Dos And Don’ts For Managing Inpatient-to-observation Status Downgrades


In the newest episode of the HealthLeaders Revenue Cycle Podcast, Charlie Brown, MBA, a former hospital executive and vice president of revenue cycle at a consulting firm, provides actionable steps for mitigating status downgrades and dealing with them effectively to ensure that organizations receive the full reimbursement for the services they provided.

In his more than 30 years of revenue cycle leadership at large, integrated systems, including University of Chicago Medicine, University of Washington, MultiCare Health System, and Tower Health, Charlie Brown, MBA, has seen his fair share of status downgrades, but never the opposite.

“We hear a lot of conversation about downgrades, but we never hear about an upgrade,” he laughs.

Status downgrades—which occur when a managed Medicare payer determines that a patient’s hospital visit doesn’t meet the medical necessity requirements for how it was billed—come in many forms, but there’s one kind that’s particularly troublesome for revenue cycles.

“I think that the most common and most impactful for hospital providers [are] status downgrades from inpatient status to observation status,” says Brown, vice president of revenue cycle consulting at Culbert Healthcare Solutions. “It’s a huge problem, it’s a huge challenge, [and it] takes a huge effort from a hospital provider to be reimbursed appropriately.”

The impacts of downgrades from inpatient to observation status can have far-reaching financial repercussions for healthcare providers, affecting reimbursement and revenue recognition.

“At an organization I was at, for example, our average reimbursement for an inpatient case was 80% higher than the observation case,” Brown says. “So, when those cases are downgraded, it’s a huge impact on the reimbursement.”

In the newest episode of the HealthLeaders Revenue Cycle Podcast, Brown provides actionable steps for mitigating status downgrades and dealing with them effectively when they occur to ensure that organizations receive the full reimbursement for the services they provided. Status downgrades were also a major topic of discussion at the Spring HealthLeaders Revenue Cycle Exchange in Naples, Florida.

“The criteria that managed Medicare payers establish are really challenging to follow and take a lot of cross-functional concerted effort,” he says.

Here are four dos and don’ts for revenue cycles to deal with status downgrades. To hear our full interview with Brown, listen to the HealthLeaders Revenue Cycle Podcast.


“You really need to get into the weeds, the details of what are the medical necessity requirements from your payers, and how those differ from payer to payer, and how those differ from the same payer for different payer types,” Brown says.

Once those details are clear, organizations should develop a cross-functional approach that pulls in clinicians, case managers, patient access, health information management (HIM), coding, and others to ensure appropriate documentation and that everyone is following payer protocols.

Otherwise, “you won’t have a leg to stand on when it comes to appealing that denial.”

“It’s not easy because every payer has their own, different requirements. But it’s really about making sure that you got the appropriate documentation for the services that you’re providing,” Brown says, along with ensuring peer-to-peer evaluations “at every step of the way.”


To achieve this, organizations “really need to leverage technology, people, and process,” Brown says.

For the technology aspect, organizations should ensure that their systems are configured to document appropriately within the medical records, using smart phrases; leverage physician advisors and hospitalists to learn from past denials or other challenging cases; make sure that tests are documented appropriately in the medical record; and finally, make sure that all that data is available when a payer comes in with their nurse auditors to review the case.

“The other technology piece that really needs to be in place is a way to track the process from start to finish, throughout the hospital’s teams—whether that’s billing indicators or [however] you want to define the term—to really make sure that the handoffs are happening appropriately and to know who has the baton step to step,” Brown says.

When it comes to people, organizations should have physician advisors available to do peer-to-peer evaluations; strong case management and denial management teams; and patient access, HIM, and coding teams that are well-educated and on board with the process.

Finally, the “process” step requires fully leveraged system configurations, comprehensive process maps, and people who are well-trained in following documented processes that start at a basic, high level and move through additional steps that consider different payers based on their requirements.

“It’s really helpful to ‘process map’ out the workflow and do swim lanes,” Brown says.


With payer processes and requirements that are challenging and convoluted, hospital providers often just give up, reasoning, “Oh well, we know we’re going to get denied on this; we’ll just bill it as observation to begin with,” Brown says.

“That’s probably the worst thing that you can do,” he says. “You really need to preserve your appeal rights by billing it as you feel appropriate for the services that were provided to that patient.”


Organizations must take a collaborative approach with their payers that includes regularly scheduled, monthly meetings to talk about specific cases and challenges, Brown says. It can also be helpful to develop and present them with a scorecard to let them know how they benchmark against other payers.

For instance, if one payer is downgrading 40% of the cases and another is downgrading only 10% of cases, that’s a discrepancy that the first payer should know about and answer for.

Brown also suggests building a denial baseline (perhaps by using an industry average) into the contract language.

“When this gets to [a certain] level, we all recognize it’s out of whack and we need to do something,” Brown says.

Contracts should also contain clearly defined criteria for how the payer is defining medical necessity; the ability to have a neutral, third-party review of disputed cases; a good dispute resolution process, such as arbitration; and clearly outlined next steps if arbitration doesn’t work. For instance, “are you prepared to litigate on these issues?” Brown asks.

“[Make] sure that you understand all those provisions in your contracts to build them in so that they’re very clear,” Brown says.

To hear our full interview with Charlie Brown, MBA, vice president of revenue cycle consulting at Culbert Healthcare Solutions, listen to the HealthLeaders Revenue Cycle Podcast.

For More Information: