Observation status: How Medicare’s solution could make things worse

There are tens of thousands of policies in Medicare’s policy manual, which makes for stiff competition for the “Most Maddening” award. But my vote goes to the policy around “observation status,” which is crazy-making for patients, administrators, and physicians.

“Obs status” began life as Medicare’s way of characterizing those patients who needed a little more time after their ED stay to sort out whether they truly needed admission. In many hospitals, “obs units” sprung up to care for such patients – a few beds in a room adjacent to the ED where the patients could get another nebulizer treatment or bag of saline to see if they might be able to go home.

Giving the hospital a full DRG payment for an inpatient admission seemed wrong, and yet these patients really weren’t outpatients either. The Center for Medicare & Medicaid Services’ (CMS’s) original definition of obs status spoke to the specific needs of these just-a-few-more-hours patients: a “well-defined set of specific, clinically appropriate services,” usually lasting less than 24 hours. Only in “rare and exceptional cases,” they continued, should it last more than 48 hours.

A recent article in JAMA Internal Medicine, written by a team from the University of Wisconsin, vividly illustrates how far the policy has veered from its sensible origins. Chronicling all admissions over an 18-month period, Ann Sheehy and colleagues found that observation status was anything but rare, well defined, or brief. Fully one in ten hospital stays were characterized as observation. The mean length of these stays was 33 hours; 17 percent of them were for more than 48 hours. And “well defined?” Not with 1,141 distinct observation codes.

To underscore just how arbitrary the rules regarding observation are, an investigation by the Inspector General of the U.S. Department of Health and Human Services released today found that “obs patients” and “inpatients” were clinically indistinguishable. Their major difference: which hospital they happened to be admitted to.

The potion that turned this particular policy into a monster was the Recovery Audit Contractor (“RAC”) audits, whose existence was authorized by the 2003 Medicare Prescription Drug Act. RAC auditors can target a hospital, pull a hundred or so charts, and, if they find improper billing, collect a bounty for every dollar they save CMS. With the determination of obs status so amorphous, hospital administrators have adopted a “better safe than sorry” stance, generally deciding that cases that are anywhere near a close call should be called obs. (Just this week, Beth Israel Deaconess Medical Center in Boston forked over $5.3 million to Medicare to settle charges related to admissions that auditors believed were really obs.) The result of all this angsty wheel-spinning: the number of obs cases in the U.S. went up by 50 percent between 2006 and 2011, with a more-than-400 percent (!) increase in Medicare patients staying more than 48 hours under observation.

If this mess were only about the question of money for Medicare, hospitals, and auditors, it would be plenty maddening but not miasmal. Unfortunately, patients and their families are unwitting victims, collateral damage. Picture this: your mother is sitting in a hospital bed, with a band on her wrist, an IV in her arm, nasal prongs in her nose, and EKG squiggles skipping across a telemetry monitor. Luckily, she does reasonably well and is discharged to a skilled nursing facility after a three-day stay. OK, your family thinks, at least we know that Medicare will pay for the SNF since she’s crossed CMS’s magic three-day threshold to trigger SNF coverage.

Only later do you learn that her hospital stay doesn’t count, because she was on obs the whole time. Or you get a co-pay bill for several thousand dollars because, while inpatient medications are covered under Medicare, “outpatient” medications are not. While she sat in her hospital bed, you see, she was really an outpatient.

In my editorial accompanying the Wisconsin paper, I cite the case of a 78-year-old woman who received a $16,000 bill for an uncovered nursing home stay following a four-day observation stay in the hospital. “I thought it was surely a mistake,” she said. “Nobody ever said I wasn’t admitted.” In a brochure that could have been written by Franz Kafka, Medicare tries to explain the unexplainable. “REMEMBER,” it says, the capital letters designed to make you fully alert for the nonsense that follows, “Even if you stay overnight in a regular hospital bed, you might be an outpatient.” Huh?

I hope you’ll take a look at both the Wisconsin paper and my editorial. In this blog, I’d like to extend the discussion to the fix, which didn’t seem like a bad idea to me when I first penned the editorial, but which I’m coming to learn might – hard as it is to believe – make things worse.

On April 16, 2013, CMS proposed a new rule that would, using a time-based criterion, clarify which patients should be on observation. Patients who stay for less than two midnights (“one Medicare day”) will be assumed to be obs; those staying longer than two midnights would be inpatients. Medicare apparently believes that turning all these two-day or more stays from obs into inpatient admissions will cost the agency money, since they have proposed a 0.2% cut in hospital reimbursement to compensate for these projected increased costs.

