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Taking a cue from the medical industry, which has a knack for coming up with catchy acronyms for clinical studies,  the U.S. House of Representatives and Senate recently passed H.R. 876, The Notice of Observation Treatment and Implication for Care Eligibility Act – more commonly known as the NOTICE Act.

This legislation was inspired by the great deal of attention given to Bagnell v. Sebelius, the lawsuit concerning long observation stays filed by the Center for Medicare Advocacy, and it completely ignores the two-midnight rule, which became the law of the land on Oct. 1, 2013. In short, once signed by the president and within one year of passage, this law will require hospitals to provide patients written and verbal notice that they are receiving observation services.

With an amazing amount of restraint considering the number of lawyers in Congress (213 of 535 total members), elected officials were able to limit the full text of the law to under 500 words.

The law requireshospitalsto give each individual who receives observation services as an outpatient for more than 24 hours an adequate oral and written notification within 36 hours after beginning to receive them, further mandating that the notification:

  • Explains the individual’s status as an outpatient and not an inpatient and the reasons why;
  • Explains the implications of that status on services furnished (including those furnished as an inpatient), in particular the implications for cost-sharing requirements and subsequent coverage eligibility for services furnished by a skilled nursing facility;
  • Includes appropriate additional information;
  • Is written and formatted using plain language and made available in appropriate languages; and
  • Is signed by the individual or a person acting on the individual’s behalf (representative) to acknowledge receipt of the notification, or if the individual or representative refuses to sign, the written notification must be signed by the hospital staff who presented it.

The act also contains a very generous (but perhaps unnecessary) concession to hospitals by allowing them one year to operationalize this requirement. It also goes without saying that when Congress starts to regulate without adequate input from experts (like this author), there will be mistakes. And in this law, the mistake appears in the first sentence, where it states, “to amend title XVIII of the Social Security Act to require hospitals to provide certain notifications to individuals classified by such hospitals under observation status rather than admitted as inpatients of such hospitals.” Congress has called observation a status when in fact it is a type of service, with inpatient and outpatient being the only two recognized statuses. Fortunately, within the body of the act they refer to observation correctly as a service.

There are also several questions that must be asked with the passage of the NOTICE Act. The glaringly obvious question is whether it is necessary at all. The advent of the two-midnight rule meant that no patient who is receiving medically necessary hospital services should pass the second midnight in the hospital without being admitted as an inpatient. If a patient remains in the hospital past the second midnight but there is no medical reason for that continued stay, the billing of medically necessary observation services should cease. The patient then either should be given an advance beneficiary notice (ABN), shifting financial liability for the continued stay, or the patient should be informed that he or she is being kept in the hospital as a convenience and the hospital will not be billing Medicare for room and board and nursing services. Patients who spend only one midnight in the hospital do not need to be notified that their hospital stay will not allow them to access their Part A skilled nursing benefit, as they are nowhere near the three days necessary to access that benefit and will not reach that landmark. If they do require a second midnight and get admitted as an inpatient, they will have lost one day of eligibility for that benefit, but it is less likely that a patient who appeared to only need one midnight in the hospital would require a stay at a skilled nursing facility. If they do, they must only meet the “broad definition” of medical necessity for the three inpatient days in order to qualify, which is a very low hurdle to attain.   

Financially, the argument that observation costs more than an inpatient stay has little to no merit. An inpatient stay is a Part A obligation and brings with it a $1,260 deductible with each 60-day spell of illness. An outpatient stay with observation is Part B and has a $147 yearly deductible with 20 percent coinsurance on all approved charges. The average outpatient with observation stay charge was $1,741 in 2012 and will go up to $2,111 in 2016 if the comprehensive ambulatory payment classification 8011 is adopted. Additionally, patients in outpatient status must pay for any self-administered medications. In a stay of less than two midnights, that would mean the average financial obligation as an outpatient with observation would be less than $1,000, including medications, which compares quite favorably to the $1,260 inpatient obligation. So unless the patient had an admission within the previous 60 days or a supplemental plan that does not cover outpatient services, outpatient with observation is less expensive.

This act also conflicts with laws that several states, such as Connecticut, Maryland, and New Jersey, have passed. In the case of Connecticut, the notice must be given within 24 hours, whereas the federal law allows 36 hours. Many of the laws also refer to observation as a status and some refer to any patient who spends the night in a hospital bed as being in observation status, despite this being contrary to Medicare regulations.

And finally, limiting this act and some of the state laws to observation, be it a status or a service, ignores the patients who had an outpatient surgery or procedure for which normal recovery includes an overnight stay in a hospital bed, with no observation ordered by the physician. Are these patients not also subject to the same costs, access issues, and confusion as outpatients receiving observation services? 

Despite the urgings of many, this act only provides for patient notification. The patients continue to have no immediate appeal rights with the quality improvement organization (QIO) or Medicare, nor does it allow Medicare or the QIO to retroactively deem a hospital stay worthy of inpatient status. While these provisions would have been difficult to operationalize, they would have done much to quell the many complaints over observation.

The NOTICE Act would have been appropriate in the pre-two-midnight rule world, in which hospitals routinely kept patients as outpatient with observation services for days on end, both to avoid the dreaded audit denial and also because the patient never met “criteria” to be admitted as inpatient – but those days are gone. A more appropriate move would have been requiring notification of outpatients who no longer require hospital care but are being kept in the hospital as a convenience due to patient request or placement issues. They should be the only patients who ever pass two midnights without being admitted as an inpatient, the only ones whose financial liability could exceed their inpatient liability, and the only ones who may think they have accrued enough days to access their skilled nursing benefit but have not.

But once the president signs the NOTICE Act, we are stuck with one more piece of paper to add to the growing stack that likely only will serve to confuse and frustrate our patients.

About the Author

Ronald Hirsch, MD, FACP, CHCQM is vice president of the Regulations and Education Group at Accretive Physician Advisory Services at Accretive Health. 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 American Case Management Association and a Fellow of the American College of Physicians.

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