Medicare Regulations Made Clear

Practical tips for avoiding costly mistakes

Medicare regulations should not feel mysterious but because of their complexity they often do. The rules are detailed, the stakes are high and small workflow gaps between care management, utilization review (UR), clinical documentation integrity (CDI) and billing can turn into denials, delayed cash and compliance exposure.

In our work with healthcare providers, I encounter real-world scenarios repeatedly across hospitals that can adversely impact revenue and compliance. The following tips offer practical guidance for optimizing both by translating Medicare rules and policies into consistent clinical and administrative operations.

The two-midnight benchmark: What to do after two

One of the most common questions I receive goes like this: “A patient has already stayed two midnights in observation and is going home later today – should we write an inpatient order?”

For traditional Medicare, yes – the patient has met the two-midnight benchmark because they’ve been in the hospital spanning more than two midnights. The physician may write an inpatient order, and the patient can still be discharged later that same day. But here’s the nuance that matters for claims and audit defense:

• The patient is only considered an inpatient from the time the inpatient order is written until discharge.
• That may result in only one inpatient day on the claim, even though the patient spent two midnights in the hospital.

For Medicare Advantage, my guidance is blunt – be prepared to justify every stay and dicker over every claim. Many MA plans are likely to deny short stays even when you’ve met what conditions Medicare would consider appropriate. If you’re seeing denials tied to short stay policies, it’s time to ask yourself some pertinent questions:

• Did the plan count the first midnight if the patient spent it in the ED?
• Was your two-midnight expectation clinically supported, i.e. not driven by delays in care or convenience time?
• Does the documentation clearly describe why the patient needed hospital-level care?

If the criteria were applied improperly, notify the plan and appeal, but you must generally exhaust contracted appeal steps before escalating complaints.

Same-day readmissions: Combine the claim or use B4

Another high-risk area is same-day readmissions. Medicare’s direction is straightforward, but it’s often missed operationally.

When a patient is discharged/transferred from an acute care PPS hospital and is readmitted to the same acute care PPS hospital on the same day for symptoms related to (or for evaluation and management of) the prior stay’s condition, the hospital should adjust the original claim and combine both stays onto a single claim (Medicare Claims Processing Manual, Ch. 3, §40.2.5).

If the same-day readmission is unrelated, then you may bill separately, but you should place condition code B4 on the claim that has an admission date equal to the prior discharge date. My other operational tips are simple:

• Same day, same reason. Always combine and investigate what happened.
• Talk to the patient. Why are they back? Was it a hospital issue, physician issue, patient factor or external factor?
• Document thoroughly. You will need the medical record to explain why payment is appropriate.

One more nuance on readmissions to consider is quality improvement organizations (QIO) may review admissions occurring within 30 days, and their authority isn’t limited to 30 days. Two claims can still be paid unless one of the admissions is denied, but you should document as though someone will read both charts side-by-side.

Observation time carve-outs: Build a defensible policy

Observation remains one of the most misunderstood billing areas. Observation care is a well-defined set of specific, clinically appropriate services – ongoing short-term treatment, assessment and reassessment, plus physician oversight.

The problem is concurrent billing. You cannot bill “observation nursing oversight” at the same time you’re billing another diagnostic/therapeutic service where active monitoring is part of the procedure—examples include colonoscopy and chemotherapy. Other services frequently discussed in this context include blood transfusion, endoscopy, stress tests, and dialysis.

CMS doesn’t give you a neat list, so here is my most educated advice:

1. Create a monitored-procedure carve-out list for your organization.
2. Define what “monitored” means, for example clinical assessment/monitoring to assess effects of therapy – vitals, pulse oximetry, rhythm, skin color, etc.
3. Apply the list consistently and audit it regularly.

And just as important – do not assign carve-out work to case managers or UR teams because to put it quite plainly this is a billing function. Also remember that reported observation time should not include time after treatment is finished for reasons like waiting for a ride home.

Code 44 versus a clerical correction: Formal admission matters

Another scenario I run across often is when the Emergency Department enters an inpatient order, but one or two hours later the hospitalist orders observation. Is that Code 44 or an ED error?

Sometimes it’s simply a clerical error, for example, the physician says “admit to observation” and an RN accidentally enters an inpatient order. In that case, document what happened and correct the order with the appropriate timing. But if the patient is already formally admitted as an inpatient and UR later determines observation is appropriate, you’re in Code 44 territory.

What counts as “formal admission”? It’s case-by-case (involve compliance), but practical signals include:

• The patient received the IMM
• The patient is in a bed upstairs, settled in
• Significant time has passed since the order (I often cite 2–3 hours as a common marker)

If they are not formally admitted yet, cancel the inpatient order and obtain the appropriate observation order if indicated.

Self-denials and rebills are allowed, but are not a strategy

Since 2013, CMS has allowed hospitals to self-deny improper Part A inpatient admissions and rebill certain services to Part B. It’s useful. but it’s not “free money,” and it’s not a substitute for real-time utilization management. I emphasize two truths:

• It is always better to get it right up front because the payment difference can be significant.
• High volumes of self-denials demonstrate weak concurrent UR processes.

Self-denial must follow the UR process requirements, including timely notifications. And remember, self-denied admissions generally cannot be formally appealed by patients, though SNF access rules may still apply in certain circumstances.

Documentation is a revenue cycle and quality tool

I like to remind clinicians I work with that documentation is not just about capturing comorbidities and complications (CC), major comorbidities and complications and hierarchical condition categories (HCC). Every diagnosis can affect quality measures – mortality, readmissions, length of stay, SNF utilization and more. A sad truth of medicine is that very sick patients die despite the best efforts of clinicians. When they do, your medical record must prove how sick they were.

If there is one lesson I would leave with clinicians it would be this: Medicare compliance is operational. When orders, status decisions and documentation are handled consistently and aligned across clinical and revenue cycle teams, you reduce denials, protect reimbursement and strengthen audit defensibility.