Most people gazing at the outside of a hospital complex would reasonably assume that patients dwelling within are, in fact, inpatients. According to Medicare regulations, it’s not that simple. From a billing standpoint, hospitalized Medicare beneficiaries whose stay is classified as “observation” are outpatients – regardless of the patient’s location within the hospital or diagnosis.   

The “gray zone” of observation care is a topic that health care systems experts, policy analysts, and hospitalists have been watching closely. For several years, Ann Sheehy, MD, MS, associate professor and head, Hospital Medicine, has conducted research and advised policy-makers at the federal level about the implications of observation status policy changes for patients and health care systems. A white paper published in September, 2017 that was co-authored by Dr. Sheehy and other members of the Society of Hospital Medicine Public Policy Committee highlights problems and pitfalls of this policy in its current state, and suggests possible solutions. 

"Although measures aimed at simplifying the observation process have been implemented by the Centers for Medicare and Medicaid Services (CMS), observation continues to be a systemic problem. It is confusing and costly for providers, hospitals and patients," the authors wrote.

Classification of a hospital stay as observation care can have significant cost consequences for patients. Medicare patients hospitalized as inpatients are covered by Medicare Part A hospital insurance, and Medicare pays for post-discharge skilled nursing care. Medicare patients hospitalized under observation are covered by Part B (currently with a $1,316 deductible limit per service, not per benefit period), and receive no coverage benefit for discharge to a skilled nursing facility. They also do not receive coverage for any drugs that are self-administered, and hospitals caring for them during their observation stay are reimbursed at a lower rate. Because payments are made per service, Medicare and beneficiary payment amounts both increase as the number of services provided increases.

"This policy has been of keen interest to the field of hospital medicine, because hospitalists are on the front line, directly witnessing its impact. Hospitalists provide the majority – 59 percent – of observation care to Medicare beneficiaries," said Dr. Sheehy.

For hospitalists, familiarity with observation care regulations has not translated to fondness for the policy. A survey of Society of Hospital Medicine members conducted in 2017 found that 93 percent rated observation policy as a critical issue for them and their patients. 

Recent changes in the policy have occurred, but have not helped alleviate its burden.  A 2014 requirement mandates that hospital length of stay must include at least two consecutive midnights for inpatient admission; this has been shown to impact inpatient versus observation classification depending on the time of day a patient’s hospitalization initially begins. 

The 2015 NOTICE act — which requires hospitals to inform patients hospitalized under observation for 24 hours or more that they are under observation, and of the associated financial implications, using a standardized form called the MOON document — has raised patient awareness about their status. But, the Society of Hospital Medicine white paper notes, patient awareness cannot be equated with patient understanding or ability to act on the information provided. One hospitalist survey respondent stated, “NOTICE and MOON help the patient become informed about a bad policy/system.” 

Improving patient access to Medicare skilled nursing facility (SNF) coverage is a top priority position of the Society of Hospital Medicine. Toward that end, recently introduced legislation (“Improving Access to Medicare Coverage Act of 2017,” H.R. 1421 and S. 568) would eliminate the current three -day inpatient stay requirement for skilled nursing facility coverage. Other solutions suggested in the white paper included pilot programs to create a low-acuity Diagnosis Related Group (DRG) modifier to replace current observation stays, create an advanced Alternative Payment Model (APM) for observation that includes the post-acute period (i.e., skilled nursing facility care), and/or to create an inpatient payment method that blends inpatient and outpatient observation rates.

“Medicare is costly and audits are essential, but observation may not be the right answer for cost savings,” said Dr. Sheehy. “Comprehensive policy reform is needed.” 

Resources:

• Society of Hospital Medicine - white paper, "The Hospital Observation Care Problem"
• "Poor medicare patients may spend more on hospital stays," Department of Medicine, August 9, 2017
• "Counting midnights: Medicare and skilled nursing facility benefits," Department of Medicine, March 9, 2017
• "Dr. Ann Sheehy leads study finding that Medicare appeals backlog delays decisions by more than 4 years," Department of Medicine, July 11, 2017