To patients, observation status in a hospital can seem exactly like being an inpatient. Patients in observation status can be in the hospital several days just like fully admitted inpatients. They can be in a hospital bed, receiving pretty much the same kind of attention.
But the financial implications of outpatient status are worlds apart from being an inpatient for both patients — especially for those covered by Medicare—and for hospitals. For Medicare beneficiaries, outpatient status stays are billed under Part B, which means 20% cost sharing and out-of-pocket costs for medications not directly related to the primary diagnosis. Outpatient status may also expose people to nursing home bills once they leave the hospital that would have been covered by Medicare if they had been admitted as inpatients for at least three days. For hospitals, outpatient status means reimbursement at far less than if the patient had been admitted.
“Doctors get paid either way, but the hospitals get about half or even less for observation,” says Keith Lind, JD, MS, a senior policy adviser with AARP’s Public Policy Institute.
Outrage over the “surprise billing” aspects of observation status and the fact that many patients didn’t realize they were classified that way led to the Medicare Outpatient Observation Notice (MOON) rule, which requires hospitals to notify patients if they are in outpatient status. Still, some physician and patient advocacy groups remain critical of outpatient status. They see loopholes in the MOON rule and cases when patients are put in observation status when, medically, they needed inpatient care. Some groups have mounted legal challenges; in late March, a federal judge ruled that some patients in the observation status could bring an appeal to CMS challenging that status.
Not everyone is a critic, though. Christopher McCann, CEO of Current Health, a Boston company that provides patient monitoring and other services, notes healthcare systems are using the shift from inpatient to observation as a strategy in their value-based contracting agreements.
“Both private and public payers have been seeking to reduce the overall cost of healthcare delivery,” McCann says. “The hospital is the most expensive part of that delivery system, so one area of focus has been on reducing hospitalizations.” Because of the increasing reliability of remote monitoring and application of artificial intelligence, “we’ll see a reduction in both inpatient and observation stays,” he predicts, “and that observation status [care] will be delivered in the person’s own home.
Lindsey Osting, chief nursing officer and vice president of patient care at OhioHealth Doctors Hospital in Columbus, says hospitals have started to group observation patients together.
“From a nursing perspective, while they get the same quality care you would get from being considered inpatient, if we put them together on the unit, it’s easier to develop protocols and ways of doing things in a way that is best for the patient,” Osting says.
Numbers went up
The number of hospitals put into observation status started to increase significantly about 15 years ago. In some cases, hospitals were responding to Medicare auditors that challenged decisions to admit patients, especially for short periods. And there was some evidence that some fraction of inpatient admissions was at least questionable and perhaps motivated by a high reimbursement rate for inpatient care and the overall “heads in beds” incentives. In an effort to clarify when inpatient admissions were acceptable, CMS established the “2-midnight” rule in 2013. The rule states that if a doctor believes, with evidence to back it up, that a person needs to be hospitalized for a period that will span two midnights, then that person can be admitted as an inpatient. CMS adjusted the rule in 2016 to add back some physician judgment.