Of all the complex rules that plague fee-for-service Medicare, few are harder to understand and potentially more important for seniors than observation status. By now, many older adults have heard the phrase. But they are still not clear what it means.
A new study by AARP sheds some light on the consequences for seniors of hospital observation stays. But they turn out to be a muddle, in part because Medicare pays for hundreds of millions of dollars of skilled nursing facility care that probably should be billed to patients.
The AARP study, written by Keith Lind and Claire Noel-Miller of AARP’s Public Policy Institute and Lan Zhao and Claudia Schur of the consulting firm Social & Scientific Systems, finds the rules are a complex mess, and it is impossible for patients to predict whether an observation stay is financially more or less beneficial than an admission.
What is observation status? Imagine you feel tightness in your chest. You go to the emergency department. The ER doc finds you have not had a heart attack but wants to keep you in the hospital for a day or so to check you out. You are not being admitted but are staying to be observed. In technical Medicare-speak, you are an outpatient even though you are staying in a hospital room, eating its food, taking its meds, and being cared for by its staff.
While this distinction may not affect the quality of your care, it can make all the difference when it comes to Medicare payments. On average, Medicare spends about one-third less on observation than an equivalent admission—though how much less depends on why you are in the hospital.
There was no question that Medicare was overpaying for patients who did not need to be admitted. But in an attempt to fix the problem, it has gone way overboard.
While decisions on whether to admit a patient are made by doctors, not hospitals, facilities regularly caution docs to be very conservative. That’s because if Medicare contract auditors find that an admitted patient should have been kept under observation instead, the hospital must refund the entire payment to the government. (Full disclosure: I am an unpaid board member at a community hospital).
But observation does not just affect how Medicare pays hospitals. It also affects how much seniors must pay out-of-pocket for hospital services and post-acute care at a skilled nursing facility (SNF). And that’s where the story gets really complicated.
While advocacy groups have strongly objected to the rise of observation stays, the AARP study found that only about 10 percent of those patients spent more for hospital services than if they had been admitted. While observation patients are at risk for significantly more hospital costs, the AARP study found that few actually pay more.
Similarly, the financial risk for post-acute patients also is high. If you need follow-up care at a SNF, Medicare will usually pay. But only if that care follows a hospital admission of at least three days. And observation stays don’t count, even if you spend 72 hours in an observation bed.
So, in theory, a senior can be on the hook for tens of thousands of dollars in SNF care.
But only about 7 percent of observation patients are discharged to a SNF, according to a 2012 Brown University study. The AARP study found that about two-thirds were ineligible for Medicare coverage. And those patients whose SNF care was denied by Medicare spent an average of more than $12,000 out-of-pocket.
But remarkably, only about 3 percent of post-observation SNF patients ever paid out of pocket. Medicare paid more than 97 percent of their claims, even though by its own rules it should not have. The cost: About $270 million in 2009.
Still, the AARP study found that about one-third of observation patients who were referred to a SNF for follow-up care did not go. At least some may have avoided that care because they feared they’d have to pay out of pocket.
An important caveat: AARP was looking at the most recent available Medicare claims data, but it is from 2009. MedPAC, an independent board that advises Congress on Medicare issues, estimates that observation stays more than doubled between 2006 and 2012 and increased by about 15 percent from 2011 to 2012. It is possible that out-of-pocket costs, both in hospitals and SNFs, have changed. Medicare may also be less willing to reimburse SNFs for these patients.
The bottom line is the system is a mess. Hospitals, doctors, nursing facilities, and patients all hate it. Nobody understands it. And Medicare may not be saving nearly as much money as it hoped.
Once Medicare completely replaces its fee-for-service system with one that pays for high-quality outcomes, rules such as observation can be tossed in the regulatory rubbish. Until then, Medicare should drop the three-day rule and let docs order post-acute SNF care if they think it is appropriate, and if they can justify it.