Observation status: When you’re not a hospital inpatient

Two decades ago, a decision was made by Medicare policymakers that carotid endarterectomies would not be allowed. Their claim was too many were being done costing Medicare money. The following year, data revealed a sharp rise in debilitating strokes, so wisely, surgical criteria was developed recommencing the use of this quality-of-life saving operation.

For years, there have been other misjudgments against Medicare patients that are only now becoming apparent. Let me clarify a particular problem which wishes not to be clarified: observation status.

You would think when seeking life-threatening medical care at a hospital, treatment begins in the emergency room followed by admission to an inpatient bed. But under the controversial designation “observation status” determined by Medicare bureaucrats, you are still considered an outpatient even with oxygen in your nose and an IV in your arm.

Much has been written in the news about observation status, but I find despite broad media coverage, my physician colleagues don’t know the consequences of this complex and convoluted designation. The difference between being admitted versus being under observation status is now a costly problem for our seniors and caregivers, and even more difficult to understand.

As is typical, government has made rules and laws so complex, lawmakers don’t even understand them. The layers of observation status started when they initiated diagnosis-related group (DRG) to determine hospital payments. For a specific diagnosis, the time and intensity of care was predetermined, and the hospital would be paid a set Medicare DRG amount.

For example, if your admitting diagnosis is pneumonia, you are allowed four inpatient days, and the hospital is paid a flat fee of $6,000. Should your stay be 10 days, the hospital must shoulder the added cost of care. Conversely, if you stay only two days, they still get paid the flat DRG fee of $6,000 and make money.

Apparently somewhere along the line, hospitals prematurely discharged patients and still got their fee, which Medicare did not like. So they layered on observation status to counter any abuse.

In my profession, if I recommend treatment or surgery, I carefully look at potential risks and complications to advise my patients of their impact. Not surprisingly, our legislators are inept at this scrutiny (as they were with endarterectomies), and therefore peeling this onion with all its layers has made many people cry.

What are the consequences?

As a Medicare patient under observation status, you are considered an outpatient even though you are laying in a hospital bed. Therefore, you are financially responsible for 20% of all tests and services you might receive. If a $1500 MRI is ordered, your out-of-pocket cost just for that test is $300. Add a few more tests plus any doctor or hospital fees, those 20% dollars start to mount up. On the other hand, if you were an inpatient, you would be only responsible for the yearly Medicare deductible which is a little over $1,200 (even less with secondary insurance).

Also, any oral or IV medication that might be ordered is out-of-pocket possibly including $10 for one Tylenol pill. But if you were designated an inpatient, it is included in your care.

The worst horror stories surround patients who have had stokes, or broke their hip and had it surgically repaired. To have post-rehabilitation paid by Medicare, there is a 3 day hospitalization qualifier that is not met should you be admitted under observation status. For further care, you might easily have to pay over $20,000.

Adding up all out-of-pocket costs usually far exceeds the amount you would have paid if your status was inpatient. As complex as this is to explain, ask to see the hospital bill of anyone you know who was admitted under observation status. It will astound you.

What can you do?

If you are a Medicare patient in a hospital, make sure you know your status. Should you be observation, question the case manager whether there might be justification to make it inpatient. Discuss with your physician the need to minimize testing, and bring your own medications from home to be distributed by nursing.

Finally, become educated in this problem, as we should all work to mitigate the effects of observation status in the Medicare system.

Most patients feel this is cost shifting to place greater financial burden on our elder seniors. Realize your elected federal legislators who initiated observation status and Obamacare will never face these problems as they are exempt from the layers of confusion they have imposed upon us.

Infuriating as this might be, the American people might attempt a rare victory if we toss the onion back in their direction, and make them cry too.

Gene Uzawa Dorio is an internal medicine physician.

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  • disqus_qJEMXTKtR1

    Thank you for your comments.

    From what I could see from hospital statements presented to me, the greatest hardship for my patients were the itemized and mounting copays, terrorizing them with augmented balances on their post-hospitalization bills. Exposing the difference financially to our patients as an “inpatient” versus “outpatient” was the point.

    No doubt bringing medication from home is a big safety issue, but they are allowed to bring them to the hospital and request they be dispensed through the pharmacy by nursing. I’ve never seen nurses have problems with this, but you are correct, it is a nightmare for the pharmacy.

    Alluding to Obamacare is related to the complex issues of medicine we face, not linking them together. As far as I can tell, Observation status has nothing to do with the Affordable Care Act, although somewhere in the thousands of pages there might be a connection.

    Each law though was made by legislators who will not live under those laws. This is what must change.

    Gene Uzawa Dorio, M.D.

    • Dr. Drake Ramoray

      I agree with your points. It took quite a bit of committee work and discussions with pharmacy etc to let insulin pump patients routinely use their own pumps and own insulin in the hospital. If every patient brought their own meds it would indeed be a nightmare for pharmacists.

      Anecdotally, it’s gotten to the point of abusive, but at the minimum one of our local hospitals has gotten much more strict in terms of observation vs inpatient that is known to be secondary to the 30 day readmission penalty. I admittedly don’t recall if this was a rule from the ACA or has/would have happened anyway as very little of what I do involves inpatient work.

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