Improving Healthcare Value: Medicare Reimbursement for Short Stay Inpatient vs. Outpatient Medical Hospitalizations

From the 2022 HVPA National Conference

Charles Locke MD (Johns Hopkins University School of Medicine), Edward Hu MD, Ronald Hirsch MD, Ann Sheehy MD, Andrew Hughes MD


When hospitalizing Fee-For Service (FFS) Medicare beneficiaries, physicians must follow Centers for Medicare & Medicaid Services (CMS) policies regarding whether to hospitalize inpatient or outpatient (observation) status. Current CMS policies are such that many short-stay hospitalizations with similar total hospital services can be classified as inpatient or outpatient. Hospitals and Medicare spend a significant amount of money on personnel and processes to ensure that patients placed in the correct admission status even though that status does not affect the medical care provided.


To investigate differences in hospital payments under the Diagnosis Related Group (DRG)/Ambulatory Payment Classification (APC) system when common short-stay non-surgical hospitalizations occur under outpatient rather than inpatient status. We then compared these differences under the DRG/APC model with differences in payments to Maryland hospitals, which are paid under the alternative Global Budget Revenue model.


We queried the Program for Evaluating Payment Patterns Electronic Report’s, “Short‐Term National Q4FY20 Report, Top 20 Medical DRGs for Same‐ and 1‐Day Stays.”1 We selected the seven MS‐DRGs with the highest percentages of same‐day and 1‐day stays. We used the CMS Inpatient Pricer2 and CMS Addendum B3 to retrieve the mean duration-of-stay data, estimated MS-DRG (inpatient) payment, and corresponding C-APC (outpatient) payment for these 7 MS-DRGs for four non-Maryland hospitals (2 urban academic hospitals and 2 neighboring community hospitals). We then retrieved Maryland’s Health Services Cost Review Commission hospital rates for hospital services typically associated with a short-stay hospitalization for both inpatient or outpatient status to estimate hospital charges for a Maryland urban academic hospital and a neighboring community hospital4.


Among the four non‐Maryland Hospitals, , the payment for an overnight inpatient stay exceeded the payment for an overnight outpatient stay by approximately $1,300 – $8,300. By comparison under the Maryland GBR, the payment for an overnight inpatient stay varied from only $468 more to $549 less than a corresponding outpatient stay with 24 h of observation at the two hospitals sampled. As a result, in Maryland short‐stay inpatient hospitalizations result in a hospital payment that is dependent less on visit status, and more on the hospital services provided and the hospital in which the services are provided.


Large differences between inpatient (MS‐DRG) versus outpatient (C‐APC) payment exists for certain non-surgical short stay hospitalizations where the actual hospital services provided are similar. No such difference was seen under the Maryland GBR.

The current CMS‐approved Maryland GBR payment model demonstrates the inpatient‐observation reimbursement cliff can successfully be eliminated, resulting in real savings on non-patient care related activities. We recommend that CMS consider reimbursing short‐stay hospitalizations based primarily on typical resource use rather than visit status for some MS-DRGs. Modifying the DRG/APC hospital payment model toward the Maryland GBR model would result in a fairer hospital payment that focused more on the care Medicare beneficiaries actually received and less on visit status. The Maryland GBR effectively eliminates the effect of hospitalization status on hospital payment for short-stay hospitalizations and may serve as a guide toward DRG/APC payment reassessment.

National‐level Data Reports. PEPPER. https:// Web Pricer. Addendum A and Addendum B Updates. https://www.cms. gov/Medicare/Medicare-Fee-for-Service-Payment/ HospitalOutpatientPPS/Addendum-A-and-Addendum-B-Updates.Maryland HSCRC, Hospital Rate Orders, presented are from the manuscript: Improving Healthcare Value: Medicare Reimbursement for Short Stay Inpatient vs. Outpatient Medical Hospitalizations, Journal of Hospital Medicine, DOI: 10.1002/jhm.12823. In press.

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