Wednesday, September 4, 2013

Observation Status

This morning, I heard an interesting piece on Morning Edition on NPR about hospitals using "observation status" rather than admitting individuals as inpatients (the story can be found here:  I listened with interest and thought about unintended consequences--the heart of so much of the study of health economics.

The key message here is that the government (the Center for Medicare and Medicaid Services, abbreviated CMS) has a program in which it reviews old hospital admissions (up to three years back) and determines whether the patient should have been an inpatient or outpatient.  If the patient was admitted as an inpatient and should have been (based on the CMS standards) an outpatient, then the hospital will have to repay the reimbursement it received and will likely get nothing back (according to the story).

Holding a patient in observational status (which we would generally expect would be just for a day or less, perhaps two days) avoids the determination of whether the patient needs inpatient care.  Some patients have been held in observation for even longer.  If their care is essentially inpatient and they recover, they can then be sent someplace else.  So far, if they do not need the full inpatient care this would seem to be good for CMS, good for taxpayers, and good even for the patient to the degree that the patient has copayments for which she is responsible.

The hang up (and the unintended consequence is this).  Patients are only eligible for Medicare to pay for nursing home services if they are discharged from an inpatient setting.  So, now patients who still need fairly skilled care but who do not need hospital care are not eligible for having the nursing home care covered by Medicare.  Who pays?  The family in most cases.

So, the government implemented a policy to control costs.  This led to a rational response by hospitals to avoid losses.  This leads to a lack of ability to discharge to nursing homes and/or get high quality nursing home care as patients and their families cannot pay for it.  This was not part of the intended cost control but is part of the impact.

The solution--perhaps allow Medicare to cover any rehabilitation-related care regardless of prior location.  But what unintended consequences might this have?  I will leave readers to ponder. 


  1. It seems where CMS tried to contain one cost, other costs have entered the equation shifting higher costs to both CMS and Medicare beneficeries. Just two months ago on July 29th, The Department of Health and Human Resources, Office of the Inspector General sent a memorandum to Marilyn Tavenner, Centers for Medicare & Medicaid Services detailing how Short Inpatient days and Observation days increased Medicare costs during 2012.(Memorandum Report:Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, S.Wright.) The memo details how CMS and Medicare beneficiaries paid more for short inpatient stays versus observation stays but in some cases, depending on diagnosis, beneficiaries paid more during an observation stay than an inpatient. Two weeks ago the Boston Globe ran a story depicting several cases where beneficiaries were forced to pay hefty, and I mean hefty sums upwards of $40,000, because they were considered observation instead of inpatient. (Kowalczyk, L., Status of Medicare patients can result in huge bills, August 25, 2013.
    The HHS memo addresses that post-care benefits were compromised if the Medicare beneficiary did not have a three night inpatient stay. All in all, these unintended costs have shifted the equilibrium of health care delivery cost to undesirable consequences which now CMS and HHS are trying to regulate pushing the market back to a more stable time.
    One proposal, as the host of this blog suggests is the elimination of the three-night qualifying inpatient stay which would certainly help ensure beneficiaries could have access to post-care services such as skilled nursing stays or home health visits. As matter of fact, a bill written in 2011 addressed the three night rule and gained little traction in the Senate to pass. In my opinion, this approach opens a whole new can of worms. The issue is rooted in the mechanics of the hospital coding system and how hospitals are qualifying patients as observation, inpatient or outpatient. Coupled with CMS penalizing hospitals for patients returning within 30 days for further medical attention. I think we are witnessing health care regulations forcing costs reductions but unfortunately most people can't afford the consequences placed on them as the burden shifts from the hospital to the patient. I'm pretty sure there is no single answer here but we do need to protect the Medicare beneficiaries during the process. As much as I disagree with further regulating health care, CMS should define current regulations to prohibit the use of observation days and short inpatient days as a means to circumvent the cost reductions. It should be fairly black and white; the patient is either admitted or not and the decision is made in 24 hours. Seems easy enough.

  2. Nice post, i hope everyone will like your post..