Is it the End for Observation Status?

Q. Late last year, you answered a question about a woman who spent a week in the hospital and was seen by doctors and nurses, given every kind of test imaginable, operated on, transferred to another room for recovery, and then to a nursing home for two weeks of rehabilitation.  Subsequently, she received a monstrous bill from the hospital and an even larger bill from the nursing home. Although Medicare covered the surgery and the one day in the hospital after that,  it did not cover the first week in the hospital and did not cover the time in the nursing facility for rehab. She was told that Medicare isn’t paying because the hospital had her in “observation status” rather than “inpatient status” during the week, and that Medicare doesn’t pay for “observation status” in the hospital. 

A. Observation status is a designation that was meant to be exactly what it sounds like: a short period during which the hospital observes you to assess whether you need to be checked in for longer-term inpatient care or whether you can be quickly treated as an outpatient and sent home. Under current rules, Medicare only will cover skilled nursing services after a beneficiary spends three days as a hospital inpatient, and time spent in observation is not counted toward this threshold. 

According to the Centers for Medicare and Medicaid Services (CMS), observation status is a “well-defined set of specific, clinically appropriate services” and in “the majority of cases” a patient is either admitted as an inpatient or discharged in less than 24 hours; “in only rare and exceptional cases” do they last more than 48 hours. Unfortunately in most instances, this definition isn’t accurate. In fact, thousands of people each year have similar situations to yours and Shirley‘s in our previous article. And, according to a 2013 report sent to the CMS by the Department of Health’s Office of Inspector General, on average beneficiaries are being held liable for SNF charges of more than $10,000.

Health Care Workers Are Not to Blame 

Most doctors and nurses believe that the observation status/two-night rule has a negative impact on patient care and trust. A recent poll given by the Society of Hospital Medicine (a membership organization for hospitalists) found that only 17.4% of respondents felt that the rule was an improvement; 47% said it has had a negative impact on patient care. According to one of the respondents: “I assume CMS has done a lot of homework to get a good fix, but what they ended up with nobody likes. The hospitals don’t like it, and providers are confused.” 

Observation Status Isn’t Working- What’s Being Done 

So as you can see, observation status as a way of classifying hospital patients is not working. Long-term care providers and senior advocates have protested the rise in observation stays, which can keep patients from qualifying for Medicare coverage of subsequent skilled nursing services. However, the issue has proven difficult to resolve. 

The Reason for the Observation Status Problem 

Rest assured that even if observation status is not eliminated altogether, there are other potential solutions on the table to make SNF care after hospitalization more accessible. One suggestion from the Medicare Payment Advisory Commission involves counting days in observation care toward the three-day threshold, where at least one of the days would have had to be spent as an inpatient to trigger SNF benefits. Political action committees and congressional advisors are continuing to debate Medicare’s hospital short-stay policies, and to lobby for change.

The NOTICE Act 

Although observation status is still intact at this time, at least patients will be more informed than in the past. The NOTICE Act became a law in August 2015, requiring hospitals across the nation to tell Medicare patients when they receive observation care, but have not been admitted to the hospital. The law requires hospitals to provide written notification to patients 24 hours after receiving observation care, explaining that they have not been admitted to the hospital, the reasons why, and the potential financial implications.