CMS leaves hospital observation status policy unchanged

In September, I discussed the adverse consequences Medicare beneficiaries may face when admitted to the hospital under "observation status." Although Congress and the courts are in the process of tackling this issue, a recent ruling by the Centers for Medicare and Medicaid Services seems to suggest that it will be some time before we have any resolution.

Observation status usually means that the hospital is unable to determine what is wrong, or the patient does not necessarily need inpatient services. For example, a patient who goes to the emergency room with chest pains may be admitted to the hospital and receive diagnostic tests, medicines and so on. Although he is occupying a hospital bed and getting care indistinguishable from other patients, he may still be classified as  "observation status." 

The distinction between observation status and official hospital admission is not just a semantic one. When it is classified as observation, the patient's hospital stay is not covered by Medicare Part A. Instead, it is considered a Part B expense. That means the patient will have co-pays for every hospital service billed under Part B and will have to pay for any medications. Moreover, if skilled nursing care is required immediately following the hospitalization, the patient's hospital stay will not count toward the three-day hospitalization Medicare requires to pay for skilled care.

The number of observation stays is increasing. According to a recent study from Brown University published in Health Affairs, there has been a 25% increase in observation stays from 2007 to 2009. Certainly one reason for the increase is that hospitals must return their Medicare payments if Medicare auditors determine that an inpatient stay was not truly necessary. And although an observation stay is not supposed to last more than 48 hours, many do. The Centers for Medicare and Medicaid Services reports that the number of hospital patients in observation for longer than that increased from 3% of hospital claims in 2006, to 7.5% in 2010.

Despite having solicited public comment on this thorny issue, the Centers for Medicare and Medicaid Services has now decided to keep the status quo. The rules published on November 15 state that no changes are being made to observation policy, at least for now. They further state that CMS "will take all of the public comments that we received into consideration as we consider future actions that we could potentially undertake to provide more clarity and consensus regarding patient status for purposes of Medicare payment."

The Center for Medicare Advocacy has launched a class action lawsuit against the Department of Health and Human Services that seeks to change this policy. Concerned organizations are also hoping House Bill 1543 and Senate Bill 818, introduced in 2011, will be reintroduced to the Congress in its next session. The bills propose that all the days a Medicare beneficiary spends in the hospital, regardless of classification, count toward the three day qualifying stay for subsequent skilled nursing coverage by Medicare.

No easy answers here. My best advice is that if you are in the hospital, you find out how your stay is being classified. Many patients do not realize they have been on observation status until the bills come due.