As a result of the recent increased use of observation status hospital stays, the Senate Select Committee on Aging held a hearing to gain more information about the financial implications that such stays are having on Medicare beneficiaries and their families. The hearing was a follow-up to a previous hearing that found that the being placed on observation status can have “devastating” consequences, according to Committee Chairman Susan Collins (R-Me).
A hospital decision to designate a patient as an admitted in-patient versus an outpatient placed on “observation status” can have significant financial consequences. Medicare Part A provides that in-patients are required to pay only a single deductible for services performed within hospitals, while outpatients are required to be an outpatient deductible and a percentage of a Medicare-allowed charge for each outpatient service, with no limit on charges for multiple outpatient services. Additionally, patients who spend fewer than three days in the hospital are not eligible for Medicare coverage of post-hospital care in a skilled nursing facility (SNF) (see AARP study: observation status is costly Medicare purgatory, April 21, 2015).
In response to concerns over observation status, CMS proposed the Two-Midnight Rule, which provides that patients who are in the hospital for two midnights are considered to be inpatients. However, according to Mark Miller, Executive Director of the Medicare Payment Commission, hospitals have not responded favorably to the Rule, and the Commission recommended withdrawing the Rule and implementing its audit-related and other recommendations instead.
Jyotirmaya Nanda, M.D. of the American Hospital Association stated that, “CMS payment rules and overzealous auditors, such as RACs [Recovery Audit Contractors], and prosecutors are second-guessing physicians’ clinical judgment, placing hospitals and physicians in the difficult position of placing patients in observation status.” He added that the AHA will work with the Committee to, “develop clear federal policy on observation status, reform the RAC program and address payment regulations that inhibit reform efforts.”
However, Sean Cavanaugh, Deputy Administrator and Director of CMS expressed confidence that the Two-Midnight Rule would assist in clarifying federal policy with regard to the criteria to be used when determining whether inpatient admission to a hospital is “reasonable and necessary.” He also added that improvements were being made to the Recovery Auditor program, “that will help ease the implementation of new payment policies.”