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Observation Status Costly for Hospitals

Cheryl Clark, for HealthLeaders Media, 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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3 comments on "Observation Status Costly for Hospitals"


A Concerned Compliance Professional (7/12/2013 at 3:20 PM)
Dear Ms. Clark, I am certainly thankful that someone is paying attention to this crisis in America's hospitals and the inequality it has [INVALID]d with Medicare Fee Schedules and reimbursement patterns. There is an aspect of observation status that is often overlooked. The idea that a patient in observation should cost less, is a CMS derived fantasy. To a nurse caring for a patient in observation status, there is no difference in the care, treatment, resources or costs to the hospital provider. The patient is admitted to the same bed regardless of their admission status of inpatient or observation. Most bedside nurses and care providers know that the patients status is observation but they don't know what that means. To an organization, as stated above, the patient is still "admitted" though it may be "observation", the patient still receives care from any and all providers that are necessary to improve the patient's condition; including expensive diagnostic radiology procedures, medications, respiratory therapy procedures, physical or occupational therapy etc. The observation status patient receives the same compassionate care and respect of any other patient. The rubber meets the road as you mentioned when it comes to CMS reimbursement. But what was not mentioned is that while the patient is admitted to "inpatient observation" hospital providers must also spend thousands of dollars to hire and train staffs to "carve-out" the number of minutes or hours that the patient may be away from his or her bed to receive the expensive tests and procedures mentioned above. Not to mention that hospitals are not permitted to count inpatient observation patients in the daily census. This [INVALID]s another "ding" when the cost reports, average daily census, case mix index and other financial data is reported. In addition, CMS has been trying to "fix" this "short-stay" debacle for a number (many) of years. I remember in the 90's as an ER nurse, transcribing telephone orders from a physician. The physicians were frustrated then because they continued to be confused with the rule's revisions. CMS's many changes to the rule has [INVALID]d physician admitting orders to be defied because the physician did not write the order "precisely". Meaning, the rule changed and the "new" admission order had to change. Observation has been called such things as admit for 24 hours, 24 hour admission (even though the patient may stay up to two days), observation and admit to observation. CMS obviously recognized that observation status, may not actually mean twenty-four hours or less. It is noted in your report that patients may actually stay for two or more days. I propose to aks every Medicare beneficiary or their loved ones; caught in the "observation status"-hospital stay, if their care was any different than a previous "real" inpatient admission. How do you tell a 90 year-old widowed patient that their overnight hospital stay for uncontrolled high blood pressure did not qualify him or her and therefore they are now responsible for 20% of the charges and 100% of the self-administered drugs. As you can see, Ms. Clark, the issue of observation reaches much farther and into every crevice of our infrastructure. Thank you very kindly for reporting on this subject.

Tyco Brahe (7/12/2013 at 11:54 AM)
Observer status is a way for hospitals to skirt the rules on readmissions so their numbers looks better than they really are and the hospitals don't incur penalties. Patients get angry because they have to pay a large part of the bill (using Medicare Part B) instead of Medicare Part A.

Mary P. Malone (7/12/2013 at 11:21 AM)
I am wondering if placing recently discharged patients in observation status helps keep "readmission rates" lower?