Code 44 Medicare Inpatient vs Observation Rules Clearly Explained

What is the Medicare code 44 and why is it so important?  Read on for detailed explanations on how to define inpatient vs observation hospitalization across a variety of situations.  With the Medicare  recovery audit contractors moving full speed ahead, they will be searching to recovery billions of dollars of inappropriately paid claims with an emphasis on hospital billing practices. One issue  they will be looking carefully at is whether the inpatient status or observation status was paid appropriately and  that's where code 44 becomes applicable.

I present to you several scenarios and what happens behind the scenes for your hospital to get paid by the Medicare National Bank.  When you get admitted to a hospital, your physician has a choice to either admit you as an inpatient or bring you in as an observation stay. The implications for you as a patient is mostly in how much your deductibles will be, whether you will have to pay for your own medications while in the hospital (you do as observation status) and whether you need three midnights in the hospital to qualify for your skilled nursing benefits.

Medicare has a giant book of criteria that must be met for you to qualify for inpatient stay. Did you know ordering fluids at 100 cc/hour would help qualify you for inpatient under the "intensity of hospital services" component, but ordering fluids at 75 cc/hour would not? I learned that a few weeks ago. How am I ever supposed to know that? And why is it up to a physician to decide whether you are inpatient or observation. These are Medicare rules. It should not matter what I write. If the patient qualifies for inpatient, they should be inpatient.   If they don't qualify, they should be observation status.

However, under the current rules, I the physician get to write what status I want my patient. So what happens if I get it wrong? Read through these scenarios to see what goes on behind the scenes in order for your hospital to get paid.

Scenario 1: Admit observation and patient qualifies for inpatient the next day

The doctor writes the order to admit observation status on Sunday. The observation status is correct on Sunday. On Monday, the care management team identifies that inpatient criteria are now met on Monday. What needs to happen?
  • Care management obtains an inpatient order from the physician on Monday
  • The patients status is changed on Monday to inpatient
  • The observation day on Sunday will be rolled into the hospital admission for DRG payment purposes
  • The counting of inpatient midnights begins Monday night
  • Patient will not be charged for their outpatient medications on Sunday
For physicians, they bill their observation admission codes (99218-99220) on Sunday. On Monday, the doctor could bill a full history and physical examination (99221-99223) if they did the work to support it. I usually just bill an inpatient follow up code (99231-99233).

Scenario 2: Admit observation but meets inpatient criteria

The doctor writes an order to admit observation status on Sunday. On Monday, care management realizes that inpatient criteria was met on Sunday. What needs to happen?
  • The physician needs to write an order to change to inpatient status on Monday. The physician cannot back date the order to Sunday even though  the criteria was met.
  • Change the status to inpatient effective on Monday.
  • The observation charges for Sunday will be rolled into the inpatient DRG, so no money is really lost by the hospital.
  • However, counting of inpatient midnights won't begin until Monday even though the criteria was met on Sunday. This could impact the three midnight requirement for skilled nursing benefits.
  • The patient will not be charged for their medications during their observation stay on Sunday
In this situation the physician bills their observation admission stay on Sunday (99218-99220). They could bill another full inpatient H&P on Monday (99221-99223)  if they did the work to support it. Otherwise they should bill hospital followup codes on Monday (99231-99233). 

The problem I see with this scenario is that Medicare, is reneging on their stated obligations. If the patient meets criteria for inpatient on Sunday by their rules, they should start paying for inpatient on Sunday. They should start counting midnights on Sunday night. And the physician should be allowed to change their billing to an inpatient admission H&P on Sunday. Whether a patient is observation or admission should have nothing to do with a physician order and everything to do with whether the criteria for inpatient are met. Whether a patient meets inpatient criteria or not depends on a giant book, hundreds of pages, that no physician could possibly know the answers to.

Did you know if a patient came into the hospital with a diagnosis of acute renal failure with a creatinine of 6 and was placed on IV fluids at 75cc/hour, they would not qualify for inpatient? As I stated above, the fluids must run at 100cc/hour or greater to qualify for inpatient status. I have discussed inpatient vs observation many times with my care management folks. That's what they do for a living. We can't possibly expect physicians to know the correct status on admission every time. 

One solution is to make every patient inpatient from admission and let the care managers sort it out. The real loser here is the patient who increases their risk of hospital acquired complications and the hospital which spends valuable hospital resources so the patient can get their necessary unnecessary third midnight to qualify for a skilled nursing bed at the local nursing home. That Medicare would allow the rules under this scenarios to exist is misunderstanding of who clincal care is actually carried out.