Yet CMS has not released any financial models that might help predict what the impact of this change is likely to be. And, whatever Medicare’s projections may be, many hospital administrators believe that the new policy will cost them huge amounts of money. How can this be? While hospitals will now receive a full DRG payment for some longer-stay patients who previously would have been observation (a win), these administrators believe that their losses – particularly on short-stay surgical patients who will now be observation, despite high resource use – will far outstrip the gains. I’ve seen some preliminary data that supports their fear.

Moreover, there is a widespread panic that, rather than soothing the RAC auditors, the new policy will be fresh meat for them. After all, with the two-midnight rule, it’s likely that RAC auditors will be suspicious (potentially with some justification) that hospitals will keep some patients an extra midnight. You might call it an inverse Cinderella effect, as patients are not sent home before midnight in order to capture an inpatient reimbursement and spare the patient the costs associated with an observation stay. So the unproductive and maddening cat-and-mouse game will continue, albeit within slightly less arbitrary boundaries.

A watchdog organization, the Center for Medicare Advocacy, recently highlighted this concern. They noted that the new policy calls for an inpatient admission when …

… the patient is expected to be in the hospital for at least two midnights. The physician “expectation [of a two-midnight stay]. . . should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event.” These factors “must be documented in the medical record in order to be granted consideration.” In other words, the physician certification that he or she expects the patient will need to stay for more than two midnights is not enough: [RAC auditors] can scour the medical record and if they don’t see evidence, they can deem it an improper hospitalization.

Richard Rohr, a seasoned hospitalist leader who is now a consultant, echoed this fear, adding in a note to me:

The basic problem with observation stays is the disconnect between functional status and medical necessity. Many elderly patients who are not able to care for themselves and need more help than a family can perform come to the hospital because it is the social service agency that is open at night and on weekends and does not turn anyone away. These patients often do not have medical needs as defined [by Medicare]. Having stepped away from clinical hospital medicine to focus on medical necessity work, I talk regularly with hospitalists and other physicians, who struggle with the distinction between functional needs and medical needs in caring for patients.

A rather dense (and, at times, impenetrable) editorial the New England Journal of Medicine also questions whether the proposed policy is an advance. The authors don’t think so. They recommend that patient co-pays be capped, that the costs of medications the patient is already on at home be covered, and that obs days count toward the 3-day requirement for SNF eligibility.

While these are reasonable recommendations, they don’t go far enough to stem the madness. Rather, the line of the old song comes to mind: “Let’s call the whole thing off.” It’s time to restore obs to its original meaning. Medicare should develop a new payment code for those patients who need several, perhaps up to 24, hours of very specific therapy, in a physical observation unit, to determine whether they need admission: nebulizers, fluids, maybe a unit or two of blood. For everyone else admitted to a regular bed on a hospital ward, they are (and it seems silly to have to say this) admitted to the hospital, and the reimbursement system should reflect this. Utilization Review can look to see if there was medical or social justification for admission – if not, the day or days can be denied. Isn’t that simpler?

While the policy around obs is important and frustrating, there are larger issues at play. As I wrote in my editorial, Medicare is in the process of transforming itself from a “dumb payer” into an active shaper of the medical marketplace, through policies such as public reporting, “no pay for errors,” and value-based purchasing. On balance, that’s a good thing. But when Battleship CMS turns, it sends out giant wakes, some of which are unanticipated, even by the organization itself. Policies like the one related to obs status risk capsizing a lot of boats.

Whether the problems with the new observation policy will represent unintended consequences, a lackluster analysis, or a purposeful cost-cutting strategy will doubtless be in the eyes of the beholder. But whatever the motivation, it will be crucial for interested parties (AHA, SHM, and others) to thoroughly vet the proposed changes and push back hard on CMS if they truly are wanting. It’s a sad reality that CMS may well be in the process of turning a vague but maddening policy into one that is less vague but equally problematic.

Bob Wachter is professor of medicine, University of California, San Francisco. He coined the term “hospitalist” and is one of the nation’s leading experts in health care quality and patient safety. He is author of Understanding Patient Safety, Second Edition, and blogs at Wachter’s World, where this post originally appeared.

Comments are moderated before they are published. Please read the comment policy.

  • NewMexicoRam

    Why Medicare is allowed to get away with this ridiculous rule is beyond me. If you stay overnight in a hospital, it should be an admission. No questions, no reviews.

