Stakeholders: Medicare Should Cover Care Received in ‘Observation’

Patients and health care providers are calling attention to what they perceive as a hole in Medicare coverage that affects what patients pay out-of-pocket for skilled nursing care.

What a patient will pay for skilled nursing care is decided at a hospital, before the Medicare beneficiary arrives at the nursing facility.

Medicare beneficiary Loretta Jackson sought care at Santa Rosa Memorial Hospital on April 18, 2009, when she had trouble walking. The diagnosis? Trouble with her sciatic nerve, said her husband Carl Jackson.

She was released April 22, 2009. Her next stop would be a skilled nursing facility, where she could receive therapy to help her be able to walk again.

Carl Jackson told California Healthline, “I tried to figure out what would be the most [cost] efficient convalescent place to go, and we did.” The Jacksons chose a facility called Golden Living in South Pasadena.

Costs Go Uncovered

Although the Jacksons sought the most cost-efficient facility, they ended up receiving a bill for $7,000 for the 30 days of nursing care for Loretta Jackson. Those costs were not covered by Medicare.

Medicare authorizes payment for care at a skilled nursing facility when the beneficiary has been a hospital inpatient — and is thereby covered under Medicare Part A — for at least three days before being admitted to the nursing facility.

While Loretta Jackson’s hospital stay exceeded three days, she was not admitted as an inpatient, but was placed instead under observation status — which is not covered under Medicare Part A.

Carl Jackson said he did not know his wife had been under observation status.

“Once a hospital says, ‘observation status,’ everyone else’s hands are tied,” Jackson said.

Lawsuit Filed Over Observation Status Issue

Loretta Jackson and several other Medicare beneficiaries across the nation are plaintiffs in a lawsuit — Bagnall v. Sebelius — challenging the government’s interpretation and use of observation status in Medicare. The November 2011 suit against HHS Secretary Kathleen Sebelius seeks compensation for plaintiffs as well as changes and clarifications in the Medicare rules.

The lawsuit seeks declaratory and injunctive relief so that Medicare beneficiaries are not deprived of Part A coverage when a hospital places them under observation status.

The lawsuit also seeks to require that beneficiaries receive notice that they have been placed under observation status.

Number of Observation Stays Increasing

A Brown University study released in June found that from 2007 to 2009, there was a 34% increase in the ratio of observation stays to inpatient hospitalizations among Medicare beneficiaries.

The researchers also found that 44,843 Medicare patients were held for observation stays for 72 hours or longer in 2009, an 88% increase from 2007.

Factors Behind the Trend

Recovery Audit Contractors — or RACs — and other regulatory groups audit Medicare claims and have begun denying large numbers of claims that show short inpatient stays.

Auditors sometimes can focus on the patient’s length of stay instead of their health condition, according to an amicus brief filed earlier this year by the American Hospital Association in the Bagnall v. Sebelius lawsuit.

The auditors sometimes conclude that Medicare beneficiaries who were admitted as inpatients could have been placed under observation status instead, the brief notes.

Consequently, AHA notes that “hospitals and physicians may feel pressure to order outpatient observation when a patient is not ready to return home but is unlikely to require a lengthy hospital stay.”

The hospital association’s brief, filed “In Support of Neither Party,” notes that inpatient stays and outpatient stays “have different post-hospital coverage consequences, yet the government has not specified when it considers each type of stay to be appropriate.”

What Government Says About Observation Stays

Medicare regulations do not specifically detail what should be considered an observation stay, according to the not-for-profit Center for Medicare Advocacy.

However, various CMS manuals define observation services as being “a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”

The CMS manuals, in most cases, state that a beneficiary may not remain in observation status for more than 24 or 48 hours, according to the Center for Medicare Advocacy.

Effects of Observation Status on Care Delivery

In addition to the financial implications of placing a Medicare beneficiary under observation status, there could be implications for how care is delivered.

Charlene Harrington — professor emeritus at UC-San Francisco’s Department of Social and Behavioral Sciences and one of the authors of the Brown University study – said the use of observation beds is “dangerous, especially for older people and individuals with dementia and ones that have been sent from nursing homes.”

She said such patients need full care, exercise and their medications, “and it’s not clear that any of this happens when they are put in observation beds.”

Hospitals Seek Solutions

David Perrott – senior vice president and chief medical officer of the California Hospital Association – said hospitals want to do what is best for patients.

“We are hearing things from patients who are obviously concerned about the status they’ve been placed in, thinking that it’s totally a hospital decision, but it’s not,” Perrott said. It is a regulatory issue, he said, adding that educating beneficiaries and their families is key.

He said government regulations must be clearly understood by health care providers, though he acknowledged that evaluating and ensuring that a patient has been correctly admitted as an inpatient or placed under observation status requires a lot of hospital resources.


Implications of an Observation Status Policy Change  

Alice Bers, an attorney at the Center for Medicare Advocacy, said that ideally, the Bagnall lawsuit would be resolved in a way that simplifies Medicare billing so that it is more rational from beneficiaries’ perspectives.

She said nursing facilities would be able to serve more Medicare beneficiaries if coverage was not prevented by the observation designation.

Bers added, however, that there are two major motions pending on the lawsuit — a motion by the federal government to dismiss the case and the Center for Medicare Advocacy’s motion to gain class certification for the lawsuit.

Stakeholders submitted comments to CMS about possible changes to the observation status policies.

Bers said “the general thrust is frustration with the current policy” and a desire to see the beneficiary’s time in the hospital count toward the requirement for Medicare coverage of SNF care.

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