Under observation? Some hospitals admit just 10% of patients

OIG report finds major variation in how hospitals classify patients

A new report from the HHS Office of Inspector General (OIG) found major variation in how Medicare patients were classified at different hospitals in 2012, with some facilities claiming more than 70% of patient stays as inpatient stays and other facilities claiming just 10% in the same category.

Background: Inpatient v. Observation?

Whether a patient is classified as "inpatient" or "under observation" has a big effect on what patients must pay out of pocket, Susan Jaffe writes for Kaiser Health News.

Beneficiaries who are under observation face higher out-of-pocket costs, including increased 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 classification also affects how hospitals get paid, because observation payment rates are significantly lower than inpatient rates. However, a Medicare policy denies payments to hospitals when auditors retroactively determine care could have been provided in an outpatient setting.

According to a lawsuit filed by the American Hospital Association, 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 some hospitals to classify services as outpatient services.

In April, Medicare officials proposed a new rule aimed at helping more Medicare beneficiaries become eligible for nursing home care after a hospital stay. Under the proposed rule, patients would have to be admitted if a physician expects the individual to be in the hospital for three or more days. In addition, a rule issued earlier this year directs Medicare judges to allow hospitals to claim Part B inpatient costs in situations where the setting of care was initially incorrect.

OIG investigation finds ongoing challenges for CMS, too

In addition to major variation in how hospitals classify patients, the OIG investigation found that six of the top 10 reasons for declaring a beneficiary as under observation care—chest pain, circulatory issues, digestive disorders, fainting, irregular heartbeat, and nutritional disorders—were also in the top 10 reasons for inpatient stays of one night or fewer.

The report also found that even CMS has difficulty with the distinction between observation and inpatient status. For example, the report found that Medicare in 2012 inappropriately reimbursed $255 million for nursing home services for beneficiaries who did not have inpatient stays of at least three consecutive days.

The report—which comes just as CMS is about to finalize its rule on the issue—urges the agency to count observation visits toward the three-day minimum. The report also recommends that Medicare put better controls in place to make sure it does not make payment errors (Jaffe, Kaiser Health News, 7/30).

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