Observation Status Costly for Hospitals

Cheryl Clark, July 12, 2013

Hospitals take a financial hit when patients are assigned observation status. Surprising study results show that "though the cost of hospital observation care costs less, reimbursement per encounter is proportionally a lot less."

Hospitals are likely losing money and incurring ill will from patients when they assign them to observation status under Medicare rules, especially if the patient has a general medicine diagnosis, and is female, an 18-month study of the practice at a Wisconsin academic medical center has found.

"Though the cost of hospital observation care costs less, reimbursement per encounter is proportionally a lot less," says Ann Sheehy, MD, principal investigator of the study published Monday in JAMA Internal Medicine.


"If you look at it in terms of gain or loss per hour, we saw a net positive margin of about $16.65 for inpatients, but a net loss of $9.94 for those on observation status," says Sheehy, a hospitalist at the 566-bed University of Wisconsin Hospital in Madison.

That was a surprise, Sheehy says, because several studies have recently suggested that placing patients in observation status cost less per day than officially admitting them as inpatients. That may be so, but if reimbursement is a lot less per patient assigned to observation status, "that's important for institutions to know… but the bottom line is that our reimbursement (for observation) is less than it is for inpatient care, dollar for dollar."

Fear of having hospital claims questioned by Medicare recovery audit contractors prompts some admitting physicians to place patients in observation status rather than admit them as inpatients. Between 2006 and 2008, use of observation has increased 26% for Medicare beneficiaries, and has spiked even higher in recent years.

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