Medicare tries to limit the use of observation status

Proposed rule would limit the length of observation stays

CMS officials have proposed a new rule aimed at helping more Medicare beneficiaries become eligible for nursing home care after a hospital stay—but hospitals and patient advocates say the rule does not do enough to curb the use of "observation status."

Background: Observation v. inpatient?

In November 2012, the American Hospital Association (AHA) and four health systems filed a lawsuit against HHS over a policy that denies Medicare payments to hospitals when auditors retroactively determine care could have been provided in an outpatient setting.

According to the lawsuit, CMS refuses to provide any payments to hospitals in cases where auditors retroactively determine that an inpatient service should have been performed outside the hospital. This pushes hospitals to classify services as outpatient services.

Beneficiaries who are under observation face higher out-of-pocket costs, including higher copayments and charges for drugs that are not covered for outpatient stays. Moreover, Medicare reimburses nursing home care only if a beneficiary spends at least three consecutive inpatient days at a hospital. Beneficiaries who are placed under observation—which is considered outpatient care—cannot qualify for nursing home coverage, even if they are in the hospital for three days.

The number of beneficiaries under observation has increased by 69% in the past five years, reaching 1.6 million in 2011, according to the most recent federal statistics. In addition, the number of such visits that last more than 24 hours has doubled to more than 744,000.

In March, acting CMS Administrator Marilyn Tavenner released a new rule that directs Medicare judges to allow hospitals to claim Part B inpatient costs in situations where the setting of care was initially incorrect. However, experts say the rule makes it tougher for hospitals to receive payments for wrong-setting-of-care cases because it imposes a one-year time limit for Part B claims, even if a Medicare recovery audit contractor took more than a year to appeal the claim.

Proposed rule limits length of observation stays

According to the Washington Post/Kaiser Health News, the proposed rule would require that Medicare patients be admitted if a physician expects that he or she will be in the hospital for three or more days. However, a patient will be considered an outpatient under observation status if he or she is not expected to be in the hospital for more than two days.

Officials say the proposal—which was included in the proposed Inpatient Prospective Payment System (IPPS) for fiscal year 2014—will limit the growing length of observation visits.

However, patient advocates and health care providers criticized the proposal, according to the Post/KHN. Toby Edelman, senior policy lawyer with the Center for Medicare Advocacy (CMA), said, "I can't imagine anyone is going to like this proposed rule because it makes time the determining factor in whether the services are provided on an inpatient or observation basis" instead of "what the hospital is actually doing for you, what kinds of care you need."

Edelman also said the rule is inadequate because it does not:

  • Repeal or change the three-inpatient-days requirement for nursing home coverage;
  • Require hospitals to notify patients of their observation status; or
  • Give patients the right to appeal their observation status.

Patients continue to challenge observation rules

CMA is representing 14 Medicare beneficiaries in a lawsuit against CMS to remove the observation care designation. The first hearing on the lawsuit was last week.

In the event that the judge rules against CMA and the beneficiaries, the plaintiffs plan to ask that hospitals be required to notify patients when they are under observation and beneficiaries be given the opportunity to appeal the decision before leaving the facility (Jaffe, Post/KHN, 5/3; Jaffe, USA Today/KHN, 5/3).


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