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Admit to observation status: Policy brief

Published:October 15, 2016DOI:https://doi.org/10.1016/j.outlook.2016.09.002

      Executive Summary

      The Centers for Medicare and Medicaid Services (CMS) has differential payment for inpatient and observation status patient services. Observational stays are not credited toward the admission criteria for a skilled nursing facility (SNF). This rule poses financial concerns and burdens for Medicare patients. The Academy supports efforts to amend and replace the current payment rules with a more equitable payment policy for observation status and to limit its financial liability on patients.

      Background

      Observation care is a defined set of clinically appropriate services that allows for short-term treatments and assessments as patients await a decision regarding inpatient treatment or hospital discharge (
      Centers for Medicare and Medicaid Services (CMS)
      Medicare benefit policy manual: Chapter 6- hospital services cover under part B. Outpatient observation services, section 20.6.
      ). Medicare beneficiaries pay a single deductible for an inpatient stay but may incur separate co-payments for each outpatient service received while being in an observation status (
      • Cassidy A.
      Health policy briefs: The two-midnight rule.
      ). Medicare beneficiaries who opt out of part B may incur all costs of observation status services, if they lack other forms of coverage for these services (
      • Mason D.
      The unintended consequences of the “Observation Status” policy.
      ). Days spent in observation status are not credited toward the 3-day inpatient admission requirement to an SNF, which can prevent Medicare beneficiaries from obtaining coverage for those services (
      Center for Medicare Advocacy
      Revisions to “Two-midnight Rule” do not help hospitalized Medicare patients in observation status.
      ,
      Office of Inspector General
      Hospitals' use of observation stays and short inpatient stays for Medicare beneficiaries.
      ).
      Hospital stays under observation status have increased dramatically over the last decade (
      • Feng Z.
      • Wright B.
      • Mor V.
      Sharp rise in Medicare enrollees being held in hospitals for observation raises concerns about causes and consequences.
      ,
      • Wiler J.L.
      • Ross M.A.
      • Ginde A.A.
      National study of emergency department observation services.
      ). Between 2001 to 2009 and 2007 to 2009, 100% and 34% (
      • Feng Z.
      • Wright B.
      • Mor V.
      Sharp rise in Medicare enrollees being held in hospitals for observation raises concerns about causes and consequences.
      ) increases in observation status stays were recorded among Medicare beneficiaries (
      • Mason D.
      The unintended consequences of the “Observation Status” policy.
      ). Significant uncovered costs to beneficiaries have resulted because of Medicare's differential payment of inpatient and outpatient services. Hospitals receive a single payment for all inpatient services that Medicare A beneficiaries receive for inpatient services. Payment is based on the Medicare severity diagnosis-related group under the inpatient prospective payment system (IPPS) (). Because payment for observation status services is covered by the Outpatient Prospective Payment System (OPPS) (), patients are assessed a co-payment for each individual outpatient service provided under Medicare part B (
      • Cassidy A.
      Health policy briefs: The two-midnight rule.
      ).
      Physicians and hospitals are autonomous in determining inpatient or outpatient status. While a patient may be admitted for a short inpatient stay at one hospital, another patient with the same diagnosis may be placed in an outpatient status at a different hospital, thus incurring additional expenses. In 2013, the CMS announced the two-midnight rule as a time-based criterion for inpatient admission, meaning that inpatient admissions would generally be payable under part A if the patient is expected to spend two midnights in the hospital (). CMS postponed enforcement of this new rule several times since issuing the rule on October 1, 2013. The two-midnight rule directed CMS payment contractors to presume that hospital stays are billed appropriately as inpatient admissions rather than observation status, if the admissions span two midnights. At this writing, the two-midnight rule, which was never implemented, is no longer an option. CMS also proposed that Medicare Recovery Audit Contractors (RACs) review all inpatient claims. RACs receive a contingency fee for every inappropriate inpatient claim they identify (). Hospitals can bill denied inpatient claims as outpatient services. Effective from January 1, 2016, the OPPS update now emphasizes provider judgment when determining appropriateness of inpatient admission and requires justification and supportive documentation from licensed independent providers in the medical record (
      • Harris S.L.
      • Kelly J.
      Building clarity on the two-midnight rule.
      ).

