Why Your Hospital Is Losing Money on Nursing Home Billing?

You discharge a patient to a nursing home. You think everything is fine. Then three months later, you get a denial. Or worse, you never get paid at all. This happens every day in hospitals across the country. And it’s costing you serious money.

Let’s talk about why this keeps happening. And what you can actually do about it.

The Basic Problem Behind Nursing Home Billing

Here’s the situation. Medicare pays for nursing home stays after a hospital stay. But only under specific conditions. The patient needs a three-day inpatient stay. Not observation. Not two days and 23 hours. Three full midnights as an admitted inpatient.

If you get this wrong, the nursing home doesn’t get paid. And then they come after you. 

But here’s the thing. You probably already know about the three-day rule. Yet money still slips through the cracks. Why?

Observation Status is the Hidden Cause of Billing Denials and Revenue Loss

Observation status is your biggest enemy here. Patients sit in observation for two or three days. Everyone thinks they’re admitted. The family thinks so. The patient thinks so. Even some of your own staff think so.

Then the patient goes to the nursing home. The nursing home bills Medicare. Medicare denies it. No three-day stay. Now what happens? The nursing home has already provided care. They want someone to pay. They look at your hospital.

Some nursing homes will bill the patient directly. The patient gets angry. They call your hospital. Now you have a patient satisfaction problem on top of everything else. Other nursing homes are more aggressive. They push the bill back to you. They say you should have told them about the observation status. They might have a point. You end up writing off the charges. Or you negotiate a settlement. Either way, you lose money.

The Importance of Accurate Documentation in Preventing Billing Issues

Let’s say you do have a three-day stay. Great. But did you document it correctly? Medicare needs proof. They want to see that admission order. They want the right dates and times. They want everything to match up.

Your documentation needs to show medical necessity. Why did this patient need inpatient care? Why couldn’t they go home? Why do they need a nursing home now? If your documentation is weak, denials happen. The nursing home gets denied. They turn around and point at your hospital.

Here’s what happens in the real world. The attending physician writes sparse notes. The discharge planner rushes through the paperwork. Nobody thinks about what Medicare will want to see six months later. By the time the denial comes, the patient is long gone. Good luck getting better documentation now.

How Small Mistakes Like Timing Errors in Billing Cost Your Hospital Big Money?

Timing matters more than you think. Let’s walk through it. Patient admits on Monday at 2 PM. They were discharged on Thursday at 10 AM. How many midnights is that?

Monday night. Tuesday night. Wednesday night. That’s three midnights. You’re good. But what if they admit on Monday at 11 PM? And discharge Thursday at 6 AM?

Still three midnights. But it feels different. And sometimes the billing staff makes mistakes in the count. Here’s another timing problem. The patient bounces back to your hospital. Now the nursing home stay gets interrupted. Does the three-day stay still count? It depends on timing and circumstances.

If the patient comes back within 30 days, different rules apply. If they get readmitted as inpatients versus observation, different rules apply. These timing nuances trip up even experienced billing staff. Each mistake costs money.

How Communication Breakdowns Between Hospitals and Nursing Homes Lead to Financial Loss?

Your discharge planner talks to the nursing home. They arrange the transfer. Everyone agrees on the plan. But did anyone tell the nursing home about the observation time? Did anyone confirm the three-day stay is solid? Did anyone send the right paperwork?

Usually, the answer is no. Or sometimes. Or maybe. The nursing home assumes everything is fine. They accept the patient. They start billing Medicare. Then boom. Denial.

Here’s what makes this worse. Different people at your hospital handle different pieces. Admissions does one part. Case management plays another part. Billing is another part. The attending physician does their part. Nobody owns the whole process. Information gets lost. Details fall through the gaps.

The nursing home doesn’t find out about problems until it’s too late. Then they want someone to pay for their loss. That someone might be you.

How is the Complexity of Medicare Advantage a Billing Challenge for Hospitals?

