vandegriftBObservation status continues to be a problem for hospitals. One significant issue relates to observation status that extends beyond 48 hours and the qualifying skilled nursing facility (SNF) stay.


During the demonstration program, Recovery Audit Contractors (RACs) reviewed “short stays” and observation cases and found the errors listed below. As the permanent RAC program moves forward, reviewers are sure to address these errors:


  • Time spent in observation status rolled together with an inpatient stay in attempts to meet the qualifying three-day SNF requirement;
  • Inpatient admission for the purpose of a SNF placement only and with little evidence of medical necessity; and
  • Inpatient admissions lacking the medical necessity documentation for all three days of the three-day qualifying rule.


And, finally, the extended observation outpatient status beyond 48 hours was used not to determine if the patient needs to be an inpatient but for the fear of an inpatient claim rejection due to the lack of medical necessity.


Observation Use Increasing


In a recent communication, the Centers for Medicare & Medicaid Services (CMS) noted the upward trend of the number of hours a patient spends in observation. In 2006, the stay for 3 percent of patients extended beyond 48 hours and in 2008 that number increased to nearly 6 percent.


Needless to say, CMS wants to learn more about this increase, so it contracted with the American Hospital Association (AHA), the Association of American Medical Colleges (AAMC) and the Federation of American Hospitals (FAH). These organizations will conduct an investigation into the causes for this increase.


CMS Listens to Providers


On August 24, 2010, CMS held a listening session about extended observation care for Medicare beneficiaries.


Toby Edelman, an attorney for the non-profit Center for Medicare Advocacy, told the CMS panel that the number of patients being rejected from coverage after an “outpatient” stay has dramatically increased in the last 11 months. “Then, the beneficiaries and their families end up paying tens of thousands for nursing home care that Medicare would be paying for otherwise, except for this outpatient (observation) status,” she said.


Reasons for provider angst were made clear at the listening session.  The following examples are situations that providers experience on a daily basis.


Patients come into hospitals; stay for days; and receive meals, medications, diagnostic testing and even surgeries but are still considered as outpatients. They do not understand why they receive a bill for services that they expected Medicare to cover. This scenario leads to anger and mistrust of the health system and also creates problems for hospitals.


Observation is a “catch-all status.” Many of the patients who end up in observation are those who cannot return safely to their homes yet are not sick enough to be inpatients.


Listening session attendees expressed concern about the strict CMS admission criteria. They state that their own internal audit process is driving the over-use of observation because of their fear of RAC reviews and claims’ rejections.  Hospital administrators fear that the lack of medical necessity documentation will make them targets for RAC reviews.


One attendee cited the reason for the growing use of observation service was the thinning of the inpatient-only list developed by CMS for the hospital outpatient prospective payment system (OPPS).  As this attendee pointed out, the trend is to move toward services and procedures that are less invasive due to evolving technology.


The result is the belief that recovery can occur in the home setting, but this is not always possible for Medicare patients because they lack the resources and support for even routine postoperative care. Physicians then respond by keeping the patient in the hospital with the use of observation status.


Confused Patients, Fearful Providers


Medicare patients are confused when the hospital billed their four-day stay as an outpatient claim. The confusion continues when patients are not told that they were in an observation status, which makes them ineligible for their SNF benefit under the Medicare program. The consequence is that the patient is financially liable, and they may have higher cost-sharing for the outpatient services.  They also will be entirely financially liable for a SNF stay since they did not qualify for the Medicare-covered care.



Patients who linger for days in an outpatient status with observation services are of great concern to providers.  The lack of medical necessity in the documentation does not support the inpatient level of care or meet strict admission criteria. Hospital providers are anxious over ongoing threats of the RAC and claims of fraudulent billing practices.  They hear the accusations that they are being incentivized for the use of observation status and fear for the quality of care for patients who are only in the hospital for “observation.”


Quick Fix


A quick fix to this issue may be the passing of legislation entitled Improving Access to Medicare Coverage Act of 2010, Representative Joe Courtney (D-CT) introduced on July 29, 2010. During the bill’s introduction, he stated, “My legislation will fix this unfair component of Medicare law that arbitrarily differentiates between patients on inpatient versus observation status with obtaining necessary skilled care. The Improving Access to Medicare Coverage Act will count a beneficiary’s time on observation towards the three-day hospital stay requirement for skilled nursing care.”


HR 5950 would amend the Medicare statute’s definition of “post-hospital extended care services” at 42 U.S.C. §1395x(i) by adding the following language at the end of the section:


“For purposes of this subsection, an individual who is in a period of observation status in a hospital that exceeds 24 hours shall be deemed to have been an inpatient during such period of observation status and the individual’s leaving the hospital after such period of status shall be treated as a discharge from the hospital.”


Stay tuned to see if bill HR 5950 will pass the 111th Congress prior to their session closing on October 9.


About the Author


Barbara Vandergrift, RN, BSN, MA, is a senior healthcare consultant with Medical Learning, Inc. (MedLearn®), St. Paul, MN. MedLearn is a nationally recognized expert in healthcare compliance and reimbursement. Founded in 1991, MedLearn delivers actionable answers that will equip healthcare organizations with their coding, chargemaster, reimbursement management and RAC solutions.

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