  • betsynicoletti

    Hospitals expend enormous resources in making the decision about whether the patient should be inpatient status or observation status. Case managers and physicians spend time reviewing the chart. Outside firms are sometimes called in to make the determination. The hospital wants to maximize revenue but also minimize compliance risk. Then, the case manager calls the admitting physician, “Can you write an order for inpatient?” or “This patient should be OBS.” Although only the physician can write the order that determines the status of the patient, the decision is often made by someone other than the physician.

    If only “simpler” as you suggest, would win the day.

    • Stefani D

      The issue of inpt vs obs hangs over the heads of every case manager and utilization review specialist. Both are often referred to as the ‘chart police’ or the ‘chart nazis’ because of the attention that must be paid to stay in compliance and avoid RAC or MAC scrutiny. This just adds another unnecessary criteria layer in an already complex and confusing process. Shame on HHS

  • David Gelber MD

    For years I’ve told our case managers there should be only two levels of hospital care, inpatient admission or outpatient, which would mean the patient would receive a specific service and then be discharged. Everything would be much simpler.

  • drll

    I read in the NY Times awhile back on how the family of the patient that was changed from inpatient to observational made the charges out of pocket or at least a whole lot more expensive for the patient. They came out of inpatient/observational with a whopping bill. Brilliant way to defer the costs.

    • karen3

      And I suspect, more profitable to the hospital, since obs is basically cash pay if its non-covered.

      • betsynicoletti

        Less profitable for the hospital.

      • querywoman

        Most patients can’t pay their bills. It’s a write-off.

  • Anthony D

    see what happens when the unintended consequences kick in. Like Nancy
    PIGosi said we have to pass it to see whats in it. Heck of a way to run a

    • May Wright

      “Nancy PIGosi”? Is that really necessary? And in any case, the issue of obs status is not specifically an Obamacare problem anyway, since the number of obs cases started spiking before Obama was even elected.

    • LIS92

      “When I am able to resist the temptation to judge others, I can see them as teachers of forgiveness in my life, reminding me that I can only have peace of mind when I forgive rather than judge.”

      -Gerald Jampolsky-

  • karen3

    This is a disaster for people with chronic, serious conditions. I have no adrenals and there are times where is it more than prudent to hold and make sure that potassium levels are stable. For severe diabetics, people with COPD, and a host of other serious problems, going to the hospital, having things be stablized and keeping an eye on things without the need for an ambulance run is prudent and medically appropriate.

  • buzzkillerjsmith

    Payment should be based on the services performed, not on where in the hospital they are performed.

    This is another example of one of the arbitrary rules that drive docs and hospitals nuts. If you know one rule, you still cannot predict the admin rule for a very similar clinical situation. A wonderful employment program for the rule makers and office staff with no positive impact on the health of patients or on saving money.

  • Anthony D

    This is the problem with the ACA.

    It took $700 billion away from Medicare. This means that medical care for the elderly will be rationed and some elderly will be denied treatment per admission of President Obama, who phrased it as an improvement due to cost-cutting.

    Additionally, now even the unions are complaining that it is causing an increase in health insurance premiums of up to 400%. Many people wanted Obamacare because they thought that they were getting something for nothing. Now they find that adding a Washington bureaucrat to the process of medical treatment is putting medical treatment out of the reach of the common man and leading us down the road to Soviet-style
    medical collapse.

    Finally, it is clear that the American medical system is the best in the world. Even the rich, who could go anywhere, stay here for medicine and other people from all over the world come here for treatment. Part of the cost of medicine is set aside for research and development and America has led the way in the world for the discovery and production of new life-saying medicines.

    All of this will totally be destroyed by a power-thirsty political party responsible for the deaths of 4,000 unborn babies everyday. If Obamacare is implemented, we soon must have economic collapse. Part of the administration of Obamacare is designated to go to the IRS, and we now see that they are politically controlled so that it will soon be apparent that medicine will be politically controlled as it was in the Soviet system.

    • Robert Luedecke

      There is no doubt medical care in the US is out of the reach of the common man, but it is not because of Obamacare. With our average healthcare costs being twice that of the next highest country, our current system has caused an unsustainable bloating of costs. We will bankrupt businesses and the US if we do nothing. Obamacare is the first step in doing something to fix a very broken system.

      • Mike Pline

        How is Obamacare going to make healthcare cost less?

        I can see how cost transparency, and making patients responsible for more of their own medical costs, could bring down prices. But how will Obamacare make, say, a colonoscopy less expensive?

        • Robert Luedecke

          The Texas Medical Association has tried for about 10 years to get insurance companies to stop blaming every rate increase on doctor charges going up, but could not get it to pass the state legislature. Obamacare established a nationwide uniform system for insurance companies so they have to pay out at least 85% of the premium money for actual medical care. If they don’t do this, they have to rebate the extra to customers. Insurance companies will put pressure on doctors doing every procedure to lower cost, including colonoscopy.

          • Mike Pline

            Sorry to remain skeptical, but that doesn’t make much sense to me.

          • Robert Luedecke

            Insurance can be a really difficult thing to understand. As a doctor I see first hand the pressure insurance companies put on all of us to lower our fees and that is why I know about that.

  • Robert Luedecke

    As a physician who has been very involved with healthcare reform since 2007, I know the preceding comment about Obamacare is disinformation. The ACA is definitely not perfect, but it does not take money and healthcare away from old people. All of us are aware of the idea that you cannot die in the US unless you are on a ventilator in the ICU and that was what Pres. Obama was talking about when he said we need change and it will save money. I don’t have any idea where the 400% number came from, but it does make since that in states like Texas where it was legal to sell health insurance that had huge loopholes to actually paying anything, if you increase quality, it might increase cost, but at least you know you are really covered. Obamacare is a really good effort to keep private health insurance but have the government make rules to stop the fleecing of the public by some insurance companies.

    There is no doubt US medical care is twice as expensive as any other country and some people would like to keep it that way. While we have outstanding results with acute care, we do not have better results in many areas, just much higher costs.

    • C.L.J. Murphy

      “All of us are aware of the idea that you cannot die in the US unless you are on a ventilator in the ICU”

      That simply isn’t true. Advance Directives/Living Wills/DNR orders have been around long before Obama’s reign. My own sister died at home, quietly and comfortably, cared for by her long-time family physician, after a long bout with cancer, back in 2005. Neither of my parents died “on a ventilator in the ICU” either. And the government did not have to give their physicians taxpayer dollars to get them to discuss these measures either – it was just part and parcel of being a primary care physician.

      But unless Obama is going to mandate that free citizens MUST sign Advance Directives &/or DNR orders, we’re still going to have a mix of those who die in ICUs after weeks if not months of expensive intervention, and those who choose to receive minimal intervention and and receive professional comfort care in their last weeks or months. Obamacare is not going to change anything in this regard.

      • Robert Luedecke

        I applaud the wisdom of your family members. Before Sara Palin coined “death panels” there was bipartisan support for Medicare to pay doctors for having the often long discussion with patients about end-of-life issues. It is estimated that 25% of total Medicare spending occurs in the last year of life. Some of this may be caused by some doctors who are not willing to have this discussion. I am not talking about forcing anyone to do anything. Much of that spending does nothing to improve life and Medicare would be more fiscally secure if we had the courage to look at this more. I also have signed Advanced Directives. Don’t you wish everyone had the opportunity that we have?

        • Mike Pline

          Why doesn’t everyone have the opportunity? Just because Obama has not made a royal decree to that effect?

          We all had the opportunity to sign Advance Directives under Clinton and Bush, we still have that same opportunity under Obama.

          • Robert Luedecke

            Everyone definitely has that opportunity. But if you want to increase the exposure, you pay the already overburdened Medicare doctor specifically for the time to talk about Advance Directives. There are only so many minutes in a visit and every year more requirements on what has to be covered in visits. If you pay the doctors, there can be a separate visit. It would be a very cost-saving move.

          • Mike Pline

            Keep piling on the Federal legislation as to how the already-overburdened doctors who see Medicare patients must practice, and we’ll keep seeing fewer and fewer doctors who are willing to see Medicare patients. Maybe LESS government involvement in the patient-doctor relationship and FEWER regulations about how doctors should be treating their patients is the answer, not MORE.

            And there ARE going to be those patients who feel like Obama is paying their doctors to talk them into dying in order to save the government money, like it or not. That’s not the fault of the former Governor of Alaska: there were a lot of people who wouldn’t trust the Bush administration; there are a lot of people who don’t trust the Obama administration; there are a not-small number of people who wouldn’t trust ANY federal government bureaucrat paying their doctor to talk them into dying.

            I actually think it might backfire, that a lot of people who would otherwise have been thinking of having an advance directive are going to buck it if they get an inkling that it’s just the government trying to kill them early to save money.

          • Robert Luedecke

            You are right, that would be very unethical for doctors to be paid more for getting patients to accept less care in the end days. The Advanced Directive can also say I want everything done as long as my heart is beating. The extra pay would be for just having the discussion, not for what choices were made.

