Medicare “Observation Status” refers to the classification of a hospital patient as an outpatient, even though the patient is placed in a hospital bed, stays multiple nights, and receives nursing and medical care, tests, treatment, therapy, prescription medications and food. Yet, the hospital stay is classified as an outpatient stay, thus the patient has a 20 percent copay on the hospital stay and does not meet the three-day hospital stay rule to qualify for the Medicare post-acute, skilled nursing home benefit (which results in significant out-of-pocket costs to the beneficiary). Unfortunately, the Medicare appeals system seems not to recognize challenges to the hospital patient classification status.
Complaints about this “extra-legal” shifting of Medicare costs to beneficiaries and hospitals have been growing as the number of such observation days have been growing over the past few years. In July 2013, the Office of the Inspector General (OIG) of the Department of Health and Human Services (DHHS) issued a report on Medicare Observation Status suggesting that legislation may be necessary “to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost-sharing for SNF services.” [http://oig.hhs.gov/oei/reports/oei-02-12-00040.asp].
There are bills in the Congress (H.R. 1179 and S. 569) to fix this problem by counting the time in “observation status” towards meeting the requirement of a three-day qualifying inpatient hospital stay for Medicare skilled nursing coverage. But, despite bipartisan support for these bills, given the gridlock in Congress they may not move through the legislative process anytime soon. There is a lawsuit pending [Bagnall v. Sebelius] to clarify the use of Observational Status in Medicare. Until the use of Observational Status is resolved, by legislation or litigation or executive action, both providers and beneficiaries must be mindful of the consequences of this reimbursement trap.
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