1. Steele, Julia RN, BSN

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As home healthcare clinicians, we spend a great deal of time helping our patients navigate the Medicare maze. Increasingly, we are seeing patients spend time in the hospital under "observation status." However, many patients and clinicians do not know the negative implications of observation status until it is too late.


As a home care nurse, I have seen first-hand the negative impact of observation status. For example, Mrs. S, an 82-year-old widow on a tight budget. She spent 4 days in a local hospital under observation status and then was sent to a rehabilitation facility to regain her strength before going home alone. Imagine her surprise when she was saddled with a bill for more than $3,000 from the rehabilitation facility!


This commentary will describe observation status, explain its theoretical benefits and actual downfalls, and take a stand for our patients who have been sucked into the observation status nightmare.


What Is Observation Status?

Observation status was originally developed as a protocol to monitor patients with chest pain (Baugh & Schuur, 2013). Since then, it has expanded into a period of time for clinicians to monitor patients in a hospital setting while deciding whether or not their condition warrants hospital admission. The standard observation period lasts 24 hours, during which time the patient undergoes testing and/or monitoring. Although the patient is on observation status, he or she is considered an outpatient, even if he or she is in a regular hospital bed receiving identical care to patients who have been admitted.


Medicare bills these patients under observation status differently than patients who are receiving in-patient care. Patients receiving in-patient care are covered under Medicare Part A, which typically pays for hospital events. Patients under observation are billed under Medicare Part B, which also covers primary care and outpatient procedures. Medicare patients must pay 20% copay for all care delivered while on observation status, and they must pay for most medications given to them while in the hospital (Baugh & Schuur, 2013).


Observation status stays now last much longer than 24 hours. The Office of the Inspector General (OIG) found that "of the 1.5 million observation stays in 2012, 26% lasted two nights and 11% lasted at least 3 nights" (OIG, 2013). A research study of a large academic medical center noted patients "with a wide variety of diagnoses" were kept on observation status "often more than 48 hours" (Sheehy et al., 2013).

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Why Do Hospitals Use Observation Status?

Increasingly, hospitals are using observation status instead of formally admitting patients. This trend is driven by Centers for Medicare & Medicaid Services (CMS) fines and denials of payment. CMS penalizes hospitals whenever a patient is admitted more than once within 30 days for conditions such as heart failure, myocardial infarctions, and pneumonia (Carlson, 2013). However, if a patient comes to the hospital multiple times and stays under observation status, this fine does not apply (Feng et al., 2012).


Hospitals are also using observation status because CMS can also deny payment at the time of billing or retroactively. If at any point a CMS auditor reviews a file and determines that an inpatient could have been effectively treated as an observation status, CMS will deny that claim and take back all of the money that was given to the hospital under Medicare Part A coverage. Hospitals find that they are better off keeping patients on observation status rather than risking a monetary loss or fine. It is important to note that patients receive the same standard of care no matter their admission status. Hospitals are not changing the quality of care they provide, only the patient's billing status.


What's the Problem With Observation Status?

First, patients and clinicians do not understand the meaning or impact of observation status. When a patient is told that he or she is under "observation," the patient has no reason to assume that he or she is not actually an inpatient. To patients and their families, observation status looks just like inpatient status. There are no requirements that hospitals tell patients whether they are under observation status or the impact on Medicare billing (OIG, 2013). This means that hospitals may never tell a patient if he or she is under observation status. And if patients are told that they are under observation status, no one is obligated to tell them what that means or its billing implications. This is surprising in the modern healthcare industry, where informed consent in all aspects of healthcare is paramount.


Patients are paying more and Medicare is paying less. For a patient that has expensive imaging studies or invasive procedures, a 20% copay is a huge cost. A study by the OIG found that Medicare pays less for observation stays than inpatient stays; "for each of the most common reasons for hospital stays, the average payment [by Medicare] was always higher for short inpatient stays than observation stays" (OIG, 2013).


