Observation Stays in the Hospital: The Impact on Medicare Beneficiaries

The National Academy of Elder Law Attorneys (NAELA) has designated May National Elder Law Month.  Below is a recent article that appeared in the NAELA: Eye on Elder and Special Needs Issues newsletter.  It addresses disturbing new hospital practices that may severely impact medicare patients.

May 2014


Observation Stays in the Hospital: The Impact on Medicare Beneficiaries

By Judith Stein, Esq.

In December 2013, Ms. M., 99, was found on the floor in her assisted-living apartment. She was sent to the hospital and treated for a broken shoulder. She stayed at the hospital for three nights, but instead of being deemed an “inpatient,” she was considered to be under “observation.” As a result, she had to pay $300 a day for subsequent skilled nursing facility care that otherwise would have been covered by Medicare.

The Problem
Under the Medicare statute, an individual must have an inpatient stay in the hospital of at least three consecutive days, not counting the day of discharge, in order to meet Medicare criteria for coverage of post-acute care in a skilled nursing facility (SNF). Unfortunately, like Ms. M., many Medicare beneficiaries are being denied access to Medicare coverage of SNF stays because of the growing use of “observation status” in the hospital setting. Pursuant to this practice, hospitals classify patients as “outpatients” receiving observation services rather than admitting them as inpatients.i

Care received by patients in observation status is often indistinguishable from care received by inpatients. But the designation of a patient as an outpatient (covered under Part B of Medicare) vs. an inpatient (covered under Part A) can result in beneficiaries being charged for some services received in the hospital that would otherwise be covered, including their prescription medications. Further, the most vulnerable patients will be responsible for their entire subsequent SNF stay, having not satisfied the statutory three-day inpatient hospital stay requirement.

Use of “Observation Status” Is on the Rise
Hospitals’ use of observation status and the amount of time patients spend in observation status have both increased significantly in the last few years. The Center for Medicare Advocacy (CMA) regularly hears about beneficiaries throughout the country whose entire stay in a hospital, including stays in excess of 14 days, is classified by the hospital as outpatient observation.

The primary motivation for hospitals’ increased use of observation status is the threat of punitive action by Recovery Auditors. These Medicare contractors review claims. If they reject a hospital’s admission of a patient as an inpatient, the hospital loses reimbursement for almost all related services. Penalties imposed on hospitals that readmit patients who return to the hospital shortly after discharge from a prior inpatient admission also foster the use of observation status.

The Centers for Medicare & Medicaid Services (CMS) has issued various payment rules in an attempt to address certain problems posed by the use of observation status, but these rules do not solve the problem for beneficiaries.ii

Take Action
CMA and the National Academy of Elder Law Attorneys (NAELA) have brought together a broad coalition of organizations representing consumers, nursing homes, physicians, and other stakeholders supporting a bipartisan, common-sense approach to help Medicare beneficiaries who are hospitalized in observation status.iii The Improving Access to Medicare Coverage Act of 2013 (H.R. 1179) introduced by Reps. Joe Courtney (D-CT) and Tom Latham (R-IA) would require that time spent in observation in the hospital be counted towards meeting the three-day prior inpatient hospitalization requirement for Medicare coverage of SNF care. A companion bill has been introduced in the Senate, S. 569, co-sponsored by Sens. Sherrod Brown (D-OH) and Susan Collins (R-ME). We urge you to ask your Members of Congress to support these bills. Find out more about Observation Status on NAELA’s website.

For individuals who find themselves affected by observation status, see the Self-Help Packet for Observation Status problems on CMA’s website.


iSee, generally, the Center for Medicare Advocacy website.
iiSee, e.g., the Center’s Weekly Alert “New Study: CMS’ New 2-Midnight Rule Increases Use of Observation Status” (February 20, 2014).
iiiSee NAELA’s webpage devoted to observation status. Also see a flyer supporting this legislation by the observation status coalition, including a list of members.


About the Author
Judith Stein, Esq. is the founder and executive director of the Center for Medicare Advocacy and a past president of the National Academy of Elder Law Attorneys.


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