            It is not just Medicare that wants more done in the visits, it is all the insurance companies. Some are very good improvements and others not so much.

          • EmilyAnon

            “Keep piling on the Federal legislation as to how the already-overburdened doctors who see Medicare patients must practice, and we’ll keep seeing fewer and fewer doctors who are willing to see Medicare patients….”


            If doctors/hospitals refuse medicare patients, don’t you worry that the government might make it conditional to treat these patients in order to receive medicare monies needed to train new doctors?

    • Mengles

      In the name of transparency and your continued advocacy for Obamacare,, don’t forget to mention Dr. Luedecke, that you are also part of the liberal front group for President Obama, known as “Doctors for America”, previously known as “Doctors for Obama”. I still laugh at your advocacy for students to go into primary care, when you yourself went into anesthesiology, a ROAD specialty. The soapbox which you stand on must be daunting. Yes, Obamacare DOES take nearly 700 billion dollars from Medicare to pay for Obamacare. How are those “savings” achieved? By paying providers and hospitals LESS for their services.

      • Robert Luedecke

        I am a member of Doctors for America and I am trying to help everyone in the US get health insurance. The US is the only industrialized country in the world to not assure health access. If it makes me a liberal to want better health for everyone, so be it.

        I went to medical school with the idea of becoming a family doctor and decided I was not smart enough to keep up with all the advances that a primary care doctor needs to do.

        Some money in Medicare was saved by cutting the extra money that was going to Medicare Advantage insurance companies. Doctors had been asking for many years for this decrease so we can all play on a level field instead of them getting an extra subsidy. Hospitals did cut a deal to decrease their pay in return for more business. Neither decreased services for Medicare patients.

        • Mengles

          “I went to medical school with the idea of becoming a family doctor and decided I was not smart enough to keep up with all the advances that a primary care doctor needs to do.” ==> Yes, I’m sure that’s the reason. I’m sure it had nothing to do with primary care being “too much paperwork, too much time, with too little pay.” I’m always amazed by people such as yourself that advocate for liberal policies which directly affect others but not yourself.
          I like how you avoided the point I was making about Medicare. I never said services would be decreased DIRECTLY. I said that providers and hospitals would be PAID LESS for those services. What do you think happens when providers are paid less for services than what the service costs? It eventually stops getting offered in the first place. Unlike the govt., providers can not operate in the red.

  • drgn

    Dr. Reznick, Just more confirmation about the RUC being toxic. If you have a moment, the AMA answered my derogatory post about the RUC. It is under the blog ” Why the Accuracy In Medicare Physician Payment Act should pass” by Brian Keppler posted here on KevinMD which discusses the RUC in depth. If you have a moment please read it. Would love to hear your reply.

    • Steven Reznick

      I have been an opponent of the RUC’s policies and its disproportionate composition of procedure oriented specialists at the expense of primary care physicians for years now. I am all for transparency and the summary of the bill certainly sounds like an improvement , but just like the affordable care act, without reading it first in its entirety its hard to comment. I am open to non physician participation in a consulting fashion from financial and economic experts but clearly do not believe untrained lay persons, nurses or allied health care providers have a place determining physician payment. They should have an opportunity to comment on proposals before they are passed on to CMS if they choose to. I believe the RUCS minutes and discussions should be open and available for public review and comment

      • drgn

        I so agree with everything you just said. Unfortunately, immediately after the RUC articles broke in the WashPost, WashMonthly and Time, Modern Healthcare reported that the AMA deployed an army of lobbyists to defend their policy position with Congress. It does not look like any change can happen with this series of events. As soon as i wrote that in the blog the AMA found my response and wrote that canned response about volunteering their expert help with the RUC ( i.e. volunteering to manage 80 million medicare dollars) I believe. Nice charity work on their part.

  • betsynicoletti

    I listened to CMS’s Open Door Forum on the subject of inpatient versus observation. It seems that inpatient will depend on the physician’s judgment that the patient will need a stay that lasts for two midnights. A patient may be admitted to OBS, but on the second day, after the first midnight but before the second midnight the physician may change the order to inpatient. This rules goes into effect on October 1, and will be a major change. If the physician changes the order before the second midnight, then the entire stay becomes inpatient.
    There is no change to the rule that the patient need to be an inpatient for 72 hours to qualify for SNF.

  • betsynicoletti

    And it is not clear to me what category of code (inpt, OBS) the physician will bill for the first day, if the order for inpatient is written before the second midnight. I did send an email question about that to CMS but have not received more than a “we got your question” reply.

Most Popular