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    Coding Q&A: Outpatient vs. Inpatient vs. Observation Status Under the Medicare Payment Systems

    July 01, 2011

    Key Points

    • Patients staying overnight in the hospital can be classified as "outpatient."
    • Medicare patients will typically experience higher co-payment rates for more complex procedures, such as coronary stent services, when these services are performed as outpatient versus when they are performed as inpatient.
    • The same service typically costs the Medicare system significantly more money when performed as "inpatient" than when it is performed as "outpatient" due to the substantial increase in facility costs for inpatient services.
    • Observation status cannot be determined retroactively. If it is not ordered initially and clearly documented in the patient medical record, then the facility and provider will not be able to bill for these services.


    Can an overnight stay at the hospital be considered "outpatient" under the Medicare system? What impact does status have on payment rates to the facility and to the physician, and how does status impact patient co-payment?


    The simple answer to your question is yes, a Medicare patient can remain overnight in the hospital and still be considered an "outpatient." The reason for this contradiction occurs because Medicare differentiates among three types of status:

    • Outpatient
    • Inpatient
    • Observation

    The status assigned to a patient does not impact Medicare's reimbursement to the physician, but it can have a significant impact on payment to the facility and on how much the patient is charged for copayment. Here are few guidelines that clarify status assignments:

    • Regardless of whether the patient stays overnight, those undergoing routine surgeries are commonly classified as outpatients.
    • Patients expected to be hospitalized for several days typically qualify for inpatient status.
    • Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge. An observation period can extend beyond 23 hours.

    How CMS Defines Status

    For a patient to qualify for inpatient status, the Centers for Medicare and Medicaid Services (CMS) instructs:

    "Review of the medical record must indicate that inpatient hospital care was medically necessary, reasonable, and appropriate for the diagnosis and condition of the beneficiary at any time during the stay. The beneficiary must demonstrate signs and/or symptoms severe enough to warrant the need for medical care and must receive services of such intensity that they can be furnished safely and effectively only on an inpatient basis." [Medicare Program Integrity Manual; Chapter 6.5.2].

    CMS defines observation status as follows:

    "Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital….the purpose of observation is to determine the need for further treatment or for inpatient admission. Thus, a patient receiving observation services may improve and be released or be admitted as an inpatient."

    Observation status cannot be determined retroactively. If it is not ordered initially and clearly documented in the patient medical record, then the facility and provider will not be able to bill for these services.

    Impact of Status on Payment

    Why does status impact payment to facilities but not to physicians? Because physician work is the same whether the patient is classified as outpatient or inpatient. In contrast, the resources used by the facility are significantly different for outpatient vs. inpatient. Physician services and facility outpatient services are paid under Medicare Part B, whereas facility inpatient services are paid under Medicare Part A. Facility observation services are also paid under Medicare Part B unless the patient subsequently qualifies for and is admitted as an inpatient.

    The difference in payment between the Medicare Part A Inpatient Prospective Payment System (IPPS) and the Part B Hospital Outpatient Prospective Payment System (HOPPS) can vary significantly. The IPPS pays the facility based on Medicare Severity Diagnosis Related Groups (MS-DRGs). The HOPPS pays the facility based on Ambulatory Procedure Classifications (APCs). As Tables 1 and 2 indicate, coronary stent placement services qualifying for inpatient status are reimbursed between $10,047 and $17,759, whereas these services are paid only $5656– $7279 when classified as outpatient.

    By focusing on the difference in facility costs for outpatient vs. inpatient status, it becomes clear that, when outpatient facility costs exceed $5,660, the patient typically pays more for outpatient services than he or she would for inpatient services.

    For More Information

    Medicare has crafted educational materials to assist providers and their facilities in determining the appropriate patient status. For guidance on hospital inpatient admission decisions, go to http://www.cms.gov/MLNMattersArticles/ Downloads/SE1037.pdf. For guidance on outpatient observation services, see section 20.6 at http://www.cms.gov/manuals/Downloads/bp102c06.pdf.



    Please note: SCAI is committed to making every reasonable effort to provide accurate information regarding the use of CPT®, and the rules and regulations set forth by CMS for the Medicare program. However, this information is subject to change by CMS and does not dictate coverage and reimbursement policy as determined by local Medicare contractors or any other payor. SCAI assumes no liability, legal, financial, or otherwise, for physicians or other entities who utilize this information in a manner inconsistent with the policies of any payors or Medicare carriers with which the physician or other entity has a contractual obligation. CPT codes and their descriptors are copyright 2010 by the American Medical Association.