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.
And while the Centers for Medicare & Medicaid Services has proposed a rule change in which the hospital could submit claims for inpatient care for those patients who justifiably spend at least two midnights in the hospital, many worry that it won't be enough to resolve concerns. That proposal would take effect in October.
A patient rights organization, the Center for Medicare Advocacy, has filed a lawsuit against the federal government seeking an end to observation status altogether.
The dollars lost to hospital revenue isn't the only downside.
Observation status creates tension and sours relationships between hospitals and their patients, who are surprised to learn that because they weren't considered inpatients, they aren't covered under Medicare Part A, and instead must absorb a 20% share of costs for their care under Medicare Part B.
Patients also aren't eligible for Medicare coverage for expensive skilled nursing facility care they may need after discharge unless they meet Medicare's inpatient criteria for at least a three-day stay, although a bipartisan bill seeks to fix that problem as well.
"We still have a lot of patients who are being financially hurt by this rule," Sheehy says. "Patients come in and have a much larger out-of-pocket bill, because Medicare Part B doesn't cover them, and they're not eligible for nursing home coverage, even though they're in the hospital for at least three days.
She adds that hospitals' and physicians' relationships with patients "[get] to the core of why we did this study. It's very understandable that patients are upset. They think they're going to be covered because they have Medicare, but they're not. I think it's a problem for hospitals PR-wise. We are really struggling with this."
Sheehy's study also found that even though Medicare's rules say observation status should typically require less than a 24-hour stay, and only in rare circumstances last more than 48 hours, that is not the common practice at the University of Wisconsin Hospital, or in many other organizations as well.
In fact, of the 43,853 patient stays analyzed, 10.4% were assigned to observation status. Of these 4,578 patients, 44.4% were discharged within 24 hours, 39.1% between 24 and 48 hours, and 16.5% exceeded 48 hours.
The fact that hospitals aren't always following Medicare's rules, Sheehy says, "is a problem for any type of legislation" that may come out.
"On a doctor-to-patient level, this is upsetting," Sheehy says. There's a proportion of patients who may not understand what this means. And those patients who do understand, many of them ask us, 'Make me an inpatient,' but we just can't do it. It would be fraudulent billing. We're in a tough spot. Our hands are tied."
In a related invited commentary, Robert Wachter, MD, likened the assignment of patients to observation status to a passage from Lewis Carroll's Alice in Wonderland, because Medicare's original observation policy has "morphed into madness."
"But I don't want to go among mad people," Alice remarked.
"Oh, you can't help that," said the Cat:
We're all mad here. I'm mad. You're mad."
"How do you know I'm mad?" said Alice.
"You must be," said the Cat,
"Or you wouldn't have come here."
"If one was charged with coming up with a policy whose purpose was to confuse and enrage physicians and nearly everyone else, one could hardly have done better than observation status," he wrote.
With Medicare's proposed rule "improves on the status quo and should provide much needed clarity.""However," he wrote, "CMS could further improve the situation by requiring hospitals to inform patients of their status—observation or inpatient—as soon as it is determined, given the potential financial impact."
The agency also should be more flexible in allowing hospitals to retroactively change patients' status when more information becomes available, rather than taking the physician's initial orders to determine to what status the patient should be assigned.
See Also:
Hospitals Caught Between a Rock and a Hard Place Over 'Observation'
AHA: Observation Status Fears on the Rise