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On a Monitor Mondays broadcast in July, I reported that The Center for Medicare Advocacy had received half a million dollars from the John A. Hartford Foundation to “raise awareness” of the negative consequences of what they call “observation status” (observation is service provided to patients whose status is listed as outpatient, but I will refer to it simply as “status” in this article).

Details about the first result of that grant were released last week via a lovely multi-color infographic that is just teeming with pieces of alleged misinformation, a few of which I shall refute here.

Let me preface this by noting that determining the correct status of a patient is no easy task. The regulations are vague and the care needed by the patient is often unclear. The fact that a patient can spend a night or two in a hospital and not be called an “inpatient” is confusing to patients and providers alike. But the Medicare program has two pools of money, Part A and Part B, and it is not up to each hospital’s discretion to decide which pool pays for a hospital stay; we must follow the rules. Every year, varying interest groups and individuals have proposed “fixes” to the system, but it is up to the Centers for Medicare & Medicaid Services (CMS) and Congress to make any changes they deem appropriate. So for now, the system is what it is.

Now, on to my critique of the infographic. In it, the Center states that “observation” is a billing code hospitals use to protect from overzealous auditors. Do they not know that in the last three years, the Recovery Audit Contractors (RACs) had been prohibited from auditing short stays, meaning hospitals did not need to protect themselves from the RAC boogieman that is no longer hiding underneath the bed?

The Center once again suggested that patients ask their doctors to commit Medicare fraud by asking to be admitted as inpatients. Due to CMS’s misguided linking of patient satisfaction and quality in the value-based payment program, doctors are under constant pressure to please patients, which can include writing an admission order when a patient requests it. But doctors cannot compliantly admit a patient who does not warrant inpatient admission unless the hospital issues a hospital-issued notice of non-coverage (HINN), and in that case, the patient assumes financial liability for the entire admission, accruing no days for access to the Part A skilled nursing facility (SNF) benefit.

The Center also suggests that patients file complaints with their state health department if they did not get written notice about being placed in observation status. Although federal law required such notice be provided starting on Aug. 6, 2016, as of this date there is no federally approved form to be used, and CMS has temporarily waived the mandate for hospitals. Several states have taken it upon themselves to require a written notice of observation, but it is not yet required in all states.

Complaints to the state health departments are not taken lightly, even if they are unsubstantiated, and they often result in surveys of a whole hospital’s operation and compliance with all the conditions of participation. Perhaps a listener in Washington, D.C. could perform an unannounced survey of the Center’s office, make sure the hand sanitizer on the receptionist’s desk is not posing a slip-and-fall or fire risk, look under all the sinks, watch to ensure that employees wash their hands after using the bathroom, and check the expiration dates of all the food in their refrigerators.

The Center also gets overly dramatic in its graphic, stating that “it may just seem like semantics, but for Medicare beneficiaries, (observation status) can ruin lives.” I would agree that a patient who has not had three medically necessary hospital days cannot get a SNF stay covered by Medicare, and perhaps that can ruin a life, but it has nothing to do with observation. As I have repeatedly preached, observation is limited to one midnight. If the patient requires more hospital care, they should be admitted as an inpatient and start accruing the needed days for access to the Part A SNF benefit.

Observation for most patients is less expensive than inpatient admission, despite the Center stating that observation “saddles patients with increased out-of-pocket costs.” The Center scares people by citing the average cost of an observation stay at $10,400. Well, that was the out-of-pocket cost in 2012 – before the two-midnight rule, which limits medically necessary observation stays to under two midnights, and before the new C-APC 8011 for observation was introduced in January. The latter sets the approved charge at $2,275, of which the patient is responsible for 20 percent, and it does not take into account supplemental insurance coverage, which often covers out-of-pocket expenses.

Unfortunately, the reality is that such falsehoods can ruin lives; many hospitals have had patients who have signed out from the emergency department against medical advice when told they are being placed in observation because of an unsubstantiated fear of a large bill. That is a real danger.

I understand that the Center is committed to advocating for Medicare beneficiaries, and that is a noble mission, but attacking observation is not the way to do it. They should work to eliminate the three-day rule for access to the Part A SNF benefit; if a patient has skilled needs with the potential to improve or requires skilled care to maintain a level of functioning, they should have access to that care without requiring a preceding hospital stay of any length.

To alleviate the fears of runaway spending on SNFs, they should work with the SNFs to optimize the care in their facilities and shorten stays, as is being done with many of the accountable care organizations and bundled payment programs. They also could advocate for the merging of Part A and Part B. And they should work to educate beneficiaries and help them understand that custodial care is not a covered benefit, as that represents arguably the biggest misconception in this area and creates a huge burden for hospitals.

I am sure most hospitals would support them if those were their goals.


Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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