Hospitalized Seniors Should Watch Out if They're Under Observation

By S.Z. Berg

NEW YORK ( MainStreet)--An increasing number of hospitalized patients age 65 and over are being classified as outpatients under observation rather than as admitted.

"When hospitals classify people as 'outpatients,' on observation status, rather than as admitted inpatients, those patients cannot obtain Medicare nursing home coverage and may also have hospital bills they would not have if properly considered inpatients," says Judith Stein, executive director of Center for Medicare Advocacy.

Medicare will only cover the cost of nursing home care when a patient has been hospitalized as an inpatient for three consecutive days. In these cases, Medicare will foot the entire bill for the first 20 days in an approved facility. Patients who have been classified as outpatients will have to pay the entire tab.

In addition, Medicare patients who have been relegated to observation status may be responsible for paying cost sharing and the unreimbursed cost of prescription drugs under Medicare Part B that under inpatient status would have been paid for by Medicare Part A.

In June 2012, a study was published in the journal Health Affairs showing that there has been a sharp rise in the number of Medicare patients held in the hospital under observation. This finding was accompanied by a downward shift in patient admissions into the hospital. The Brown University researchers reported that the ratio of patients placed in observation to patients admitted into the hospital increased 34% between 2007 and 2009 and that outpatient observation hospitalizations grew 7% longer, on average, over the study period.

For their part, patients can't tell the difference between whether or not they've been admitted into the hospital or are classified as under observation as an outpatient. They lie in the same beds, wear the same gowns, eat the same hospital food, receive the same nursing care and wear the same ID bracelets.

The Brown University researchers, led by Zhanlian Feng, assistant professor of health services, policy and practice, noted that there was a lead up to a shift in Medicare costs to patients and hospitals, most recently through the Affordable Care Act, which includes a provision that penalizes hospitals for high readmission rates. Hospitals are able to avoid readmitting patients and dodge the associated penalty by classifying patients as outpatients, either on their initial or second visit.

In addition to shifting the burden of costs to Medicare patients, this practice has consequences for public health data.

"When people are classified on observation status, they are not considered hospital inpatients and, therefore, if they need to return to the hospital, those admissions are not considered readmissions," Stein says. "Thus we cannot accurately determine which hospitals tend to have a lot of admissions and readmissions."

Last year, the Center for Medicare Advocacy filed a class action lawsuit against the federal government to get hospital labeling policy changed. The filing for the Bagnall suit notes that in some cases patients are admitted into the hospital and their status is later changed to observation, an outpatient status. It goes on to note that under the secretary's Medicare manual, observation status is generally supposed to last no more than 24 hours, but that " both the incidence of placing beneficiaries on observation status and the average time period in which beneficiaries are on observation status have been increasing dramatically in recent years."

"The lawsuit also challenges the lack of notice and appeal rights for those on observation status," says elder law attorney Christopher J. Berry, adjunct professor at the Thomas M. Cooley Law School.

"On the legislative front, Rep. Joe Courtney (D-Conn.) and Sen. John Kerry (D-Mass.) have introduced legislation that would require time spent on observation status to count toward the three-day stay requirement," Berry says.

"The Center is also working with Congress, led by Joe Courtney of Connecticut, to count all time in the hospital towards the three-day hospital requirement for Medicare nursing home coverage," Stein says. "The bill is bi-partisan in the House and Senate."

The Centers for Medicare and Medicaid Services recently released its proposal to make changes to the Hospital Readmissions Reduction Program.

"The agency seems to assume a continuing role for observation status, but public sentiment is leaning toward a solution that does not subject beneficiaries to drastic financial consequences for a classification that remains largely invisible and counterintuitive," Berry says.

The final rule is expected to be announced in August.

--Written by S.Z. Berg, author of College on the Cheap

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