Hospital Observation Days

ABSTRACT: Action needed to address increasing use of hospital observation days.

Introduction

Observation stays in hospitals are on the rise, raising concerns for Medicare beneficiaries and skilled nursing facility (SNF) providers. LeadingAge New York has been working on this issue with various stakeholders, and urges member organizations to contact Congress to co-sponsor proposed legislation that would address the issue.

Background

When it is not clear that an individual needs to be admitted as an inpatient in an acute care hospital, he or she may be placed “under observation” for evaluation and short-term treatment. This often occurs following an emergency room visit, although this is not always the case. Use of observation services is increasing and has become a controversial practice that has spurred litigation and efforts in Congress to change the law to address its consequences.

Under longstanding federal law and regulations, in order for a Medicare beneficiary to receive covered care in a SNF following a hospitalization, he or she must first be considered a hospital inpatient for at least three days. If the beneficiary is held under observation, any such observation days do not count towards a qualifying inpatient stay and may result in denial of post-acute SNF benefits.

Receiving observation services, rather than being admitted, can increase out-of-pocket costs for Medicare beneficiaries both in the hospital as well as in the post-acute setting. Beneficiaries that are held for observation are classified as hospital outpatients, and as such are not entitled to Medicare Part A coverage for the costs of their stay. In this circumstance, Medicare Part B covers the associated physician services and certain tests/procedures, leaving the patient liable for Part B cost-sharing and other costs of the observation stay that must be met with other insurance or out-of-pocket payments.

Furthermore, lacking the required minimum 3-day inpatient hospital stay, such beneficiaries will not be entitled to Medicare Part A SNF benefits and would be liable for the associated costs of their post-acute stay. Affected beneficiaries may not even know they will have to pay for their post-acute care until receiving a bill for thousands of dollars after care has been provided. This obviously affects the beneficiary, and can jeopardize payments for services to the SNF.  

Incidence and Underlying Causes

According to a recent analysis by Brown University, the ratio of Medicare patients who were held for observation rather than being admitted for an inpatient stay increased by 34 percent from 2007 to 2009. Observation stays grew an average of 7 percent and the number of patients held for longer than 72 hours (i.e., 3 days) in observation status nearly doubled during the study period. The results varied widely by state and hospital, with a relatively low ratio of 0.8 per 1,000 beneficiaries in New York in 2009 which seems to be on the rise.

In its efforts to contain Medicare costs by preventing unnecessary hospital admissions and readmissions, the government has revised its policies over the last decade. In 2006, federal officials signaled an increase in audits of inpatient admissions, two years after they began allowing hospitals to change a patient’s status retroactively from inpatient to outpatient with observation before discharge.

Inpatient hospital stays are reimbursed differently from observation stays by Medicare and, hospitals maintain, the federal government has not specified when it considers each type of stay to be appropriate. Recovery audit contractors have recently started denying large numbers of claims for short hospital inpatient stays, concluding after-the-fact that beneficiaries could have been placed in observation status and that inpatient admissions were medically unnecessary. As a consequence, hospitals and physicians have become more wary about admitting patients and more likely to order observation services when they are not ready to return home but are unlikely to require a lengthy hospital stay. 

The Affordable Care Act (ACA) includes a provision penalizing hospitals if they fail to reduce preventable readmissions. Beginning Oct. 1, 2012, over 2,000 U.S. hospitals will be subject to financial penalties of up to 1% of their base Medicare reimbursement. The maximum penalty jumps to 2% of base Medicare reimbursements in the following year, then 3% the next year. According to a recent Kaiser Health News analysis of government data, 166 hospitals in New York will be penalized an average of 0.51% in 2013, the second highest average penalty rate of any state in the country. Classifying patients as outpatients (i.e., in observation status), either on their first or second visit, could help hospitals avoid counting them as having been readmitted.

“The dual trends of increasing hospital observation services and declining inpatient admissions suggest that hospitals and physicians may be substituting observation services for inpatient admissions — perhaps to avoid unfavorable Medicare audits targeting hospital admissions,” Brown University investigators wrote. Anecdotally, shortages of hospital inpatient beds in certain areas may also be contributing to the issue.

Recent Developments

The Center for Medicare Advocacy and National Senior Citizens Law Center filed suit on November 3, 2011 on behalf of seven individual plaintiffs from Connecticut, Massachusetts, and Texas who represent a nationwide class of people harmed by the observation status policy and practice. Bagnall v. Sebelius argues that the use of observation status violates the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution. The lawsuit is still pending.

A DOH regulation adopted in Jan. 2012 requires hospitals to establish distinct observation units under the direction of the emergency department and to limit observation stays to 24 hours for Medicaid billing purposes. These standards are more restrictive than Medicare rules, which allow hospitals to provide observation services anywhere in the hospital, without any specific limit on the duration of observation status. DOH concluded that the Medicare rules result in lengthy periods of observation far in excess of 24 or even 48 hours, in denials of Medicare coverage of post-discharge care, and in unexpected out-of-pocket costs for Medicare beneficiaries.

The Centers for Medicare & Medicaid Services (CMS) has launched a pilot program, known as the Part A to Part B Rebilling Demonstration, which among other things is intended to address the observation status issue. Currently, when outpatient observation services are billed as inpatient services, the entire claim is denied in full. Under the pilot, up to 380 participating hospitals will be allowed to rebill for 90 percent of the Part B payment when a Medicare contractor denies a Part A inpatient short stay claim as not reasonable and necessary. Beneficiaries will be held harmless with respect to changes in hospital coinsurance liability. The demonstration began January 1, 2012, and will be conducted through December 31, 2014. 

In proposed rules on the hospital outpatient prospective payment system, CMS provides information on the Medicare Part A to Part B Rebilling Demonstration and solicits public comments on observation status. See the 7/30/12 Issue of the Federal Register, pp. 45155-45157.  Comments must be received by CMS no later than 5:00 p.m. EST on September 4, 2012.

Advocating for a Legislative Solution

Bi-partisan legislation has been introduced in Congress that would address the SNF coverage aspect of the observation days issue. Sen. John Kerry and Rep. Joe Courtney have introduced the Improving Access to Medicare Coverage Act, S. 818 in the U.S. Senate and H.R. 1543 in the U.S. House of Representatives.

The legislation would amend Title XVIII of the Social Security Act to deem an individual receiving outpatient observation services in a hospital to be an inpatient with respect to satisfying the three-day inpatient hospital requirement in order to entitle the individual to Medicare coverage of any post-hospital extended care services in a SNF.

As of the date of this memo, only three members of the NYS House delegation (Reps. Bishop, Hinchey and Tonko) have co-sponsored the bill and neither of New York’s Senators is a co-sponsor. According to LeadingAge, while Congress is unlikely to take up very many Medicare issues this year, this one is a possibility.

If this issue is important to your organization and the Medicare beneficiaries it serves, please contact your U.S. Representative and Senators Schumer and Gillibrand as soon as possible, and urge them to co-sponsor this important legislation. Please visit our advocacy page, which provides sample letters and other information to assist you. With members of Congress on recess, now is also a good time to contact your representative in his/her local district office. Also encourage affected Medicare beneficiaries and their families to contact their Congressional representatives on this issue as well.   

LeadingAge New York will continue to coordinate its efforts with other provider associations and consumer groups.

If you have questions on observation days, please contact Dan Heim at (518) 867-8383, ext. 128 or dheim@leadingageny.org. For any questions on advocacy, contact Ami Schnauber at ext. 121 or aschnauber@leadingageny.org. Thank you in advance for your assistance on this issue.