      Responses and Policy Options

      A number of policies related to observation status services have been proposed as solutions to address the identified concerns. One example is The Improving Access to Medicare Coverage Act of 2015 (
      114th Congress (2015-2016)
      Improving access to Medicare Coverage Act of 2015 (S. 843).
      ), which was assigned to a congressional committee in March 2015. This bill called for an amendment of the Title XVIII (Medicare) Social Security Act and proposed that length of stay as a patient in observation status would satisfy the 3-day inpatient hospital requirement needed for Medicare beneficiaries to receive coverage for SNF care. However, it is unlikely to be enacted at this time.
      A second example is The NOTICE Act of 2015 (
      114th Congress (2015-2016)
      NOTICE Act (Pub. L. No: 114-42, 129 Stat. 468).
      ), which was enacted in August 2015 and received support from the American Association of Retired Persons (AARP), American Hospital Association, and American Academy of Family Physicians. This Act requires hospitals to notify Medicare beneficiaries verbally and in writing of their observation status within 36 hours after services are initiated (). The notice must describe the reason for observation status, cost implications, and eligibility for SNF care following discharge (). In August 2015, the Center for Medicare Advocacy reported the NOTICE Act would be signed into law soon (); however, CMS recently indicated the date to comply with the NOTICE Act has been extended to October 1, 2016, at the earliest (). Although informative, this Act does not resolve the financial concerns and burdens on beneficiaries associated with receiving services while on observation status.
      In 2015, AARP released a report highlighting the financial implications of observation status for Medicare beneficiaries and proposed a cap for out-of-pocket observation status costs to be no greater than the total Medicare part A deductible (
      AARP
      Observation status: Financial implications for Medicare beneficiaries.
      ). The AARP also proposed that, at a minimum, time spent in observation status should be counted toward the 3-day inpatient hospital requirement for SNF care (
      AARP
      Observation status: Financial implications for Medicare beneficiaries.
      ). Preferably, the AARP recommended the elimination of the 3-day inpatient stay requirement for SNF admission. Moreover, they advocated for the use of clinical factors to determine eligibility for SNF care services (
      AARP
      Observation status: Financial implications for Medicare beneficiaries.
      ).
      The Department of Health and Human Services Office of Inspector General (OIG) (
      Office of Inspector General
      OIG policy statement regarding hospitals that discount or waive amounts owed by Medicare beneficiaries for self-administered drugs dispensed in outpatient settings.
      ) has ruled that hospitals are now allowed to discount or waive amounts owed by Medicare beneficiaries for self-administered medications provided as part of observation services. Self-administered medications include the usual prescription medications taken by patients that are unrelated to their current outpatient visit (
      Centers for Medicare and Medicaid Services (CMS)
      How Medicare covers self-administered drugs given in hospital outpatient settings.
      ). Medicare part B only covers medications required for treatment of the condition for which patients are in observation status. Even those beneficiaries with Medicare part D coverage will incur excess medication costs because part D does not cover self-administered medications unrelated to the reason for their observation status (
      Center for Medicare Advocacy
      Office of Inspector General authorizes hospitals to discount or waive center drug charges for patients classified as ‘outpatients’.
      ). The new policy permits hospitals to determine if they will continue to bill patients the full cost of self-administered medications or uniformly provide discounts or waivers. However, the OIG forbids hospitals from advertising medication discounts, thereby limiting the information available to patients to make an informed decision about their choice of hospital. One proposed solution is to stop classifying patients with overnight hospital stays as outpatients, thus allowing medications to be covered under Medicare part A (
      Center for Medicare Advocacy
      Office of Inspector General authorizes hospitals to discount or waive center drug charges for patients classified as ‘outpatients’.
      ).

      The Academy's Position

      The Academy is a voice for affordable high-quality care and has long championed the rights of patients as consumers of health care. Advocating for the reduction of out-of-pocket costs for health care services rendered while under observation status aligns with the Triple Aim of Strategic Goal #1 of the Academy to improve the patient care experience, improve the health of populations, and reduce the per capita cost of health care (

      American Academy of Nursing. (n.d.) Strategic goals. 2014-2017. Retrieved from https://aan.memberclicks.net/assets/docs/goals2014-17-final.pdf

      ).

