This chapter discusses insurance as a central player in the purchasing of health goods and services. It points out the flaws and quirks in the insurance market that lead to an absence of perfect competition and the potential for skewed bargaining power between providers and insurers. Managed care is then outlined as an attempt by insurance companies to curtail health spending through utilization controls and narrow networks. Additional tools such as paying for wellness programs, bundling payments for episodes of care, and cost-effectiveness measures are also discussed as possibilities to improve the efficiency of payouts by insurers. The chapter concludes by reminding us that insurance companies make more money the less they pay out and that making it more difficult for beneficiaries to access care will allow them to accomplish that.

The factors to be considered when deciding whether to admit a patient according to the Medicare guidelines and the two-midnight rule are discussed. The role of the Quality Improvement Organizations (QIOs) is to review inpatient admissions and decide whether or not the admission was medically necessary. The role of a hospital’s utilization management (UM) processes is to assist physicians in determining inpatient admission or not. The Milliman Care Guidelines and Interqual are guidelines that can be used to help the physician to decide if a patient needs to be admitted, although use of these guidelines is not mandated by the Centers for Medicare and Medicaid (CMS). When hospital internal review determines that an admission does not meet inpatient criteria then code 44 may be used. The criteria to be met when using code 44 are outlined. Specific examples are used to illustrate these processes.

Efficient and effective utilization of an observation unit (OU) requires the medical director to actively monitor key metrics of OU performance. The medical director should have use of reports or dashboards that can indicate unit census, length of stay, and inpatient conversion percentage. OU patients/bed/day is a useful measure of occupancy. In addition, the medical director should have an idea of how many patients go to the OU as a percentage of emergency department census and total hospital observation cases. These data can be used by the Medical Director to make changes to optimize OU utilization and throughput.