Scenario 3: Admit inpatient but only meets observation

The doctor writes an order for inpatient on Sunday. On Monday care management realizes that inpatient criteria was not met on Sunday. What needs to happen?
  • The physician needs to write an order to change to observation status on Monday.
  • The observation order cannot be back dated to Sunday even though  they only met observation criteria on Sunday
  • Submit a Medicare Code 44 status.  Here is a link to the original CMS code 44 description from April 2004 and a CMS update from October 2012.  
  • The claim will be rolled together and inpatient rates will not be paid on Sunday
Per CMS policy (linked right above):
1. In cases where a hospital utilization review committee determines that an inpatient admission does not meet the hospital’s inpatient criteria, the hospital may change the beneficiary’s status from inpatient to outpatient and submit an outpatient claim (TOBs 13x, 85x) for medically necessary Medicare Part B services that were furnished to the beneficiary, provided all of the following 
conditions are met: 
     a. The change in patient status from inpatient to outpatient is made prior to discharge or 
         release, while the beneficiary is still a patient of the hospital; 
     b. The hospital has not submitted a claim to Medicare for the inpatient admission; 
     c. A physician concurs with the utilization review committee’s decision; and 
     d. The physician’s concurrence with the utilization review committee’s decision is 
         documented in the patient’s medical record.   
2. When the hospital has determined that it may submit an outpatient claim according to the 
     conditions described above, the entire episode of care should be treated as though the 
     inpatient admission never occurred and should be billed as an outpatient episode of care
What should physician do in these situations where they wrote an inpatient order but the hospital plans to retroactively submit a code 44 to change that inpatient stay to an observation stay?  If I am billing inpatient codes and the hospital submits payment for observation, my CPT® codes will be denied payment.  For physicians, I have verified I should change my initial inpatient admission code and any inpatient follow up codes I may have billed to the equivalent observation CPT® code so my billing matches the hospital's billing in these code 44 situations.

One of Medicare's benefits involves hundred days a calendar year of skilled nursing benefits at a nursing home. But for Medicare to pay for it, the patient must have been hospitalized for three midnights within the last 30 days. In the above situations, if a patient is admitted observation status but qualified for inpatient, Medicare is saying they will not recognize the midnights where the patient was listed as observation, even though a retrospective analysis indicates the patient qualified for inpatient.

Why Medicare is making it harder than it has to be is beyond me. If the patient meets inpatient criteria, they are in patient. If the patient doesn't, they don't. And it shouldn't matter what the physician orders. But since it does, you get more bureaucracy and layers of paper work that does nothing but add cost to the hospital's bottom line and raises all our premiums in one way or another.  I have a lot more content available on hospital based coding and other important links for hospitalists too.

UPDATE FROM CMS (CMS 1455-P):  Some changes have occurred in 2013 that may improve hospital collections for change of status situations.  As per proposed rules in the Federal Registrar dated March 13, 2013 (page 4/14):  Specifically, the Ruling provides that when a Part A claim for a hospital inpatient admission is denied by a Medicare review contractor because the inpatient admission was determined not reasonable and necessary, the hospital may submit a subsequent Part B inpatient claim for more services than just those listed in section 10, Chapter 6 of the MBPM, to the extent the services furnished were reasonable and necessary. The hospital may submit a Part B inpatient claim for payment for the Part B services that would have been payable to the hospital had the beneficiary originally been treated as an outpatient rather than admitted as an inpatient, except when those services specifically require an outpatient status. The Ruling only applies to denials of claims for inpatient admissions that were not reasonable and necessary; it does not apply to any other circumstances in which there is no payment under Part A, such as when a beneficiary exhausts Part A benefits for hospital services or is not entitled to Part A. Under the Ruling, Part B inpatient and Part B outpatient claims that are filed later than 1 calendar year after the date of service will not be rejected as untimely by Medicare’s claims processing system as long as the corresponding denied Part A inpatient claim was filed timely in accordance with 42 CFR 424.44, consistent with the directives of the Medicare Appeals Council and ALJ decisions to which we are acquiescing.

Here are some related resources for the above change:
  • 1455-NR
  • 1455-P  Medicare Program, Part B Inpatient Billing in Hospitals.  March 18th, 2013.
  • 1455-R  
  • MM8277Implementation of CMS Ruling 1455 - R (Medicare Program; Part B Billing in Hospitals)
  • MM 8185: CMS Administrator's Ruling: Part A to Part B Rebilling of Denied Hospital Inpatient Claims 
  • Change request CR8185:  CMS Administrator's Ruling: Part A to Part B Rebilling of Denied Hospital Inpatient Claims
  • Transmittal 1277 regarding change request 8277 dated June 10th, 2013.
  • CMS 1455-F Registrar pdf document.
  • Final document available August 19th, 2013.
  • MLN Matters SE1333:  October 23, 2013 - Temporary Instructions for Implementation of Final Rule 1599-F for Part A to Part B Billing of Denied Hospital Inpatient Claims
  • Occurrence Span Code 72; Identification of Outpatient Time Associated with an Inpatient Hospital Admission and Inpatient Claim for Payment
CMS 1599-F also finalizes the provision in a March 2013 proposed rule that set the time frame in which to bill Medicare Part B for hospital inpatient services inappropriately billed under Part A at one year from the date of service. This portion of the rule makes clear that its terms apply to admissions with dates of service on or after October 1, 2013.


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