Hospital observation status: an increasing concern

Created date

March 28th, 2014
doctor with iPad
doctor with iPad

You came into the emergency room last evening. Now it is 5 p.m. the following day and you’re in a hospital room occupying a hospital bed. You’ve seen doctors and nurses. You’ve had medicines and treatments. So you’re officially a hospital inpatient, right?

Not necessarily. You may be in fact considered an outpatient. “A hospital may classify an overnight hospital stay as ‘admission,’ which means inpatient, or ‘observation,’ which means outpatient,” says Matt Narrett, M.D., chief medical officer for Erickson Living. “Although you are receiving the same care, Medicare pays the provider differently depending on the classification.”

Observation status isn’t anything new. What is new, however, is that more and more patients seem to be “under observation” than ever before. Since 2006, so-called observation claims submitted to Medicare for payment have gone up by over 50%. Many of these have been for hospital stays over 48 hours.

What’s the difference?

“When used correctly, the observation status is intended to monitor someone’s status to determine whether or not they truly need to be admitted as an inpatient,” says Craig B. Garner, owner of the Garner Health Law Corporation in Santa Monica, Calif.

From a medical standpoint, being under observation means you are sick enough to require hospital care, but not sick enough to be fully admitted to the facility as an inpatient. Before making a decision, doctors have to take into consideration multiple factors such as your disease processes, age, and safety risks of being sent home.

Seems straightforward, but not necessarily. The Centers for Medicare and Medicaid Services has sought to clarify this situation by issuing a rule stating that if a doctor expects a patient’s hospital care to last more than two midnights, then that patient should be admitted as an inpatient. Otherwise, observation status applies and outpatient benefits apply. 

“It all started as a way to control health care costs,” Garner says. “Hospitals are audited for potential overpayments, and when an improper admission is found, the Medicare reimbursements related to that admission must be paid back.”

Interestingly, the only difference between two patients with regard to whether or not they are under observation may be a few minutes. Mr. Smith, complaining of severe dizziness, comes into the hospital at five minutes before midnight on Monday. Mr. Jones, with the same complaint, arrives at five minutes after midnight. Both men go to hospital rooms and receive the same diagnostic tests, medicines, and treatments. Both men are discharged on Wednesday morning. Mr. Smith, because he was there for two midnights, is an inpatient. Mr. Jones, on the other hand, may be considered an outpatient.

The clock starts ticking once you have arrived in a treatment area, such as the emergency room. “Time spent in a waiting room does not apply toward the midnight tally,” Garner says.

The almighty dollar

The difference between the two patients has nothing to do with the type or length of care, but rather with money. Hospitals get paid a lot more for inpatients than outpatients. But inappropriately admitting people for short stays to get higher reimbursement may mean audits, payment denials, or other penalties. So hospitals are increasingly erring on the side of caution.

Being an inpatient means your Medicare Part A benefits apply. Being under observation means Parts B and D apply. “Depending on what other kind of insurance you have, you might have more copays with an observation stay than an inpatient stay because tests, treatments, medicines, and so on are billed separately,” Narrett explains.

Your greatest financial liability might end up being your post-hospital care. If you would need a stay at a skilled nursing facility (SNF) for services such as physical therapy, wound care, or medication administration, none of that would be covered under Medicare unless you were in the hospital as an inpatient for a period of at least three midnights. Under the current policy, any observation time cannot be counted toward that three-midnight requirement. 

Historically, legislation to change any of these rules has gone nowhere. H.R. 1179, “Improving Access to Medicare Coverage Act of 2013,” is currently gathering cosponsors. This bill seeks to have observation time count toward Medicare’s three-day inpatient stay requirement for skilled nursing facility coverage. 

It can’t hurt to ask

In most instances, hospitals are not required to notify you if you are under observation. “It’s yet one more thing you have to think to ask about if you are hospitalized,” says Leslie Rigali, D.O., medical director at Brooksby, an Erickson Living community in Peabody, Mass. “Sometimes your primary doctor may not even know about it.”

A recent survey of doctors showed that over 75% are very concerned about their patients being placed on observation status, especially if they and their patients aren’t informed of it.

If you know you’re on observation status and might be facing a SNF stay, bring your regular doctor into the loop. He or she may have crucial information about your health that didn’t make it into the hospital record. You can also speak to case managers, patient advocates, or other hospital administrative staff. 

“Remember that any noncoverage decisions can be appealed,” Narrett says. “What seems like a lot of paperwork might eventually save you thousands of dollars.”