More Beneficiaries Loose Out on Medicare Coverage with Hospital “Observation Stays” on the Rise

An increasing number of Medicare beneficiaries receiving inpatient hospital care are being held in “observation status” versus being fully admitted as a hospital patient. At first glance, it may seem like no big deal, as beneficiaries receive the same care and services regardless of their official hospital status. Yet, the real and quite significant “big deal” lies in who covers the bill. Medicare only covers hospital care when a patient is officially admitted as an inpatient, not when held as an outpatient, or in observation status. Also, Medicare only covers critical after-care (including rehabilitation services) in skilled nursing facilities (SNFs) when it follows a 3-day inpatient hospital stay. This means that beneficiaires held in observations status face an overwhelming burden of huge medical bills that would otherwise be covered by Medicare.

Brown University recently released a report finding a 34% increase in the ratio of observation stays to inpatient hospitalization when looking at claims data from 2007 to 2009. Medicare policy guidelines state that observation stays ideally are concluded within 24 hours and should rarely go beyond 48 hours. But the number of observation stays of 3 or more days is growing. For example, in 2009, 44,843 Medicare patients were held for observation stays for 72 hours or longer, which is an 88% increase from 2007.

Originally, the designation of outpatient observation status was created so that hospitals could assess whether a patient should receive more treatment or be discharged. Hospitals use criteria like illness severity and the intensity of medical services to determine whether a patient qualifies for inpatient care or an observation stay. Yet because of the crack down on Medicare fraud and rise in audits on hospital billing practices (which includes looking for improper or fraudulent hospital admissions for short stays), hospitals have increasingly been keeping patients in observation status as a way to avoid some of this scrutiny.

While the goal of cracking down on hospital billing fraud makes sense, some of unintended consequences, namely beneficiaries being held in observation status at hospitals without knowing it and not being able to access their entitled Medicare coverage, are unacceptable.

The Center for Mediare Advocacy and the National Senior Citizens Law Center jointly filed a class action lawsuit, Bangall v. Sebelius last November against the federal government on behalf of 7 beneficiaries who represent numerous beneficiaries across the country being hurt by this practice. Among many things, the lawsuit also claims that patients aren’t given proper notice when they are on observation stays or when their status is changed from inpatient to outpatient. They point out that federal policy actually permits hospitals to change an inpatient designation to an outpatient observation status before the patient is released with no required beneficiary notification. The lawsuit also argues that patients don’t have a clear-cut right to appeal their observation status, leaving them with little access to refute their case and get their hospital and after-care bills paid.

Also, while federal legislation (H.R. 1543) that was introduced last year would treat observation status as an inpatient stay for the purpose of obtaining Medicare coverage in a skilled nursing facility after receiving care at a hospital, it has not yet passed and is currently being referred to the Subcommittee on Health for review.

Many Medicare advocates fear that hospital’s use of “observation status” will continue to rise as the Affordable Care Act, which penalizes hospitals with “execessive readmissions rations,” is fully implemented.

See the Center for Medicare Advocacy’s “Observation Status” section on their website for detailed information on the lawsuit and links to numerous articles on the topic.