Instead of admitting patients, hospitals are increasingly keeping them under “observation status.” This decision results in lower Medicare payments to the hospitals and more out-of- pocket costs for patients. But it also means that Medicare is no longer paying for some admissions to nursing homes, and is instead shifting those expenses to residents and their families. 

What’s going on? It is complicated. But here is the story: In the past, if a physician felt it was appropriate, a patient was admitted to a hospital for care. However, hospitals, which are under increasing pressure from Medicare to reduce costs, are becoming more cautious about formally admitting people who may not meet government criteria for in-patient care but are too sick to go home. 

These days, this decision is often not made by a doctor, but by a computer program called InterQual.Why InterQual? Because it is the software used by the Medicare inspectors, hospitals rely on it as well. Hospitals do this because if they do admit a patient and Medicare determines later that she should have been kept under observation, the hospital must return part of its Medicare payment to the government.  

The consequences of this situation reach far beyond hospitals, however. Medicare provides limited payments for nursing home care, and in fact is the biggest payer of post-hospitalization skilled nursing care. But it will pay only after a person has been in the hospital for at least three days. And time under observation does not count towards those three days. As a result, nursing homes are not being reimbursed by Medicare for these stays, and patients are being billed for their care, sometimes without advance notice.

A few weeks ago, Medicare held a meeting about all of this and got an earful–from hospitals, physicians, nursing homes, patients, and advocacy groups. Most agreed that time spent in a hospital under observation status should count against the three day rule.

This issue begs for clarification from Medicare. The agency needs to better explain the rules for admission and observation. It should rethink a system that relies on commerical software to make these determinations. And it should require nursing homes and hospitals to explain to patients in plain language who is paying for their stay, and why.