Observation Status Update: Cost Saving or Cost Shifting?

Abstract

Recent 2015 Discussions Of Observation Status

The topic of Observation Status has recently gained increased attention after a Senate committee heard statements on May 20, 2015. Prior to its recent hearing, Observation Status seemed to “fly under the radar” while carrying with it some harsh realities, mainly in the form of (a) increased consumer out of pocket costs and (b) not satisfying the criteria to be admitted to SNFs, with this kind of “status” only being revealed to the victims of inappropriate use of the hospital status.

Those who spoke to the Senate committee highlighted several negative consequences of hospitals’ increased use of Observation Status in place of in-patient admissions. Moreover, the attention in Washington surfaced litigation over this issue such as Bagnall v. Sebelius (No. 3:11-cv-01703, D. Conn) in which a national class action lawsuit was brought against the Secretary of Health and Human Services claiming that Observation Status violated the “Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution”.[1]

The executive director of the Medicare Payment Advisory Commission (MedPAC) highlighted in his testimony the increased scrutiny that hospitals are experiencing with regard to inappropriate in-patient admission penalties as a result of RAC audits. This, many believe, is attributed to the increased use of Observation Status as a means of avoiding such penalties. Several planned and proposed corrective initiatives were discussed including:
(a) decreasing the in-patient legitimate stay criteria to a “two midnight” rule to qualify for SNF admission, and (b) The Medicare Audit Improvement Act of 2015, which would replace the contingency fee paid to current RAC auditors with a flat fee coupled with payment reductions for high overturn rates of denials.[2] This said, neither of these initiatives has come to fruition; each side was able to present concerns with any proposed solutions.

However, in the May 2015 hearing supporters of Observation Status continued to present evidence that, if used correctly, Observation Status can result in shorter lengths of stay, more targeted and higher quality care and significant cost reductions for patients, hospitals and Medicare. Health Affairs published several articles on the positive outcomes and projections from the use of Observation Status. Specifically, a case study conducted in Georgia demonstrated that patients treated in a “type 1” Observation Unit had “23-28 percent shorter length-of-stay, a 17-44 percent lower probability of subsequent inpatient admission, and $950 million in potential national cost savings each year”.[3]

The case studies and stories cited later demonstrate that there are significant advantages to the use of Observation Status. However, the key to its success lies in dedicated units with clearly defined protocols. In nearly all documented cases of the misuse of Observation Status patients were placed in in-patient units and unware of their status due to a lack of distinction from other admitted patients.

The Senate committee hearing focused on solutions that centered on reducing the requirements for in-patient admissions to qualify for SNFs, stricter communication protocols for informing the patient of his/her observation status, and even issuing Medicare waivers to allow patients to be admitted to SNFs without satisfying the in-patient admission requirement as seen in the Beacon Health ACO.[4] However, perhaps this is getting too far off base by virtue of shifting the focus to unnecessary hypothetical solutions that are irrelevant if hospitals were using Observation Status appropriately.

When used correctly, with the necessary protocols and safe guards in place, Observation Status is successful for all parties. However, the current use of Observation Status has caused significant problems as outlined by several cases cited later. Perhaps the best solution would be to ensure that care is delivered in a distinct setting and by appropriate personnel to match the success stories, thus ensuring that all patients are receiving the quality of care they deserve.

[1] Observation Status & Bagnall v. Sebelius, Center for Medicare Advocacy, Inc, http://www.medicareadvocacy.org/medicare-info/observation-status/.

[2] Senate Committee Mulls Medicare Hospital Observation Status, Medpage Today, (May. 22, 2015), http://www.medpagetoday.com/PublicHealthPolicy/Medicare/51715.

[3] Michael A. Ross, Jason M. Hockenberry, Ryan Mutter, Marguerite Barrett, Matthew Wheatley and Stephen R. Pitts Protocol-Driven Emergency Department Observation Units Offer Savings, Shorter Stays, And Reduced Admissions Health Affairs, 32, no.12 (2013):2149-2156

[4] Senate Committee Mulls Medicare Hospital Observation Status, Medpage Today, (May. 22, 2015), http://www.medpagetoday.com/PublicHealthPolicy/Medicare/51715.