Traditional Medicare is complicated enough. Medicare Advantage plans make it worse. Each Medicare Advantage plan has different rules. Some don’t require a three-day stay. Some do, but define it differently. Some have their own authorization requirements. Your staff discharges a patient to a nursing home. They assume the Medicare rules apply. But the patient has Medicare Advantage. Different rules. Denial.

The nursing home expected payment based on traditional Medicare. They didn’t get it. Now you have a dispute. Some hospitals don’t track which patients have Medicare Advantage versus traditional Medicare. This is a huge problem. You can’t bill correctly if you don’t know the payer.

The Two-Midnight Rule: Avoiding Confusion and Billing Denials

Medicare has a two-midnight rule for inpatient admissions. If the doctor expects the patient to need two midnights of hospital care, they should be admitted as an inpatient. This sounds simple. It’s not.

Some physicians use this rule to justify admissions. Great. But then the patient only stays one midnight. Or they stay two midnights, but the documentation doesn’t support it. Medicare audits these cases. They might change the admission to observation retroactively. Now your three-day stay isn’t three days anymore.

The nursing home already got paid. Or maybe they didn’t. Either way, you have a mess. Medicare might take the money back from the nursing home. The nursing home wants to recoup its loss. They look at your hospital.

Your hospital has to defend the admission decision. You need the documentation. Do you have it? Is it good enough?

How Premature Discharge Planning Can Impact Nursing Home Billing and Costs?

Hospitals are under pressure to move patients quickly. Reduce length of stay. Open beds. Keep things flowing. So discharge planning starts early. Sometimes too early. The patient might still be in observation status. But the discharge planner is already talking to nursing homes.

The nursing home gets the impression that everything is set. They prepare for the patient. They reserve a bed. They arrange staffing. Then the patient doesn’t convert to an inpatient. Or they go home instead. Or the admission status changes. The nursing home loses money on the held bed.

Some nursing homes try to charge hospitals for these situations. Sometimes they succeed. Even when they don’t charge you directly, you damage the relationship. That nursing home might not take your patients in the future. Now you have limited placement options. Patients stay in your hospital longer. Your costs go up.

Lost Revenue: Missing Billing Opportunities in Nursing Home Transitions

Let’s flip this around. Sometimes you’re not billing for things you should bill for. The patient goes to a nursing home. They need supplies or services that aren’t covered by the nursing home per diem. Who pays for those? Often, your hospital should bill for supplies provided at discharge. Medications. Wound care supplies. Durable medical equipment.

But these charges get missed. The patient leaves. The supplies go with them. Nobody bills for them. Money lost. Or the patient needs something that requires prior authorization. Your hospital is in a better position to get that authorization than the nursing home. But you don’t do it. The service gets denied. Everyone loses.

What Hospitals Need to Know About Readmissions?

The patient goes to a nursing home. Three days later, they came back to your hospital. Now what? If they come back within a certain timeframe, Medicare might not pay the nursing home. The nursing home might try to bill the hospital instead.

Even if Medicare does pay, you might face readmission penalties. The original admission and the readmission get bundled together for quality measures. Your skilled nursing facility billing staff needs to track these cases carefully. You need to know when patients bounce back. You need to understand the financial implications. Many hospitals don’t have good systems for this. The emergency department admits the patient. Nobody connects it to the recent nursing home discharge. The financial impact gets missed.

How Nursing Home Billing Issues Create Ongoing Costs About The Denied Claim Cycle?

Here’s how the typical denial cycle works. The nursing home bills Medicare. Weeks or months pass. Medicare denies the claim. The nursing home appeals. More time passes. The appeal gets denied.

Now the nursing home contacts your hospital. They say you owe them money. Your billing staff investigates. This takes time and resources. Maybe you determine the nursing home is right. You negotiate a settlement. You pay something. Or maybe you determine the nursing home is wrong. You push back. They push harder. Now you need administration involved. Maybe legal.

Either way, you’ve spent staff time on this. Time is money. And you might end up paying something anyway just to resolve the issue. Meanwhile, more cases are piling up. This never ends.

How Much Is This Really Costing Your Hospital?

