.
  12. Infection. If there is pre-existing infection (such as an infected joint), then the patient may require additional time in the hospital in order to receive antibiotics and to ensure that sepsis does not develop.
  13. Cognitive dysfunction. Patients with previous stroke, a history of “sundowning” when in the hospital, dementia, or other causes of impaired memory are more likely to have worsening of their memory problems after anesthesia and after medications used to control post-operative pain. Premature discharge to home can put the patient at risk of harm if their mental function is not given sufficient time to return to baseline.
  14. Fall risk. Patients with neuromuscular disease, vertigo, visual impairment, or significant arthritis in other joints often require additional physical therapy before they can be safely discharged home.
  15. Inadequate social support. Patients who live alone or in a residence where navigating stairs on a daily basis is necessary also often need additional physical therapy before they can be safely discharged home.

Before the hospital sends the final bill to Medicare for a surgery, such as a knee replacement, the hospital will want an additional level of assurance that the patient did, in fact, need to be an inpatient rather than an outpatient. This is especially true if the order for inpatient admission was made at the time of the surgery but the patient ended up only spending 1 night in the hospital post-operatively. These 1-night inpatient hospital stays are a red flag for Medicare auditors and they are at high risk of being subsequently denied by Medicare, resulting in a huge financial loss for the hospital. This is where the role of the “physician advisor” comes in. The physician advisor will typically review the chart either after the surgery but before the patient is discharged or (more commonly) after the patient is discharged. The physician advisor then becomes a (theoretically) impartial third party who can confirm that the patient did indeed need to be an inpatient. The physician advisor then reports back to the hospital billing department (and usually also to the surgeon) whether he/she agrees with the inpatient designation. In event of a Medicare audit, the documentation by the physician advisor can help the hospital defend the decision to make the patient an inpatient rather than being in outpatient or observation status. As a physician advisor myself, here are some of the things I look for:

  1. Were there pre-operative conditions that would require the surgeon to anticipate that the patient would likely need to be an inpatient? This equates to the anticipation that the patient would need to be in the hospital for at least 2 nights after surgery. The two places to most easily find this documentation is in the surgeon’s history and physical examination or in the pre-admission testing evaluation. Often the pre-admission testing evaluation will have additional details about the co-existent medical problems that can help to justify inpatient status for the surgical procedure.
  2. Were there complications at the time of surgery that would have required the patient to be an inpatient? This could take the form of intraoperative cardiac arrhythmia, witnessed sleep apnea that was previously not diagnosed, excessive bleeding, etc. The surgeon’s operative note and the anesthesiologist’s note often have this type of documentation.
  3. Did the patient recover more quickly than expected? In a presentation by our Medicare carrier’s Medical Director, the phrase that we, as physician advisors, were told to use in this situation is: “The patient had unexpectedly rapid recovery”. This is particularly relevant to those patients who had an inpatient order but only spent 1 night in the hospital after surgery. In the opinion documented by the physician advisor for the hospital’s billing office, this phrase is a key component.

Outpatient knee replacement surgery can create a lot of unhappiness. The patient is unhappy because he/she has to pay a lot more out of pocket. The hospital is unhappy because they won’t get paid as much. The patient may be unhappy because he/she is not able to go to a SNF for additional rehabilitation after hospitalization. And the surgeon is unhappy because his/her patient is unhappy.

The strategy to avoid all of this unhappiness is to appropriately designate those patients as being inpatient who justifiably should have their surgery performed as an inpatient. Although this adds additional layers of administrative cost and additional pre-operative consultation visits, it can be worth it to the patient, the surgeon, and the hospital.

June 8, 2018

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital