Inpatient Admission Fraud: When Revenue Decides Who Gets Admitted

Hospital admission fraud happens when a hospital knowingly bills for inpatient care that patients should have received as outpatient or observation care. Admission targets and physician bonuses can push that decision toward the higher bill. For the case manager who challenged an admission, or the physician whose admission rate became a management concern, the question is what happened between the patient’s chart and the claim.

This form of hospital billing fraud reaches beyond the billing department. The decision can start with management, pass through the admitting physician and utilization review, and reach Medicare as a claim for a more expensive stay. These hospital fraud cases follow a financial policy into a patient-care decision.

Inpatient and Observation Status Change What Medicare Pays

Observation is outpatient care while clinicians decide whether a patient needs inpatient admission or can be discharged. It can take place in an emergency department, an observation unit or even an inpatient unit. The bed’s location does not decide the patient’s billing status.

For most acute-care hospitals, Medicare’s inpatient payment system pays by the stay’s diagnosis group, with adjustments for factors such as severity. The outpatient payment system pays under a different set of service classifications. Observation sits on that outpatient side. An admission decision therefore changes the payment system before a coder decides how severe the inpatient stay should look.

The difference is concrete. In its December 2016 report on short hospital stays, the Department of Health and Human Services Office of Inspector General compared potentially inappropriate short inpatient stays with short outpatient stays in fiscal 2014. For digestive disorders, Medicare paid an average of $4,572 for inpatient stays against $789 for outpatient stays. Similar reasons for treatment, very different payments.

What Is the Medicare Two-Midnight Rule?

Medicare’s standard for a hospital admission is the two-midnight rule. Inpatient payment is generally appropriate when the admitting physician expects hospital care to cross two midnights and the medical record supports that expectation. The physician order must be in place at or before admission.

The Centers for Medicare & Medicaid Services introduced the two-midnight policy in fiscal 2014. Earlier guidance asked physicians to consider whether patients would need at least 24 hours of care.

Admission Pressure Can Travel Through a Staffing Contract

An admission incentive can reach the physician through the company staffing the emergency department. EmCare, which supplied emergency physicians to hospitals, agreed to pay $29.8 million in 2017 to resolve allegations involving admissions from 2008 to 2012 at Health Management Associates hospitals.

The government alleged that EmCare accepted payments to recommend inpatient admission for Medicare patients whose care belonged in outpatient or observation settings. HMA allegedly paid bonuses to EmCare emergency physicians and tied the staffing company’s existing and future contracts to increased admissions.

That arrangement put more than an individual bonus behind the admission decision. In the government’s account, the staffing company’s business depended on sending more patients upstairs. The hospital wanted admissions, and the company supplying the doctors had a financial reason to deliver them.

A Corporate Admission Policy Across Hospitals

Community Health Systems agreed to pay $89.15 million to resolve allegations of a corporate admission scheme at 119 hospitals from 2005 through 2010. That was the admission-policy portion of its 2014 settlement.

The Justice Department alleged that the scheme increased inpatient admissions of Medicare, Medicaid and TRICARE beneficiaries over 65 who arrived through emergency departments. The government said their care should have been provided in less costly outpatient or observation settings. The allegation reached the company’s policy across hospitals, well beyond any one admission order.

The whistleblowers included nurses, emergency and internal medicine physicians, an emergency medical services coordinator, a coder, a health-information director and a nurse supervising case management. Those health care jobs sit along the route from the patient’s arrival to the final classification. A case manager can know why someone objected to an admission. A health-information worker can see which status ultimately reached the record.

That is why different hospital jobs see different parts of the same practice. The clinician knows the care decision, utilization review sees the setting dispute, and coding and billing staff see how the record becomes a claim.

Admission Bonuses Put the Incentive in the Physician’s Paycheck

At Oroville Hospital, the alleged incentive went into the admitting physician’s own paycheck. The Justice Department’s December 2024 announcement describes bonuses based on how many patients physicians admitted. These were the physicians responsible for deciding whether a patient needed inpatient admission.