      Recommendations

      The U.S. Congress should reform current payment rules to: (a) allow for admission to SNF either after a qualifying 3-day hospital stay or as a desired alternative to qualify based on clinical need for SNF care and not length of hospital stay, (b) cap Medicare A patient's financial liability for observation stays, and (c) permit providers and hospitals to bill Medicare for patients' usual prescriptions provided during observation stays under Medicare part B.
      The CMS should promulgate rules that expand upon current regulations that require hospitals to clearly inform patients of the implications of observation status prior to being placed in observation status. Patients and their families should be educated about the financial implications and impact of being placed in observation status and their eligibility for additional services. Engagement of patients and their families in decision-making should be a priority.
      Nursing organizations should collaborate with other experts and consumer groups, such as AARP, to identify recommendations for future legislation about patient rights as they relate to being placed in observation status and future legislation that would limit patient financial liability for observation status.
      The CMS should seek input from nursing organizations regarding the clinical criteria for observation and inpatient status.

      Acknowledgment

      The authors thank Matthew Williams, JD, MA, for his thoughtful review of the policy brief.

      References

        • 114th Congress (2015-2016)
        Improving access to Medicare Coverage Act of 2015 (S. 843).
        2015
        • 114th Congress (2015-2016)
        NOTICE Act (Pub. L. No: 114-42, 129 Stat. 468).
        2015
        • AARP
        Observation status: Financial implications for Medicare beneficiaries.
        2015 (Retrieved from)
      1. American Academy of Nursing. (n.d.) Strategic goals. 2014-2017. Retrieved from https://aan.memberclicks.net/assets/docs/goals2014-17-final.pdf

        • Cassidy A.
        Health policy briefs: The two-midnight rule.
        Health Affairs (Project Hope), 2015 (Retrieved from)
        • Center for Medicare Advocacy
        CMS delays implementation of Notice Act until fall 2016.
        2016 (Retrieved from)
        • Center for Medicare Advocacy
        Observation status: The NOTICE Act will soon be law.
        2015 (Retrieved from)
        • Center for Medicare Advocacy
        Office of Inspector General authorizes hospitals to discount or waive center drug charges for patients classified as ‘outpatients’.
        2015 (Retrieved from)
        • Center for Medicare Advocacy
        Revisions to “Two-midnight Rule” do not help hospitalized Medicare patients in observation status.
        2015 (Retrieved from)
        • Centers for Medicare and Medicaid Services (CMS)
        How Medicare covers self-administered drugs given in hospital outpatient settings.
        2011 (Retrieved from)
        • Centers for Medicare and Medicaid Services (CMS)
        Fact sheet: Two-midnight rule.
        2015 (Retrieved from)
        • Centers for Medicare and Medicaid Services (CMS)
        Medicare benefit policy manual: Chapter 6- hospital services cover under part B. Outpatient observation services, section 20.6.
        2015 (Retrieved from)
        • Feng Z.
        • Wright B.
        • Mor V.
        Sharp rise in Medicare enrollees being held in hospitals for observation raises concerns about causes and consequences.
        Health Affairs (Project Hope). 2012; 31: 1251-1259
        • Harris S.L.
        • Kelly J.
        Building clarity on the two-midnight rule.
        Journal of AHIMA. 2015; : 68-70
        • Mason D.
        The unintended consequences of the “Observation Status” policy.
        JAMA. 2014; 312: 1959-1960
        • Office of Inspector General
        OIG policy statement regarding hospitals that discount or waive amounts owed by Medicare beneficiaries for self-administered drugs dispensed in outpatient settings.
        2015 (Retrieved from)
        • Office of Inspector General
        Hospitals' use of observation stays and short inpatient stays for Medicare beneficiaries.
        2013 (Retrieved from)
        • Wiler J.L.
        • Ross M.A.
        • Ginde A.A.
        National study of emergency department observation services.
        Academic Emergency Medicine. 2011; 18: 959-965