No issue generates more anger and confusion among Medicare recipients than observation status—that hospital stay that really isn’t a hospital stay. Over the holidays, I got an earful from three people who had been treated at a hospital by hospital staff yet not admitted to the hospital.
A typical case goes like this: A person comes to a hospital emergency department with chest pain. The ED docs determine she is not having a heart attack but want her to stay overnight to monitor her health.
But instead of admitting her as an inpatient, the hospital keeps her for a day or so as an outpatient, sometimes on a separate unit but sometimes—and more confusingly– in a regular room. This is different from a patient who stays in the emergency department, sometimes for many hours, while the hospital waits for an inpatient bed to open up. Unlike observation, which is an explicit choice, ED boarding is unplanned and forced by a temporary lack of beds.
Hospitals hate the rule
There has been an enormous growth in observation stays in recent years. Medicare spending for observation increased from $690 million in 2011 to $3.1 billion in 2016.
Despite what many patients think, hospitals hate the rule. While reimbursements differ depending on a patient’s condition, Medicare pays hospitals roughly one-third less for an observation stay than for an admission.
But hospitals feel that Medicare gives them little choice. The government sets strict guidelines for admissions. And it imposes tough penalties on facilities that Medicare auditors believe wrongly admitted patients. In those cases, the hospital must return to Medicare the entire payment for that admission, not just the difference between an observation payment and the admission. In 2016, the outside audits required hospitals to return more than $400 million to Medicare for improper Part A charges including observation.
Consequences for patients
Last year, Medicare made another rule change: It removed total knee replacements from its inpatient-only list, thus increasing pressure on hospitals to care for people who have had knee surgery as outpatients. Remember, the surgeries still are being done in hospitals and the post-operative care is essentially the same. But Medicare’s payment is lower.
Some hospital critics say there is a second, more self-serving, reason why hospitals treat patients in observation instead of admitting them: to avoid readmission penalties. In recent years, Medicare has been cutting payments to hospitals that readmit certain patients within 30 days. But if a patient is under observation, the penalties don’t apply.
The Medicare Payment Advisory Commission (MedPAC) which advises Congress on Medicare issues, says this is not an issue. That argument will continue.
But one thing is beyond dispute: Observation has major consequences for patients. It is not usually about the care they get—most research (though not all) suggests that treatment under observation is roughly as good as for an admitted patient. It is about their finances.
Skilled nursing care
Medicare pays for an admitted patient under Part A hospital insurance. But an observation patient is treated under Part B rules. Thus, an observation patient may have to pay as much as 20 percent of the costs of her stay (if she has it, Medicare Supplemental (Medigap) insurance may pick this up).
But the real time bomb goes off after discharge. If an observation patient needs skilled nursing facility (SNF) care, Medicare won’t pay.
The key is something called the three-day rule. If a Medicare recipient is admitted to a hospital for three days, Medicare will fully pay for post-discharge SNF care for up to 20 days, and partially pay for an additional 80 days.
But the key word here is “admitted.” Thus, even if an observation patient stays in a hospital for three days, Medicare will not pay for her skilled nursing care. Not a dime. Thus the patient must pay all her skilled nursing facility (SNF) costs.
Avoiding sticker shock
The result, as Medicare hoped, SNF stays have declined in recent years as observation has increased. The consulting firm Avalere Health calculates that SNF days per Medicare enrollee fell 15 percent from 2009 to 2016.
What can hospitals do about this sticker shock? To start, they need to do a better job explaining to patients and their families what observation means, both in the hospital and after discharge. Most observation patients get a Medicare form called a Medicare Outpatient Observation Notice (MOON). But that isn’t enough.
What can patients do? Demand a clear explanation, while they are in the hospital, of their status. If they feel they should be admitted, appeal. And plan for what to do if Medicare will not pay for skilled nursing facility care.
Full disclosure: Not only do I visit hospitals to learn how they care for older patients, I also serve on the boards of a community hospital and a health system. The views in this article are mine alone
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