Utilization Review FAQ

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 is concerned about overpayments and the appropriateness of inpatient admissions. As a result, Medicare and Quality Improvement Organizations (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 may be reclassified as an outpatient observation stay. If hospital has a high frequency of stays that do not meet the two midnight requirement, Medicare will investigate. If inappropriate admissions are found, Medicare may recoup money from providers. 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 reinforce the importance that each inpatient admission from the ED is medically necessary and will pass Medicare Administrative Contractor (MAC) scrutiny. (See the Two Midnight FAQ for additional detailed information.) In some cases, the use of observation status may be an alternative to an immediate inpatient admission.

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

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. 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, for Medicare, whether it was reasonable for the physician to expect the patient to stay at least two midnights. There are several medical necessity screening tools that Medicare or its contractors may choose from to determine if a hospital admission is medically necessary, and different jurisdictions may use different tools.

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—including the ED records—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 the payer’s view, did not support the necessity for inpatient care. Hospitals always have the option to appeal payment denials, but appeals require additional time and expense. Today, admission decisions must consider 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.

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?

When a reviewed record fails initial admit screening criteria, most hospitals, payers and others apply a second level 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 is crucial 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 to the physician’s decision to admit the patient. Currently, a number of RACs have "Observation Evaluation & Management (E&M) codes billed Same Day as Inpatient Admission" on their issue list for audits.

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 utilization review (UR) Committee, but only if strict criteria are met. For example, if a patient is admitted on Saturday night and UR reclassifies the admission as Observation when it reviews the admission on Monday. Medicare expects this to occur infrequently and has established specific rules for 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:

    1. The hospital has not already submitted the inpatient claim to Medicare.
    2. The UR Committee makes the decision and the physician concurs.
    3. The physician's concurrence with the UR Committee is documented in the patient's record.
    4. The UB-04 outpatient bill is submitted with condition code 44 – “inpatient admission changed to outpatient.” The use of condition code 44 applies 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 begins at the time observation services are initiated in accordance with a physician's order. While hospitals may not report observation services under HCPCS code G0378 for the period prior to a physician's order for observation services, in condition code 44 situations, as in 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). Observation time may include medically necessary services and follow-up care provided after the physician writes the discharge order but before the patient is discharged. However, reported observation time would not include the time patients remain in the hospital after treatment is finished for reasons such as waiting for transportation home.

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 ED 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:

    1. Use observation stays appropriately. CMS identifies failure to do so as one of the major reasons patients are admitted for medically unnecessary short stays.
    2. 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.
    3. 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).
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Ask for information and feedback on any ED admits that become problematic short inpatient stays.
    9. All 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 ED. It can also be a good venue to advocate for case managers in the ED.

How are inappropriate admissions monitored by Medicare?

Medicare utilizes the Quality Improvement Organizations (QIOs) 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 (MACs) are 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.

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 state, Medicare Administrative Contractor (MAC) jurisdiction and nation.

The PEPPER is produced, distributed and supported by the RELI Group 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, skilled nursing facilities, and home health agencies.

Additional reading:

  1. CERT: (
  2. Pepper Resources:
  3. Medicare Claims Processing Manual; Chapter 4 - Part B Hospital (Including Inpatient Hospital Part B and OPPS); (Rev. 10541, 12-31-20); Observation Section 290.1-290.6 (

Updated March 2021


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