Clement: What Medicare is doing to limit observation status

Expert Q&A

The Daily Briefing's Hanna Jaquith spoke with Brian Clement of the Physician Executive Council about what CMS is doing to curb hospitals' rising use of "observation status" to treat patients for days without admitting them.

Q: Hospitals' use of observation status has soared in recent years; according to one measure, the number of Medicare beneficiaries under observation increased by 69% between 2007 and 2011. What's driving that increase?

BC: A few years ago, CMS changed the rules to allow any [Medicare] patient to be classified as observation if doctors believed the patient's stay would be between 8 and 24 hours.

But officials may not have anticipated all of the consequences of that, especially because there haven't been hard and fast rules on the cutoff for observation status.

For example, Medicare has started withholding reimbursements for hospitals that have too many patient readmissions. However, the policy doesn't apply to patients under observation, [so] there's an incentive  to use observation status to [guard against]  readmissions penalties.

Another factor is the ramp-up in activity by recovery audit contractors (RACs). In 2011, RACs recouped $800 million in overpayments from hospitals, and about 20% of that was for inappropriate one-day stays. The fear of revenue takebacks justifiably drove a lot of hospitals to err on the side of observation.

Q. CMS recently proposed a time-based presumption of medical necessity, in which observation stays lasting less than two midnights are presumed to be appropriate and inpatient stays lasting longer than two midnights are presumed to be appropriate. What's the buzz on that plan?

BC: I think the proposed rule is an attempt to arrest the rise in the number of patients who are kept in observation longer than 48 hours. In 2011, 8% of observation patients stayed longer than 48 hours – up from 3% in 2006.

It will also help to rectify the confusion surrounding observation status. One of the biggest implications of the proposal is that it is expected to decrease the overall number of observation patients.

In fact, CMS estimates that if the policy was in place over the past two years, there would have been 40,000 fewer observation patients. Some of those patients would have been shifted from inpatient to observation, but the net impact would have been 40,000 fewer observation admissions and 40,000 more inpatients instead.

Q. How does the proposal affect hospitals?

BC: It makes the criteria for who belongs as inpatient and who belongs as observation much more transparent. Before, that choice was much more difficult for hospitals.

There also will be a lot less confusion for patients about observation status, which has been in the news quite a bit lately. Hospitals will be able to explain more clearly and succinctly the Medicare rules surrounding observation.

And the proposal helps mitigate the threat of RAC takebacks. That's in addition to a CMS rule that was passed a few months ago making it easier for hospitals to rebill Medicare when there is a billing error.

Q. Does the proposal go far enough?

BC: Here's one of the biggest issues that patients have: observation status still doesn't count as a three-day qualifying stay for skilled nursing facility coverage, which forces seniors to pay higher out-of-pocket costs. This proposal will do nothing to change that.

This article has been revised from an earlier version to clarify CMS's proposed time-based presumption of medical necessity and the current definition of observation status.

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