Let’s talk actual dollars. Say you discharge 50 patients per month to nursing homes. Just 50. Maybe five of those have observation status issues. The nursing home bills Medicare for each one. The average nursing home stay is 20 days. That’s about $6,000 per stay. Five patients times $6,000 equals $30,000 per month in potential disputes. That’s $360,000 per year.

And that’s just observation status issues. Add in documentation problems. Communication failures. Readmissions. Timing errors. You’re probably looking at seven figures in annual exposure. For a smaller hospital, this might be $500,000 to $1 million. For a larger system, it could be several million. Most hospitals don’t track this number. You probably don’t know your actual exposure. That’s part of the problem.

Why Hospitals Struggle with Nursing Home Billing?

You might wonder why this problem persists. If it’s so obvious, why don’t hospitals fix it? A few reasons.

• First, it’s complicated. Multiple departments are involved. Nobody owns the whole problem.
• Second, the consequences are delayed. The patient is discharged today. The problem surfaces three months from now. No immediate feedback loop.
• Third, most hospitals focus on getting paid for what they do. They don’t focus as much on avoiding payment disputes downstream.
• Fourth, nursing home billing isn’t typically part of billing staff training. People learn about hospital billing. They learn about physician billing. Nursing home interactions get less attention.
• Fifth, the rules keep changing. Medicare updates policies. Medicare Advantage plans change their requirements. By the time you figure out the current rules, they’ve changed.

What Your Hospital Can Do Today to Improve Nursing Home Billing?

Okay, enough problems. Let’s talk solutions. Follow these nursing home billing guidelines.

• Start with observation status. Every single time a patient goes to a nursing home, verify the admission status. Not sometimes. Every time.
• Create a checklist. Did this patient have three midnights as an inpatient? Yes or no. If no, stop. Do not pass go. Alert everyone involved.
• Talk to the nursing home before the transfer. Tell them about observation time. Let them decide if they still want to accept the patient. Document this conversation.
• If the nursing home accepts a patient without three days, get it in writing. Make sure they understand they might not get Medicare payment. This protects you later.
• Next, fix your documentation. The attending physician needs to document medical necessity clearly. Why inpatient? Why couldn’t the patient go home? Why do they need skilled nursing?
• Your clinical documentation specialists should review nursing home discharges. Not every case. But a sample. Look for weak documentation. Fix it while the patient is still in-house.
• Improve communication. Create a handoff process. When a patient goes to a nursing home, someone should verify that all key information was shared. Admission status. Medicare versus Medicare Advantage. Special needs. Everything.
• Use a standard form. Make sure the nursing home gets it. Make sure someone confirms they received it. Keep a copy.
• Track your Medicare Advantage patients. Flag them in your system. Make sure discharge planning knows who has Medicare Advantage. Different rules apply. Don’t treat them the same as traditional Medicare.
• Build relationships with nursing homes. Talk to their billing staff. Understand their pain points. When problems arise, work together to solve them.
• Set up a tracking system for nursing home disputes. Every time a nursing home claims you owe them money, log it. Track the reason. Track the outcome. Track the cost.
• Review these cases monthly. Look for patterns. If observation status keeps coming up, fix your observation status process. If one nursing home generates lots of disputes, figure out why.
• Train your staff. Make nursing home billing part of your regular training. Teach people the three-day rule. Teach them about observation status. Teach them about Medicare Advantage.
• Create simple job aids. One-page checklists. Quick reference guides. Put them where people can actually use them.
• Finally, measure your performance. How many patients go to nursing homes each month? How many have three-day stays? How many disputes arise? What does it cost?

You can’t fix what you don’t measure. Start measuring.

Conclusion

Your hospital is probably losing money on nursing home billing. Maybe a lot of money. The good part is that most of these losses are preventable. You just need better processes. Better communication. Better tracking.

Start small. Pick one thing from this article. Implement it. Measure the results. Then pick another thing. You won’t fix everything overnight. But you can stop the bleeding. And over time, you can turn this from a money loser into a well-managed process. Your billing staff works hard. Give them the tools and processes they need. They’ll do the rest. And your hospital will keep more of the money it earns.