Hospital Inpatient vs. Outpatient Observation Status - Why It's Important

When individuals are admitted to a hospital, they can be designated as “inpatient” or under “observation status.”  Many patients are unaware of these designations, which can have far-reaching consequences for billing and for subsequent treatment.  These consequences are of particular concern to seniors who are covered by Medicare.

Medicare Part A pays for hospital inpatient services, but does not pay for patients under observation status.  Only Medicare Part B will pay for observation status.  Since most people have Part A and Part B (as well as supplemental or Medigap insurance), this may not appear to be a serious matter to them.

However, unless the patient was admitted to the hospital as an “inpatient” for at least 3 days, Medicare will not pay for subsequent rehabilitation services, and supplemental insurance will not pay either.  Many patients are discharged from the hospital to a skilled nursing facility for rehabilitation, which can last for several weeks.  These services are extremely expensive, and, if not covered by insurance, will be financially devastating for most people.  For a detailed explanation, see the government’s Medicare website regarding this subject.

For those patients who have Medicare Part A only, the financial consequences of “observation status” are even more devastating.  They will be required to pay out of pocket for both the hospital stay and for subsequent rehabilitation.  The costs could easily run into tens of thousands of dollars.

Thus, for every senior whose primary medical insurance is Medicare, it is vitally important to know whether your hospital stay is “inpatient” or “observation status.”  Medicare will not include time spent in hospital in “observation status” or in the emergency room, when determining whether you have met the 3-day hospital stay requirement for subsequent rehabilitation in a skilled nursing facility.   It is particularly concerning that, in some cases, patients admitted to the hospital by their own doctors have seen their inpatient status retroactively reversed by the hospital to outpatient observation status.

Starting March 8, 2017, the Centers for Medicare & Medicaid Services (CMS) announced that hospitals must give patients a standardized “Medicare Outpatient Observation Notice” (MOON).  However, the MOON does not provide any right to appeal, and patients cannot challenge their observation status.  This problem is currently being addressed by the Center for Medicare Advocacy.

A sensible question to ask is:  Why are hospitals admitting some patients under observation status rather than as inpatients?  The answer may be found at least partly in the financial penalties Medicare imposes on hospitals if more than a certain percentage of patients are readmitted within 30 days.  In a 2016 article entitled “The Hidden Financial Incentives Behind Your Shorter Hospital Stay,” the New York Times stated that “Under Medicare’s Hospital Readmissions Reduction Program, hospitals now lose up to 3 percent of their total Medicare payments for high rates of patients readmitted within 30 days of discharge.  This fiscal year — the fourth one of the program — Medicare will collect $420 million from 2,592 hospitals that had readmission rates higher than deemed appropriate. . . .  [There is] evidence that hospitals are gaming the metric.  For instance, patients who are placed under ‘observation status’ are not counted in the readmissions metric even though they may receive the same care as patients formally admitted to the hospital.  Likewise, patients treated in the emergency room and not admitted to the hospital do not affect the readmissions metric either.”

It is unfortunate when well-intended ideas get turned into perverse incentives.  Of course it would be good to reduce short-term hospital readmissions.  However, it makes little sense to allow hospitals to game the system and pass on financial penalties to seniors, who tend to have chronic, recurring and deteriorating conditions.  In many cases, the difference between “inpatient” and “observation status” may be nothing more than an arbitrary designation aimed at avoiding a potential financial penalty for the hospital.

When admitted to a hospital, seniors and their families need to be alert to whether their admission is “inpatient” or outpatient “observation status.”  Ask your doctor to help make sure your hospital admission is “inpatient.”

At Lamson & Cutner, P.C., we provide advice and assistance regarding health care and long-term care.   We don’t want our clients to be caught off guard and faced with exorbitant hospital and nursing home bills.  Our Elder Law attorneys work with seniors and their families to gain access to Medicaid benefits for home care and skilled nursing care.  We can advise on attaining eligibility for benefits, and how to protect your assets and income at the same time.  We are experienced with Medicaid asset protection trusts, pooled income trusts, and all the most effective strategies of Elder Law practice. Contact the Elder Care Attorneys at Lamson & Cutner, P. C., for further details.

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