Utilization Review FAQ

FAQ 1.  I understand that many hospitals have concerns about short inpatient hospital stays (i.e., inpatient admission of a few days or less) and sometimes receive Medicare payment denials for them. What are the issues and concerns?

Medicare's inpatient prospective reimbursement system uses hospital submitted ICD-10 diagnosis codes to determine the Diagnosis Related Group (DRG), which ultimately determines payment for the inpatient admission. Each DRG has a known mean length of stay (LOS).   Of note, the mean length of stay is considered in the determination of the DRG's relative weight and thus payment. Medicare is concerned about overpayment and appropriateness of the admission. As a result, Medicare and a state's Quality Improvement Organization (QIO) monitor hospital discharge data and specifically target short hospital stays. Medicare’s Two Midnight Rule addresses admissions that do not extend past midnight of the second day after admission.  When the inpatient stay fails to meet the Two Midnight requirement, the admission is reclassified as an outpatient observation stay.   a hospital is found to have a high frequency of stays that do not meet the two midnight requirement,  Medicare will investigate.  If inappropriate admissions are found, the sanctions can be severe. As a result, hospital health information management (HIM) and utilization management (UM) staff closely monitor the medical necessity of inpatient hospital admissions and short inpatient hospital stays. Their efforts can put pressure on emergency department physicians to make sure that each inpatient admission from the ED is medically necessary and will pass fiscal intermediary or Medicare Area Contractor (MAC) scrutiny. (See the Two Midnight FAQ for additional detailed information.)

These decisions generally revolve around patients’ IS (Intensity of Service) and SI (Severity of Illness). These are listed in the various medical necessity screening tools.

In some cases the use of observation status might be an alternative to an immediate inpatient admission.

FAQ 2.  What are the methods used by hospitals to determine which patients meet criteria for Inpatient vs. Observation admission?   

There are several medical necessity screening tools that Medicare or its contractors may choose from to determine if a hospital admission is medically necessary. Different jurisdictions may use different tools.  A hospital's case managers or Utilization Management staff will review the patient's record, either prospectively in the ED or more commonly during the first 24 hours of admission, to determine if required admission criteria are met. The main criteria relate to intensity of service and severity of illness. From both the hospital's and payer's perspective, it is the admitting physician's decision whether or not to admit the patient.   Increasingly, the ED physician is being asked to be aware of these screening criteria and the potential for hospital short-stay denials.

The criteria for inpatient hospital admission vs. observation are not always clear and the decision tends to fall to physician judgment. Documentation by the treating physician becomes key in determining the intensity of service and the severity of illness. This includes the emergency department record.

If a patient does not meet inpatient criteria but it is uncertain if they can be safely discharged home, it is not automatically assumed that the patient should be placed in observation or treated as an outpatient. There are cases when inpatient criteria are not met but the patient clinically requires an inpatient admission. In these situations, physicians and case managers look at the complete picture of the clinical presentation to determine the need for hospitalization. In addition, there are cases when inpatient screening criteria are met and the payer denies payment because the documentation, in their view, did not support the necessity for inpatient care.  Hospital appeal of payment denials is always an option, but requires additional time and expense.   Today, admission decisions must take into account whether or not the patient will require a stay spanning at least two midnights.  Medicare continues to monitor for the accuracy of admission when this does not occur.  That is not to say that ALL stays that do not span Two Midnights are denied.  However, the medical necessity and patient risk must be clearly identified in the documentation provided by the admitting physician and, as applicable, the ED physician.

FAQ 3.  What are the software scoring programs and criteria used by payers, fiscal intermediaries, Medicare Administrative Contractors (MACS), or other auditors to determine which patients meet criteria for Inpatient payment vs. Observation payment?

National Government Services, the MAC for CT, IL, NY, and WI, recently posted their policies for making clinical and payment decisions regarding observation.  First, the treating practitioner should determine if the patient can be discharged from the ED to home.  Second, if it is determined discharge is not appropriate, the practitioner "understands the patient will need ongoing inpatient services with a high degree of certitude or assesses the likelihood that care may be safely rendered within a 48-hour timeframe."

