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Inpatient v. Observation: A Medicare Change That Actually Matters

The Supreme Court’s impact on health reform? That was so June. Where the states stand on Medicaid? July.

In August, Medicare reform is the story in health care.

Medicare Becoming the Primary Focus of 2012 Presidential Campaigns,” read one headline in California Healthline this week. The back-and-forth between the Romney-Ryan and Obama-Biden campaigns over how they would shore up the program, or dramatically overhaul it, has dominated the news.

A change in the White House could certainly lead to major changes in Medicare; after all, President George W. Bush followed through on his campaign pledge to add a drug benefit to the program.

But Medicare is undergoing reforms all the time, and many weren’t proposed by presidents. Some of these reforms are openly transformative, like introducing new penalties for readmissions or piloting accountable care organizations; in other cases, it takes time to perceive all the relevant effects.

This week, “Road to Reform” examines one of those smaller reforms: The decision to audit hospitals’ use of inpatient status.

It’s a case study of how a relatively wonky, minor change — an effort to tamp down Medicare fraud, which is a goal supported by both political parties — led to a ripple effect that may not be ideal for patients.

Why Observation Status Has Soared

Legislators on both sides of the aisle have long agreed that Medicare must do more to eliminate fraud and abuse. And in the past few years, CMS has introduced several new anti-fraud initiatives, such as a strike force organized with the Justice Department that has busted criminal rings.

More relevant for most health care providers, however, is that CMS in 2009 commissioned four recovery firms to review bills from hospitals and physicians, seeking to suss out potential upcoding. The auditors have since recovered $1.9 billion in overpayments.

As a result, more hospitals are choosing to classify patients under “observation” status — which tends to offer lower reimbursement — rather than take the risk of receiving no payment at all if an inpatient status later is deemed inappropriate.

Why this matters: Taken together, the changes led to a huge surge in observation stays. In a June study in Health Affairs, Brown University researchers reported a 25% increase in observation stays from 2007 to 2009. (According to Kaiser Health News Susan Jaffe, California’s use of observation status rose 32% across that period.) Half of those stays lasted more than 24 hours, and one in seven lasted more than 48 hours.

How Change Works for Hospitals …

The trend seemingly contradicts Medicare guidelines, which recommend that observation stays be no longer than 24 hours and only “in rare and exceptional cases” extend past 48 hours.

But hospital administrators are making a calculated decision to collect the dollars that they can. When an auditor determines that a hospital inpatient stay should have been classified as observation, the hospital generally loses the full Medicare payment for the stay. The losses can add up quickly; one hospital in Washington, D.C. lost $597,927 over “misclassifications,” CNN Money reports.

To avoid losing full payments, many hospitals err on the side of caution, according to Eric Coleman of the University of Colorado. “Hospitals are taking the observation payment, even though it’s lower, instead of rolling the dice to see if they get the full inpatient fee,” he told CNN Money.

… And Why it Can Be Costly for Patients

Many patients are never informed of their hospital status. This is a problem — not because of the quality of care, which physicians say does not depend on status, but because the status change can have a major impact on patient costs.

  • Hospital stay costs: Medicare pays significantly more for inpatient stays — which fall under Part A of the federal program — than for observation stays, which fall under Part B. As a result, much of the cost of a Part B hospital stay falls to the patient.
  • Post-discharge care costs: Medicare does not cover post-discharge care for Part B observation stays. As such, a patient who is placed on observation status for a broken bone will have to pay the full cost of rehabilitation.

Patient and consumer advocates say the practices unfairly shift costs onto patients. Late last year, a group of Medicare patients filed a lawsuit challenging Medicare’s observation stay practices, arguing it unfairly passes costs to patients, and pressing for an immediate appeals process for claims. (The California Hospital Association supports an amicus brief in the lawsuit.)

What Comes Next

Recognizing that it’s created a “loophole” for patients and providers, CMS has launched a pilot project that will let 380 participating hospitals resubmit a Medicare claim for observation status if it is denied as an inpatient status claim.

Hospitals will receive 90% of the allowable fee for these services, rather than the full inpatient payment.

Will this reform fix the previous one? “Road to Reform” will continue to observe its impact.

Related Topics

Medicare Road to Reform The Health Law