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Making the Right Decision—Observation or Inpatient


There is a multitude of disparate and conflicting regulations that create dilemmas for your doctors and case managers in making the 'Admit' or 'Place in Observation' decision.


The implementation of ICD-10 and implementation of the “2 Midnight Rule” has hospitals anticipating skyrocketing denials, plus the fact that the RAC moratorium for audits on most one-day stays ended on March 31, 2014. The RACs are ready to target one-day stays. Getting patient status right is a financial imperative for both your financial wellbeing as well as the patient’s.


The current MAC “probe and educate” audits are neither robust enough nor timely enough to fully identify risks on your behalf. It is up to you to implement an effective observation model, including protocols with appropriate clinical documentation. Physician reluctance or confusion about utilizing observation status must be addressed now.


One costly consequence for Medicare patients may be not meeting the 3 day inpatient stay requirement for eligibility for admission to skilled nursing facilities. Beneficiaries’ copays are often significantly higher as an outpatient in observation than when admitted as an inpatient, as well.


So what can you do? First, assess your process and vulnerabilities. Second, make the process changes and take corrective action. Third, educate your physicians, clinical documentation specialists, case managers and coders. Fourth, audit the process and the results.


Helping You Get it Right


Use the questions below to evaluate your preparedness. Remember, KHC can provide the clinical, CDI, and revenue cycle experience to get you to a “yes” on all of them.

  • Are your patients paying too much because they are in Observation too long?
  • Are you auditing one day stays beyond the mandated MAC “probe and educate” samples?
  • Are your inpatient admission and Observation orders and other physician certification requirements entered timely?
  • Have you assessed your current process for assigning patient status?
  • Do your physicians generally follow your Observation protocols?
  • Do your protocols comply with the “2 Midnight Rule” and other regulations?
  • Is your clinical documentation specific, clear and compliant?
  • Are you aware of the alternative models for providing Observation care?
  • Is your case management staffing patterns aligned with operational needs?
  • Have you verified that Observation hours are being documented correctly and that the correct hours flow through appropriately for billing?
  • Do you utilize Condition Code 44 appropriately?
  • Have your updated your policies and procedures and educated your staff on the proper use of Occurrence Code 72 in accordance with the “2 Midnight Rule”?

KOHLER HealthCare Consulting, Inc. (KHC)

has been a leader in hospital operations, clinical support, regulations, and reimbursement for over 30 years.


Changing regulations, operational responses to escalating denials, and exploding numbers of quality measures have caused overlapping processes and often conflicting departmental/individual performance goals. Paradoxically, departmental silos seemed to have been exacerbated by tightened productivity measures, creating less interaction in reaching the same goals for improved and compliant outcomes. Creating and facilitating the interplay of professionals within the hospital helps get to the optimal answer.


Case Managers are experts in determining the appropriate status. Clinical Documentation Specialists help identify and clarify missing, conflicting, or unspecific physician documentation. Documentation directly impacts the case mix index and severity of illness. Improper admissions can drive down a hospital’s case mix index and, in turn, reimbursement. Implementing strong collaboration between the Case Management with the physicians and Clinical Documentation Departments will support goals of decreased denials, improved documentation, and improved the case mix index.


Goals are Customized, Targeted Outcomes May Include:

  • Reduced risk of denials
  • Minimized risk of increase in days of unbilled accounts receivable
  • Improved physician clinical documentation
  • Implementation of Observation protocols
  • Reduced risk of noncompliance with the “2 Midnight Rule” and other regulations


Contact us to help
put the pieces together
KHC Offices (410) 461 – 5116


Collaboration + Knowledge = Sustainable Results

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