When a reviewed record fails initial admit screening criteria most hospitals, payers and others apply a second tier review called medical review. In this process a nurse or physician reviews the record for clinical documentation to support the hospital admission and/or payment.  Good documentation can be helpful to substantiate medical necessity.

In all cases, inpatient stays that do not extend past the two-midnight requirement may be candidates for review by Medicare and/or Medicare Recovery Audit Contractors (RACs).  Thus, documentation must clearly indicate the details that led the physician’s decision to admit the patient

FAQ 4.  Can an inpatient admission be changed to Observation if, on review, inpatient medical necessity criteria are not met?

Inpatient status can be changed to observation by the hospital upon evaluation of the admission by the hospital UR Committee, but only if very strict criteria are met. For example, this may happen when a patient is admitted on Friday night and on Monday, upon review of the admission by UR, the admission is reclassified as Observation. Medicare expects this to occur infrequently and has established specific rules for making the status change when an inpatient does not meet the hospital's inpatient criteria. Importantly, the status change must be made prior to the patient's discharge.

Below are some additional requirements:

  • The hospital has not already submitted the inpatient claim to Medicare.
  • The Utilization Committee makes the decision and the physician concurs.
  • The physician's concurrence with the UR committee is documented in the patient's record.
  • The UB04 outpatient bill is submitted with condition code 44-"inpatient admission changed to outpatient" in one of the Form Locators 18-28.  The use of Condition Code 44 pertains to the entire patient encounter (from the beginning of the inpatient/outpatient encounter), the patient's status, and the hospital bill type submitted. Medicare does not recognize a separate patient status called "observation;" all hospital patients are either inpatients (if they are admitted as inpatients on the order of a physician) or outpatients (registered by the hospital as outpatients). When Condition Code 44 is appropriately used, the hospital reports on the outpatient bill the services that were ordered and provided to the patient for the entire patient encounter. Even in Condition Code 44 situations, the hospital cannot report hours of observation services using HCPCS code G0378 (Hospital observation service, per hour) for the time period during the hospital encounter prior to a physician's order for observation services. Medicare does not permit retroactive orders or the inference of physician orders. Like all hospital outpatient services, observation services must be ordered by a physician and the reporting requirements specific to observation services are discussed in detail in the Medicare Claims Processing Manual (Pub. 100-04), Chapter 4, Section 290.2.2. The clock time begins at the time that observation services are initiated in accordance with a physician's order. While hospitals may not report observation services under HCPCS code G0378 for the time period during the hospital encounter prior to a physician's order for observation services, in Condition Code 44 situations, as for all other hospital outpatient encounters, hospitals may include charges on the outpatient claim for the costs of all hospital resources utilized in the care of the patient during the entire encounter.

An observation status patient may be admitted to an inpatient status at any time for medically necessary continued care, but the patient can never be retroactively changed from observation to inpatient (replacing the observation as if it never occurred). If a patient is admitted to the hospital from observation, inpatient medical necessity screening criteria must be met at the time of the hospital inpatient admit (the criteria cannot be carried over from the time the patient was placed in observation).

FAQ 5.  What can I do to be a good partner with my hospital in these situations?

First and foremost, a physician's assessment of the admission decision must be based primarily upon the patient's medical condition. It is important that emergency physicians have an awareness of the hospital's concerns regarding short inpatient hospital stays, have information about the hospital's medical necessity criteria for inpatient admissions, and consistently use good documentation practices. While technically it is the admitting physician's responsibility to assure compliance in these circumstances, the emergency department documentation can go a long way towards providing supporting information for the urgent or emergent condition of the patient.

