Is observation status substituting for hospital readmission?

Since October 2012, the Medicare program has penalized hospitals when too many patients in traditional Medicare are re-hospitalized within a month of discharge. This policy appears to be having unintended consequences for patients in Medicare and in the commercial market. Hospitals with readmission rates above the national average now receive lower payments across-the-board from Medicare; the higher the rate of "excess" readmissions, the greater the penalty. The fines are intended to push hospitals to provide better care for their patients both in and out of the hospital, to avoid having patients return. However, when patients do return to the hospital, the policy may unintentionally encourage hospitals to keep them "under observation" to circumvent the penalties.