03:10am Tuesday 07 July 2020

New Medicare Guidelines Do Not Solve Problems of 'Observation' Patients

“Observation is an outpatient designation, which implies all services delivered could be done in an outpatient setting. This is totally not the case, which is why observation status is so frustrating.”


– Dr. Ann Sheehy

That’s the conclusion of a University of Wisconsin School of Medicine and Public Health (SMPH) study that included more than 36,000 hospital encounters during a 14-month period between January 2012 and February 2013. The study is published in the March edition of Journal of Hospital Medicine.

In October 2013, the Centers for Medicare and Medicaid Services enacted a rule classifying most hospital stays of fewer than two midnights as observation and those equal to or longer than two midnights as inpatient.

The idea was to clarify the two different classifications, reduce long observation stays and reduce the financial burden on Medicare patients, who may pay greater out-of-pocket costs for observation care than for inpatient care. In addition, patients classified as “observation” may not qualify for Medicare coverage of certain follow-up care.

But Dr. Ann Sheehy, associate professor of medicine at the School of Medicine and Public Health and study leader, said under the new guidelines, patients who may be quite ill – including those who may need ICU services – may still be classified as observation if their stay is fewer than two midnights.

Recovery Audit Contractor Program at Fault

She said the fault lies with the Recovery Audit Contractor (RAC) program, which is carried out by private contractors who audit medical records and have the authority to make decisions on observation and inpatient status of patients.

“The two-midnight rule might actually be an improvement over the prior observation policy if physician judgment was honored when a particular patient should be inpatient, like an ICU patient, but by rule, end up observation,” Sheehy, a hospitalist, said. “This is very difficult to do in the current auditing under the RAC system. The RAC auditing system has enormous power. ”

“In an ideal world, observation status could only be used for patients who need essentially an extension of an emergency department stay, maybe three or four hours after an ED stay,” she added. “Everyone who reached an actual ward would be inpatient. This by far makes the most sense, but this is likely not going to happen because observation care saves money for the government.”

Patient Classification Based on Length of Hospital Stay

Sheehy said the research showed that under the new two-midnight rule, patients may be classified as inpatient or observation based solely on how long they stay in the hospital, not based on their actual medical problem.

“For the observation patients, we looked at diagnosis codes (which describe the patient’s reason for needing medical care) across length of stay, and thought if the two-midnight cut point actually distinguished between two different patient groups, then the two-midnight mark might make sense,” she said.

“Instead, we found that four of five diagnosis codes were the same across length of stay, indicating that the cut point is arbitrary and really does not distinguish different patient groups, even though insurance benefits will be different based on length of stay.”

Sheehy also said the two-midnight rule works against patients who are transferred from one hospital to another.

“CMS has stated they will not include transfer midnights, meaning if a patient spends a night at one hospital and then transfers to another, the night in the first hospital will not count toward the two- midnight tally,” she said. “Nine percent of our observation patients were transfers, meaning they may be punished for seeking the care they need at a tertiary-care center, because if they stay two nights in two separate hospitals, they will be observation.”

Negative Financial Effects

Sheehy said the CMS guidelines also negatively affect patients financially.

“Observation patients are vulnerable to higher out-of-pocket hospital bills, and are not eligible for skilled-nursing facility coverage on discharge,” she said. “Our data predict an increase in observation frequency, which means more patients will be subject to that financial burden.”

“Observation was never intended to be an actual patient class where patients are hospitalized overnight on wards, and given an observation status as their classification,” Sheehy added. “Our feeling is that if a decision is made to bring a patient into the hospital, they should be inpatient.

“Observation is an outpatient designation, which implies all services delivered could be done in an outpatient setting. This is totally not the case, which is why observation status is so frustrating.”

University of Wisconsin School of Medicine and Public Health

Share on:

MORE FROM Public Health and Safety

Health news