Oroville agreed to pay $10.25 million to resolve allegations that included those hospital kickbacks, medically unnecessary admissions and false diagnosis codes. The government alleged that the hospital knowingly admitted patients who did not need inpatient care and then billed Medicare and Medicaid for it.

The diagnosis allegation was a separate way to raise the bill: allegedly false systemic inflammatory response syndrome codes increased reimbursement. Admission status determines whether the stay belongs on the inpatient side. DRG upcoding raises the payment by making the inpatient case look more severe. Oroville’s settlement brought both decisions into the same case.

Scheduled Procedures and Missing Placements

The admission question reaches scheduled procedures as well as emergency arrivals. Dignity Health agreed to pay $37 million in 2014 over allegedly unnecessary inpatient billing at 13 hospitals. The allegations covered elective cardiovascular procedures, kyphoplasty and admissions for common diagnoses. The government said those patients should have received less costly outpatient or observation care.

Banner Health‘s 2018 settlement added another distinction. Alongside allegedly improper inpatient billing for short-stay procedures, the government alleged that Banner inflated the observation hours it reported to Medicare. The status and the reported hours were separate billing inputs.

A missing placement can drive the decision too. San Mateo County Medical Center‘s 2021 settlement concerned admissions allegedly made for social reasons and unavailable alternative placements rather than the patient’s medical status.

How Observation Status Changes What the Patient Pays

Observation status can lower a patient’s hospital bill while leaving them without Medicare coverage for skilled nursing care afterward. Inpatient billing can cost the patient more during the hospital stay. The status decision can change who pays at each stage of health care.

In the Inspector General’s fiscal 2014 digestive-disorder comparison, patients paid an average of $984 for the short inpatient stays against $231 for the short outpatient stays. The hospital collected more, and the patient owed more. Choosing the higher-paid status reached into the patient’s pocket as well as Medicare’s.

Yet a lower hospital bill could come with a coverage problem at the next stage of care. The Inspector General’s July 2013 study counted more than 600,000 hospital stays in 2012 that lasted at least three nights but did not qualify patients for skilled nursing coverage. The stays lacked the required inpatient nights, including stays that began as outpatient care before an admission. A patient could spend night after night in a hospital and still leave without the inpatient days needed for nursing-home coverage.

Short-Stay Reviews Left a Large Payment Gap

Medicare’s short-stay reviews denied only a small share of the improper payments the Centers for Medicare & Medicaid Services estimated. A June 2024 Inspector General audit examined safeguards for short inpatient stays from 2016 through 2020. The agency relied primarily on reviews after payment.

0.6 percent

of CMS’s estimated improper payments for short inpatient stays were denied through Quality Improvement Organization reviews during the audit period.

$49.2 million denied against $7.8 billion in estimated improper payments.

HHS Office of Inspector General, short inpatient stay safeguards audit, June 11, 2024

The audit measured payment safeguards. An insider can add the part those systems do not describe: who wanted the admission, what the care team said, and how the hospital responded.

From Admission Pressure to the Submitted Claim

Hospital admission fraud evidence connects the pressure to admit with the patient’s clinical record and the status ultimately billed. An admission-rate report shows what management measured. A bonus formula or staffing contract can explain why the number mattered. The admission order, medical record and utilization-review response show how that pressure met a particular patient’s needs. The final claim shows what the hospital asked the government to pay.

A broad healthcare billing pattern can leave individual claims unexplained. RAND’s 2024 review, Methodologies to Measure Upcoding in Provider Settings found that gap in studies of severity coding:

The employee who saw an objection reach management and then watched the same billing continue brings a different kind of information. That connection between the decision, what management knew and the claim is central to a hospital False Claims Act case. Our whistleblower experts work through those connections with you.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

The Decision Behind the Admission

If you saw a bonus, a contract or a revenue target decide who became an inpatient, speak with our whistleblower experts about those admissions. We build your strongest hospital whistleblower case from those decisions and claims, bringing in whistleblower lawyers who know admission-status and hospital billing cases. We stay beside you from that first account through the resolution of your case.