Some specific things the emergency physician can do:

  • Use observation stays appropriately. CMS identifies failure to do so as one of the major reasons why patients are admitted for medically unnecessary short stays.
  • Invite someone from utilization management to talk with the emergency group about medical necessity admission criteria. Have them explain what tools and criteria (with exceptions) the hospital uses to verify medical necessity for observation and inpatient admissions.
  • If there is a problem with admission denials from the ED, ask about the feasibility of basing a case manager in the ED to implement an admissions review process prior to patient admissions (this may be only a temporary need).
  • In collaboration with the hospital, consider making decision support software available to assist emergency physicians in determining if an observation or inpatient stay is most appropriate.
  • Document the full clinical picture of patients' severity of illness in the ED. This includes any social conditions, co-morbidities, debilities and risk factors that affect your decision to admit.
  • Document why the patient is being admitted to the hospital.  It is also helpful to document why it is not safe to discharge the patient home; identify the risks.
  • Physician orders to "admit to inpatient" or "place patient in outpatient observation" should be clearly written. Be aware that an order for "admit to observation" can be confused with an inpatient admit. Likewise, an order for "admit to short stay" may be interpreted as admit to observation by some individuals and admit to inpatient by others.
  • Ask for information and feedback on any ED admits that become problematic short inpatient stays.
  • Most hospitals have a Utilization Review Committee; it is wise to have an emergency physician on that committee.  The emergency physician can help the committee understand the day-to-day realities of an emergency department.  It can also be a good venue to advocate for case managers in the ED.

FAQ 6. How are inappropriate admissions monitored by Medicare?

Medicare utilizes the RAC’s to audit inappropriate, or less than Two Midnight, stays.  Hospitals are expected to initiate their own internal policies and procedures to assure that admissions are made and documented appropriately.  Medicare Administrative Contractors are now responsible for educating providers regarding improper Medicare payments, and the Comprehensive Error Rate Testing program reviews a sample of records each year to estimate the Medicare fee-for-service improper payment rate (http://cms.hhs.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/CERT/index.html?redirect=/cert).

FAQ 7. What is the Medicare comparative data report called PEPPER?

The PEPPER (Program for Evaluating Payment Patterns Electronic Report) is a report that summarizes Medicare claims data statistics for one provider, comparing the provider’s statistics with aggregate statistics for all providers in the nation, Medicare Administrative Contractor (MAC) jurisdiction and the nation.

The PEPPER produced, distributed and supported by TMF Health Quality Institute through a contract with the CMS Office of Financial Management. Providers can use this data to focus their monitoring and auditing efforts and track improvement over time and to compare their performance with other hospitals in their state, MAC jurisdiction and nationwide. PEPPER is available for short-term acute care hospitals, long-term acute care hospitals, critical access hospitals, inpatient rehabilitation facilities, inpatient psychiatric facilities, hospices, partial hospitalization programs and skilled nursing facilities. PEPPER will be available to home health agencies. For more information visit http://pepperresources.org/.



The American College of Emergency Physicians (ACEP) has developed the Reimbursement & Coding FAQs and Pearls for informational purposes only.   The FAQs and Pearls have been developed by sources knowledgeable in their fields, reviewed by a committee, and are intended to describe current coding practice. However, ACEP cannot guarantee that the information contained in the FAQs and Pearls is in every respect accurate, complete, or up to date. The FAQs and Pearls are provided “as is” without warranty of any kind, either express or implied, including but not limited to, the implied warranties of merchantability and fitness for a particular purpose. Payment policies can vary from payer to payer. ACEP, its committee members, authors or editors assume no responsibility for, and expressly disclaim liability for, damages of any kind arising out of or relating to any use, non-use, interpretation of, or reliance on information contained or not contained in the FAQs and Pearls. In no event shall ACEP be liable for direct, indirect, special, incidental, or consequential damages arising out of the use of such information or material. Specific coding or payment related issues should be directed to the payer. For information about this FAQ/ Pearl, or to provide feedback, please contact David A. McKenzie, CAE, Reimbursement Director, ACEP at (972) 550-0911, Ext. 3233 or dmckenzie@acep.org.


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