FAQ: Hospital Observation Care Can Be Poorly Understood And Costly For Medicare Beneficiaries

Sep 04, 2013

Some seniors think Medicare made a mistake.  Others are just stunned when they find out that being in a hospital for days doesn't always mean they were actually admitted.

Instead, they received observation care, considered by Medicare to be an outpatient service. Yet, a recent government investigation found that observation patients often have the same health problems as those who are admitted.  But the observation designation means they can have higher out-of-pocket expenses and fewer Medicare benefits.

More Medicare beneficiaries are entering hospitals as observation patients every year. The number rose 69 percent in five years, to 1.6 million nationally in 2011, according to the most recent federal statistics.  At the same time, Medicare hospital admissions have declined slightly.

Here are some common questions and answers about observation care and the coverage gap that can result. (Seniors enrolled in Medicare Advantage should ask their plans about their observation care rules since they can vary.)

Q. What is observation care?

A. Hospitals provide observation care for patients who are not well enough to go home but not sick enough to be admitted.  This care requires a doctor's order and is considered an outpatient service, even though patients may stay as long as several days. The hospitalization can include short-term treatment and tests to help doctors decide whether the patient should be admitted. Medicare guidance recommends that this decision should be made within 24 to 48 hours, but observation visits exceeding 24 hours nearly doubled to 744,748 between 2006 and 2011, federal records show.    

Q. What effect does observation status have on patients' care and expenses?

A. Because observation care is provided on an outpatient basis, patients usually also have co-payments for doctors' fees and each hospital service, and they have to pay whatever the hospital charges for any routine drugs the hospital provides that they take at home for chronic conditions such as diabetes or high cholesterol.   

Observation patients cannot receive Medicare coverage for follow-up care in a nursing home, even though their doctors recommend it.  To be eligible for nursing home coverage, seniors must have first spent at least three consecutive days (or through three midnights) as an admitted patient, not counting the day of discharge. 

Q: Why are more Medicare patients receiving observation care instead of being admitted?

A. Medicare has strict criteria for hospital admissions and usually won't pay anything for admitted patients who should have been observation patients. In response to these rules, hospitals in recent years have increased their share of observation patients.  

But under recently revised Medicare rules, hospitals that were denied reimbursement because a patient should not have been admitted can now can resubmit a bill within one year to Medicare for a payment based on observation status. The American Hospital Association has said that is not enough time and is suing Medicare to end the policy. 

Hospitals have another incentive for keeping patients in observation status:  If patients return within 30 days, they don't count as readmissions since they were not admitted in the first place.  Medicare withholds a percentage of payment from hospitals with high readmission rates.

Q. Will the cost of my maintenance drugs be covered when I am in the hospital?

A. No, Medicare does not pay for these routine drugs for patients in the hospital in observation care. Some hospitals allow patients to bring these drugs from home.   Others do not, citing safety concerns. 

If you have a separate Medicare drug plan, the coverage decision will be up to the insurer.  If the plan covers your maintenance drugs at home and agrees to cover them in the hospital, it will only pay prices negotiated by the plan with drug companies and in-network pharmacies. Most hospital pharmacies are out-of-network. So even if your drug plan covers these drugs, you may be left paying most of the bill. 

Q: How do I know if I'm an observation patient and can I change my status?

A. The only way to know for sure is to ask.  Medicare does not require hospitals to tell patients that they are in observation status and that they  will be responsible for paying any non-covered Medicare services. "Unless people are in an observation unit, the difference between observation and inpatient care is basically indistinguishable," said Toby Edelman, a senior attorney at the Center for Medicare Advocacy.

Medicare does require hospitals to tell patients they have been downgraded from inpatient to observation.

If you believe you should be admitted, ask your doctor to change your status to inpatient. However, even if the doctor agrees, the hospital may be able to overrule that decision or Medicare can change it later when reviewing the claim. 

Q. What can I do if I'm about to be discharged or am already in a nursing home and I find out Medicare won’t cover my nursing home care?

A. If you can't persuade the hospital to change your status, Edelman advises patients to file two kinds of appeals.  When you receive your Medicare Summary Notice, follow the instructions to challenge the charges from the hospital listed under Part B of the notice if you believe those services should have been billed as inpatient services.  Also challenge any charges from the nursing home for outpatient services such as physical therapy. 

If you do enter the nursing home, you may be billed for the care.  Ask the nursing home to submit a "demand bill" to Medicare. When it is rejected, you can appeal.  The Center for Medicare Advocacy's online "self-help packet" offers more details about to how to challenge observation status.

Q. What is being done to fix the problem? 

A.Medicare's recent revisions in payment rules, are intended to ease the financial pressure on hospitals to put patients in observation care.

So far, Medicare has not made changes that would directly affect patients, for example, dropping the three inpatient day criteria for nursing home coverage, forcing hospitals to tell patients when they getting observation care or requiring hospitals to allow patients to bring drugs from home.

A group of 14 seniors has sued the government to eliminate observation status. Government lawyers argued in court filings that the case should be dismissed. 

Medicare officials declined to be interviewed for this article because of the pending litigation.

Legislation has been introduced in Congress that would count an observation visit as part of the three hospital days required for nursing homes coverage, but has not received any action.

Contact Susan Jaffe at 

This article was produced by Kaiser Health News with support from The SCAN Foundation..

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