Medicare Continues to Complicate Patient Status and Billing

Hospital bills are more complicated and impenetrable than gravitational wave theory. As a study by AARP recently found, Medicare only adds to the confusion, leaving patients at risk of overpayment and undertreatment.

If you get Medicare, and you go to the hospital, there’s a huge financial difference between a being classified as an inpatient or as a patient “under observation.” But because the treatment for both often seems identical, you might not be able to tell until you get the bill which class you’re in. Even people under observation can spend several days in a hospital without achieving inpatient status, and that’s expensive.

As noted by, “Of all the complex rules that plague fee-for-service Medicare, few are harder to understand and potentially more important for seniors than observation status.”

The magazine reviewed the AARP study whose purpose was to clarify the consequences for seniors of staying in a hospital under observation. The rules not only are complex, but make it impossible for patients to know whether an observation stay is financially more or less beneficial than an admission.

It’s a muddle, Forbes concluded, “in part because Medicare pays for hundreds of millions of dollars of skilled nursing facility care that probably should be billed to patients.”

Wait. What? You get burned if you pay for the same care under hospital observation that would have been subsidized if you had been classified as an inpatient, but the feds also are wasting public money because they’re not charging you if you are sent to a skilled nursing facility (SNF)?

Sort of. Did we mention that Medicare’s subsidy formulas are complicated?

To illustrate observation status, Forbes offered a hypothetical patient who presents in the ER with tightness in the chest. The ER doctor determines that he didn’t have a heart attack, but advises him to remain in the hospital for a day or so to get checked out more thoroughly.

“You are not being admitted,” Forbes explained, “but are staying to be observed.” In this scenario, Medicare considers you to be an outpatient even though you are staying in a hospital room, eating hospital food, being administered hospital drugs and being cared for by hospital nurses.

There’s no difference in the quality of the care, only in who pays for it. Typically, Medicare spends about one-third less on a patient under observation than one who is admitted, although it varies according to why the patient is there in the first place.

“There was no question that Medicare was overpaying for patients who did not need to be admitted,” Forbes said. “But in an attempt to fix the problem, it has gone way overboard.”

Whether or not to admit someone to the hospital is determined by a doctor, not the hospital, which usually advises practitioners to be conservative in making this decision. They take this position not for altruistic reasons, but because they get audited, and their Medicare subsidies often are tied to what the number-crunchers find.

If an audit concludes that an admitted patient should have been kept under observation instead, the hospital must refund the entire payment to the government.

But other factors besides observation vs. inpatient status drive Medicare hospital reimbursements. One big one is how much seniors must pay out-of-pocket for hospital services and post-acute care at an SNF.

Objections have been voiced over hospital patient status for a long time, but the AARP study found that only about 1 in 10 of observation patients had a higher bill than if they had been admitted. So although observation patients are more vulnerable to higher bills, the study found that few actually paid more.

But the financial exposure for post-acute patients also is high. “If you need follow-up care at a SNF,” according to Forbes, “Medicare will usually pay. But only if that care follows a hospital admission of at least three days. And observation stays don’t count, even if you spend 72 hours in an observation bed.”

Such follow-up SNF care could cost tens of thousands of dollars.

But Forbes referred to a 2012 study that found that only about 7 in 100 observation patients are discharged to an SNF. The AARP research found that about 2 in 3 of those people were ineligible for Medicare coverage. If SNF care was denied by Medicare, those patients shelled out, on average, more than $12,000.

But only about 3 in 100 post-observation SNF patients ever paid out of pocket. Medicare covered more than 97% of those claims, even though its own rules say the feds should not have. That breach cost taxpayers about $270 million in 2009.

Tellingly, according to the study, about 1 in 3 observation patients who were referred to an SNF for follow-up care did not go. It’s reasonable to assume that at least some made that decision because they were afraid they couldn’t afford that care.

Forbes raised the issue that although AARP’s results were stunning, its data were from the most recent available Medicare claims – which was 2009. A lot can happen in six years, and MedPAC, an independent board that advises Congress on Medicare issues, estimated that observation stays more than doubled between 2006 and 2012, and increased by about 15% from 2011 to 2012.

So it’s possible that out-of-pocket costs, both in hospitals and SNFs, have changed. Also, the magazine suggested, Medicare might be less willing to reimburse SNFs for these patients.

“The bottom line is the system is a mess,” Forbes concluded. “Hospitals, doctors, nursing facilities and patients all hate it. Nobody understands it. And Medicare may not be saving nearly as much money as it hoped.”

Eventually, Medicare could replace the fee-for-service system with one that pays for high-quality outcomes, and dopey situations like observation will go by the wayside. Until then, Forbes said, “Medicare should drop the three-day rule and let docs order post-acute SNF care if they think it is appropriate, and if they can justify it.”

For more information about how to choose Medicare plans, see Patrick’s newsletter, “Welcome to Medicare.”

If you’re caught in the Medicare status/billing mess, it might be worth your while to seek advice from a patient advocate, a professional who helps patients and families navigate all kinds of medical billing issues. Sometimes they’re called medical billing advocates. There’s usually a charge for their services, but generally you end up paying a lot less even with their fees than you would on your own.

You can find a patient advocate with the help of several organizations:

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