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Observation stays increase under Medicare rules [Infographic]


Medicare patients incur higher out-of-pocket costs when they are placed on observation status

The Centers for Medicare and Medicaid Services (CMS) has issued final regulations designed to reduce the use of observation status for Medicare patients. However, there is still plenty of discussion about the issue and whether the CMS guidelines provide enough clarity to help hospitals and physicians make the right call in these situations. 

Meanwhile, the U.S. Congress has introduced legislation that would count time spent as an observation- status patient toward the three-day inpatient hospital stay requirement necessary to be eligible for care in a skilled nursing facility under Medicare Part A.

The crux of the issue is that Medicare patients incur higher out-of-pocket costs when placed on observation status rather than being admitted to the hospital. In recent years, the use of observation status has increased significantly. 

A Brown University study of 29 million Medicare enrollees found that observation stays increased 25% from 2007 to 2009, and that these patients tended to have longer hospital stays. In 2009, the study found, the number of observation status patients who remained for at least 72 hours increased by 88%. 

For patients, long hospital stays on observation status means they will be responsible for 20% of the costs, because these stays are considered to be outpatient services under Medicare. 




Reform needed>>>


Reform needed

Hospitals often use observation status as a defense against clawbacks imposed when Medicare auditors determine that certain patients should not have been admitted. 

“There are opportunities to reform the observation status rules to preserve the benefits of observation stays while addressing some of the downsides,” says David E. Williams, president of the Health Business Group, a Boston-based healthcare strategy
consulting firm.

Williams suggests that, because patients have no control over their assigned status, the rules should allow patients to pay the same amount whether they are on observation status or admitted as an inpatient. 

“Time spent in the hospital on observation status should also count toward the three-night requirement for rehab coverage,” he says. “In addition, incentives for hospitals to place patients on observation status as a defensive measure should be removed. When auditors determine a patient should have been on observation status rather than admitted, payment should be adjusted so that the hospital is paid for observation status rather than paid little or nothing.”

Williams notes that introducing penalties for readmissions is another way regulations have pushed hospitals into potentially overusing observation status for patients. If there is no original admission, as would be the case with an observation stay, then there can be no readmission penalty if the patient returns within 30 days, he says.

Smoother transition>>>


Smoother transition

Healthcare providers have their own concerns. 

“We need clear guidelines on when it is appropriate to place a patient on observation status with scenarios that make sense to us,” says Manoj Mathew, MD, medical director for Torrance, Calif.-based HealthCare Partners. 

At the clinical level, providers are looking for help managing the transition from observation status to inpatient status. 

“If there was a smoother transition from observation status to inpatient without all of the questions about paperwork and billing dates, that would be a huge relief to clinicians as well as to hospitals,” says Mathew. “This is particularly true given the different requirements from one payer to another.

In theory, at least, it is possible to view the increase in observation status as a positive trend because inpatient hospitalization is costly and is often unnecessary, according to Williams. He says observation status enables doctors time to evaluate whether a patient really needs to be in the hospital.

With Medicare patients and their advocates concerned about the cost of continued use of observation status, the issue is not likely to go away anytime soon. With advocacy and senior groups pushing for changes, “I am optimistic something will happen,” says Mathew.


Read the Brown University study here

See a hospital-by-hospital list of readmission penalties here.

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