Q&A: Diagnosis for patient moved from observation to inpatient

Q: When you have a patient admitted for observation and then changed to inpatient, do you use the diagnosis that makes them meet inpatient criteria as your primary diagnosis or the observation diagnosis?

A: This is a great question and one that can be different depending on the scenario, so we will start at the beginning and work our way through this issue.

According to CMS, the determination of an inpatient or observation status for any given patient is specifically reserved to the admitting physician. The decision must be based on the physician's expectation of the care that the patient will require. The general rule is that the physician should order an inpatient admission for patients who are expected to need hospital care that extends through two midnights or longer.

CMS adopted the Two-Midnight rule for admissions beginning October 1, 2013. This rule established Medicare payment policy regarding the benchmark criteria to use when determining whether inpatient admission is reasonable and necessary for purposes of payment under Medicare Part A.

In general, the original Two-Midnight rule stated that:

• “Inpatient admissions would generally be payable under Part A if the admitting practitioner expected the patient to require a hospital stay that crossed two midnights and the medical record supported that reasonable expectation.
• Medicare Part A payment was generally not appropriate for hospital stays expected to last less than two midnights.”

Determining how to approach the principal diagnosis is outlined in the FY 2023 Official Coding Guidelines, page 106:

• If the reason for the inpatient admission is a complication, assign the complication as the principal diagnosis.
• If no complication or other condition is documented as the reason for the inpatient admission, assign the reason for the outpatient surgery as the principal diagnosis.

The first step in determining the principal diagnosis is distinguishing between medical observation, post-op observation, and an admission from an outpatient surgery. If the patient was admitted from medical observation, the principal diagnosis is the reason why the attending decided to admit the patient, NOT necessarily the reason for observation. That’s an important distinction to make in order to correctly apply the instructions within the Official Coding Guidelines.

And that was the easy part. The problem arises when the provider does not document the exact reason for the inpatient admission, which I’m suspecting is the reason for this question.

Because the inpatient admission reason can only be assigned by the admitting provider, a query is needed when documentation is unclear regarding the reason for admission when the admitting diagnosis for observation care is not for the same reason as admitting to inpatient care. In these cases, it is important to evaluate the documentation carefully.

The first thing that I look for in this situation are the signs and symptoms and any past medical history that the admitting provider may have felt warranted an inpatient admission. What treatment is being provided, if any? Also be sure to evaluate the medication administration record for any significant medications ordered and check to ensure if they were actually given, as that can impact provider decisions as well as a denial. What condition(s) is being monitored, if any? Were diagnostics employed? If so, were the results normal or abnormal (include all normal results if the test/lab is significant to the suspected reason for admission)? Does the patient have comorbidities which could be contributing to the decision to admit the patient? Where is the focus of care? These are the clinical indicators you want to include in the query. 

If a diagnosis is not clinically supporting an inpatient admission, the admission is at high risk for a medical necessity denial, as this is a highly audited area. Physician education is usually needed, as documentation can sometimes be so sparse that it is difficult to arrive at a principal diagnosis. Unfortunately, the only person who can state the reason for admission is the attending provider. If a provider doesn’t respond in a timely manner, this should be escalated up the chain of command for a quick resolution if the patient truly does not qualify for an inpatient admission.

Below is a statement from Novitas, which is a Medicare contractor, regarding factors that should be considered when a provider admits a patient (bold added for emphasis):

The decision to admit a patient is a complex medical judgment which can be made only after the physician has considered a number of factors, including the patient’s medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital’s by-laws and admissions policies, and the relative appropriateness of treatment in each setting. In general, the decision to admit a patient should be primarily based on the severity of illness and intensity of services rendered. Medical necessity at the time of admission to the hospital must be clearly documented in the medical record.

This website may be helpful to you as it also provides five different clinical scenarios for observation vs. inpatient admission.

Editor’s note: Dawn Valdez, RN, LNC, CCDS, CDIP, CDI education specialist at HCPro/ACDIS, which is based in Middleton, Massachusetts, answered this question. Contact her at dvaldez@acdis.org.