Think Tank

Bills Offer Two Approaches to Hospital Observation Status

The California Legislature is considering two bills taking different paths toward reconciling a vexing question dealing with observation status of patients in hospitals.

Labeling sick and injured people as in-patients or outpatients has several ramifications for hospitals ranging from reimbursement to staffing levels.

Health officials at CMS and lawmakers in several state legislatures are wrestling with the issue.

In California, one bill (SB 1269) by Sen. Jim Beall (D-San Jose) seeks to establish a firm deadline of 24 hours for hospitals to either declare individuals in-patients or out-patients.

Another bill (SB 1238) by Sen. Ed Hernandez (D-West Covina) creates several scenarios that would allow hospitals to go beyond the 24-hour limit.

Beall’s bill is sponsored by the California Nurses Association. Hernandez’s bill is sponsored by Tenet Healthcare. Both bills were placed in the Senate suspense file this month, effectively ending their chances for this year. But debate continues.

We asked stakeholders to assess the strengths and weaknesses of the two approaches.

We received responses from:

Observation Care: Slippery Slope With High Cost for Patients

Registered nurses in California say the time has come to put limits on the hospital shell game of parking patients in “observation” beds as a substitute for inpatient admission — with significant health and cost risks for patients.

In the past six years, the number of patients held in observation has risen by 88%, with many staying 48 hours or more.

In testimony to the Senate Health Committee earlier this year, Kaiser Permanente RN Kathy Donahue noted that “patients that historically have been admitted with their presenting complaint or diagnosis are now being placed in observation status and remaining there for as long as currently legally possible.”  

“Many of these patients are extremely sick,” Donahue noted. “They are now there with much more serious symptoms such as chest pain and cardiac complaints. Make no mistake, being a patient in an observation unit is currently extremely unsafe.”  

Why the explosion? The reason, as so frequently happens in the hospital industry, is to protect profit margins.

Observation care, even when within a hospital’s walls, is considered an outpatient service, typically with fewer public oversight rules, less staffing and no Medicare penalties if the patient is re-admitted within 30 days, as now often occurs.

Hospitals are not required to tell patients they are in an observation bed, and are thus responsible for costs Medicare doesn’t cover, including higher copayments for physician fees, other hospital fees, or the inflated charges hospitals impose for certain medications, especially those for chronic conditions. 

Further, a patient sent from a hospital to a nursing home must have been have been an in-patient for three consecutive days for Medicare to pay the hefty costs. Time in an observation bed does not count.

Noting these problems, Medicare officials last fall announced a new rule requiring hospitals to admit patients for at least two nights if they thought full hospital care was likely needed. But the hospital industry has vigorously lobbied against the rule leading to a current moratorium.

CNA this year sponsored SB 1269 to direct hospitals to limit patient observation stays to 24 hours and meet the same staffing standards as regular hospital units. It would also require hospitals to inform patients when they are being held in an observation bed.

CNA opposed a hospital-backed bill, SB 1238 because of loopholes that could continue to leave patients in limbo while waiting for needed hospital admission to the appropriate setting.

While SB 1269 has been stalled in committee due to hospital industry opposition, we fully intend to continue to fight for it this year or next.

Setting a Rigid Time Limit Limits Physicians

Observation services are post-stabilization services that include ongoing short-term treatment, assessment and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or are able to be discharged from the hospital.

Two bills introduced in the California Legislature this year (SB 1238, Hernandez and SB 1269, Beall) aim to limit the amount of time a patient could remain under observation. Specifically, these bills would require a patient either to be discharged or admitted as an in-patient after no more than 24 hours. Setting a rigid time limit on how long a patient may remain in observation (as an outpatient) limits a physician’s ability to determine if an inpatient admission is medically necessary.

A state law requiring either discharge or an inpatient admission after only 24 hours of observation would further confuse patients, as it is in conflict with a new federal Medicare policy related to criteria for inpatient admissions. Medicare’s two-midnight rule instructs physicians that a Medicare inpatient admission is generally appropriate if there is a reasonable expectation that the patient will have a stay that crosses two midnights — not 24 hours. The physician decision to admit must be supported by this reasonable expectation of a stay that crosses two midnights, and that may or may not overlap with a 24-hour clock. 

Unfortunately, if a Medicare patient is admitted after 24 hours and that stay does not cross two midnights, the admission will be denied and the hospital will not be paid. SB 1238 allows for certain scenarios when a hospital may keep a patient in observation beyond 24 hours.  However, implementing two separate admission policies within the hospital would mean that two patients with the same clinical criteria would be treated differently based solely on their insurance coverage.  Further, many commercial insurance companies often follow Medicare payment policy, and we are beginning to see this unfold with observation services.

A state law requiring discharge or an inpatient admission after 24 hours of observation care can have unintended consequences. Specifically, a patient may either be discharged prematurely based on the 24 hour window expiring or, if the patient is reclassified from observation to inpatient, it would result in California hospitals forfeiting millions of dollars in Medicare payments for inpatient admissions that Medicare deems inappropriate.