Observation or Admitted? The Cost of Hospital Care Can Depend on Your Status

If you are covered by Medicare and you spend time in a hospital, how much you pay depends on whether the hospital calls you an inpatient or someone under observation. Even people under observation can spend several days in a hospital without achieving inpatient status, and that’s expensive.

As explained by KaiserHealthNews.org, a recent government investigation concluded that observation patients often have the same health problems as those who are admitted. But Medicare offers fewer benefits to them.

Medicare hospital admissions declined over a five-year period, but its number of beneficiaries under observation increased by more than two-thirds, according to KHN. Is it too cynical to conclude that this trend is all about cost-shifting?

To help people with Medicare coverage understand what patient status signifies and how it affects what you pay, we’re excerpting a KHN Q&A on the topic. Seniors who have a Medicare Advantage supplement might have different observation coverage, and should check the details of their plan.

Q. What is observation care?

A. Hospitals provide observation care for patients who are not well enough to go home but not sick enough to be admitted. This care requires a doctor’s order and is considered an outpatient service, even though patients may remain several days. The treatment can include diagnostic tests to help doctors decide whether the patient should be admitted. Medicare recommends that the decision whether or not to admit should be made within 24 to 48 hours, but observation visits exceeding 24 hours nearly doubled between 2006 and 2011.

Q. How does observation status affect patient care and expenses?

A. Because observation care is an outpatient service, patients usually have co-payments for doctors’ fees and each hospital procedure; they must pay whatever the hospital charges for routine drugs it gives them to take at home for chronic conditions such as diabetes or high cholesterol.

Observation patients do not qualify for Medicare coverage for follow-up care in a nursing home, even if doctors recommend it. That coverage is available only if seniors have spent at least three consecutive days (or through three midnights) as an admitted patient, not counting the day of discharge.

Q: Why are more Medicare patients receiving observation care instead of being admitted?

A. Medicare has strict criteria for hospital admissions and usually won’t pay anything for admitted patients who should have been observation patients. Medicare can deny reimbursement to a hospital that admitted a patient the federal agency thought should have kept under observation. So in recent years, hospitals have increased their share of observation patients.

Also, if observation patients return to the hospital within 30 days of their visit, they don’t count as readmissions. Medicare reduces its reimbursement if a hospital’s readmission rates are too high.

Q. Is the cost of my maintenance drugs covered when I am in the hospital?

A. No. Medicare does not pay for routine drugs given to patients under observation. Some hospitals allow patients to bring these drugs from home, but others don’t because they can’t vouch for their safety.

If you have a separate Medicare drug plan, the coverage decision lies with the insurer. If the plan covers your maintenance drugs at home and agrees to cover them in the hospital, it will pay only prices negotiated by the plan with drug companies and in-network pharmacies. Most hospital pharmacies are out-of-network. So even if your drug plan covers these drugs, you could be left paying most of the bill.

Q: How do I know if I’m an observation patient and can I change my status?

A. The only way to know for sure is to ask. Medicare does not require hospitals to tell patients that they are in observation status and that they will be responsible for paying noncovered Medicare services. “Unless people are in an observation unit, the difference between observation and inpatient care is basically indistinguishable,” Toby Edelman, a senior attorney at the Center for Medicare Advocacy, told KHN.

Medicare does require hospitals to tell patients if they have been downgraded from inpatient to observation.

If you believe you should be admitted, ask your doctor to change your status to inpatient. But even if the doctor agrees, the hospital may be able to overrule that decision or Medicare can change it later when reviewing the claim.

Q. What can I do if I’m about to be discharged or am already in a nursing home and I find out Medicare won’t cover my nursing home care?

A. If you can’t persuade the hospital to change your status, Edelman advises patients to file two kinds of appeals. When you receive your Medicare Summary Notice, follow the instructions to challenge the charges from the hospital listed under Part B if you believe those services should have been billed as inpatient services. Also, challenge any charges from the nursing home for outpatient services such as physical therapy.

If you do enter the nursing home, you may be billed for the care. Ask the nursing home to submit a “demand bill” to Medicare. When it is rejected, you can appeal. The Center for Medicare Advocacy’s online Self-Help Packet spells out to how to challenge observation status.

Q. What is being done to fix the problem?

A. Recent revisions in Medicare payment rules are intended to ease the financial pressure on hospitals to put patients in observation care. But so far, the program has not made changes that would directly affect patients, such as dropping the three-inpatient-day criterion for nursing home coverage, forcing hospitals to tell patients when they getting observation care or requiring hospitals to allow patients to bring drugs from home.

Seniors have sued the government to eliminate observation status, but the government is seeking dismissal of the case. And legislation has been introduced in Congress to include an observation visit as part of the three hospital days required for nursing home coverage, but it has not received any action. Contact your congressional representatives to express your opinion; you can find them here.

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