New law: Hospitals must notify Medicare patients of observation status. Here's what you need to know.

AHA, AAFP have praised the measure

President Obama last week signed a bill into law that will require hospitals to notify Medicare beneficiaries when they have been put under observation status, rather than being admitted to the hospital, Virgil Dickson reports for Modern Healthcare.

Background on observation status

Beneficiaries who are under observation—which is considered outpatient care—often face higher out-of-pocket costs, including higher copayments and charges for drugs that are not covered for outpatient stays.

The amount of time spent under outpatient observation also can affect whether a patient is eligible to receive Medicare coverage for post-acute care. To be eligible for Medicare's nursing home coverage, beneficiaries must spend three consecutive midnights admitted in a hospital, not counting observation days.

Are you using observation care status too often?

Several states already require observation care notices, including:

  • Connecticut;
  • Maryland;
  • New York;
  • Pennsylvania; and
  • Virginia.

CMS in a final rule for the fiscal year 2014 Inpatient Prospective Payment System instituted the "two-midnight" rule in an attempt to clarify when Medicare will reimburse at inpatient rates. Congress has repeatedly delayed full enforcement of the rule.

HOPPS proposal: What's next for the two-midnight rule?

Law details

Under the Notice of Observation Treatment and Implication for Care Eligibility Act, hospitals must provide written notification to Medicare beneficiaries within 24 hours after receiving observation care. The notification will detail the:

  • Denial of admission;
  • Potential financial implications; and
  • Reasons for denial of admission.

CMS will now begin the rule-making process to implement the law. However, the agency has not given a timetable for when it will release a rule, Virgil Dickson writes for Modern Healthcare.


Andrew Scholnick, a senior legislative representative at AARP, says that while the new law does "not address all the issues associated with observation care ... it helps educate consumers and protects individuals from surprise hospital bills."

Provider groups, including the American Hospital Association and the American Academy of Family Physicians (AAFP) have also praised the measure.

"This legislation will provide a much needed layer of transparency for many patients who find themselves under medical care within the walls of a hospital, but haven't officially been admitted," says AAFP President Robert Wergin (Dickson, Modern Healthcare, 8/7; Dickson, Modern Healthcare, 7/30).

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