Observation Status: Cost Saving or Cost Shifting?

Abstract

Observation units were developed to bridge the gap between hospital emergency rooms and inpatient hospital care. They have the intention of providing an opportunity for physicians to diagnose a patient with an uncertain condition resulting in a stay typically less than twenty-four hours. Once a diagnosis is achieved the attending physician can then determine if the patient meets the criteria to be admitted as an inpatient or should be discharged. However, with recent fears of harsh readmission penalties and audits from the Center of Medicare and Medicaid Services’ (CMS) Recovery Audit Contractor (RAC) Program, hospitals have seen a dramatic increase in the number of patients being held under “observation status”. This simple change in patient status designation, without adhering to the guidelines set forth by CMS for observation status, has pushed a significant amount of cost onto the patient. Observation status is considered an outpatient service and, therefore, is covered under Medicare Part B as opposed to Medicare Part A. Moreover, many Medicare patients have lost coverage of post-acute skilled nursing care due to not fulfilling the three-day inpatient hospital stay requirement, further burdening these consumers with additional health care costs. Recent awareness of the need to change Medicare policies on observation status has gained bi-partisan support in Congress. As a result, the “Improving Access to Medicare Coverage Act of 2013” has emerged; however, no concrete changes in the Medicare policies have yet to be seen.