In most circumstances, Medicare will pay for rehabilitation or skilled nursing facility (SNF) care after a hospital stay. Many patients need this period to regain strength and functional independence before returning home. Medicare has a rule that a patient must be an inpatient for 3 days for rehabilitation and SNF care to be covered. An observation patient who spends 3 days in the hospital does not meet this requirement because he or she was never formally admitted as an inpatient. Any observation stay, no matter how long, does not count toward the 3-day inpatient rule for rehabilitation cost.


There are many cases of patients being sent to rehabilitation care and not finding out until much later that he or she is responsible for the cost of the stay in a rehabilitation facility, which is often several thousand dollars. This is best illustrated by a class action lawsuit brought by multiple senior citizens who felt that this practice was illegal (Bagnall v Sebillus). However, the citizens lost this case and Medicare can continue this practice.


What About the 2-Midnight Rule?

CMS implemented the "2-midnight rule" on October 1st. This rule is essentially a promise to hospitals that they will not be audited or fined if a patient admitted to inpatient status is likely to stay in the hospital for more than 2 midnights. If the hospital thinks that a patient will stay fewer than 2 midnights, then they should be on observation status. But this rule will not change the use of observation status or solve any of its problems. Most important, observation time will not count toward the 3-day-rule for rehabilitation/SNF coverage. It does not require hospitals to tell patients when they are under observation status, and it does not give patients the right to appeal their observation status (Jaffe, 2013). The OIG indicated, "the number of observation and long outpatient stays may not be reduced" with the 2-midnight rule (OIG, 2013).


Clinicians Advocating for Change

As clinicians working closely with patients, we are in a prime position to educate our patients on these potential pitfalls. Every patient should know (especially if he or she is at risk for readmission) what observation status is and the potential impact on their Medicare coverage. Patients need to know that they should ask their physician if they are under observation status and advocate to be put under inpatient status. Patients need to know that they face higher out-of-pocket costs and must pay for rehabilitation if they have been in the hospital under observation status.


We owe it to our patients to be informed, and to inform our patients about these risks with hospitalization. We are able to take a stand against these practices. Even former Medicare chief Dr. Donald Berwick spoke out saying that long observation stays are "leaving many older Americans without coverage for expensive rehabilitation care after they leave the hospital" (Kowalczyk, 2013).


Write to your senators and congressmen; inform your patients and your colleagues. There is no reason for our patients to suffer from high bills and legislative hurdles!




Bagnall v Sebillus. CV. NO. 3:11-CV-1703 (MPS) (D. Conn., Memorandum of Decision, 9/23/2012) doc. # 106.


Baugh C. W., Schurr J. D. (2013). Observation care-high-value care or a cost-shifting loophole? New England Journal of Medicine, 369(4), 302-305. [Context Link]


Carlson J. (2013, June 8). Faulty gauge? Modern Healthcare. Retrieved from[Context Link]


Feng Z., Wright B., Mor V. (2012). Sharp rise in Medicare enrollees being held in hospitals for observation raises concerns about causes and consequences. Health Affairs (Project Hope), 31(6), 1251-1259. [Context Link]


Jaffe S.(2013, July 30). HHS inspector general scrutinizes Medicare observation policy. Kaiser Health News. Retrieved from[Context Link]


Kowalczyk L. (2013, August 29). Former Medicare chief Don Berwick: Scrap rule forcing some hospital patients to pay for rehab. White Coat Notes-Boston Globe. Retrieved from[Context Link]


Office of Inspector General. (2013, July 29). Hospitals' use of observation stays and short inpatient stays for Medicare beneficiaries (OEI-02-12-00040). Washington, DC. Retrieved from


Sheehy A. M., Graf B., Gangireddy S., Hoffman R., Ehlenbach M., Heidke C...., Jacobs E. A. (2013). Hospitalized but not admitted: Characteristics of patients with "observation status" at an academic medical center. JAMA Internal Medicine, 173(21), 1991-1998. Published online July 8, 2013. Retrieved from[Context Link]