New Report Details Hospital Use of Observation Stays vs. Short Inpatient Stays

The Department of Health and Human Services (HHS) Office of Inspector General (OIG) recently released a report describing hospitals’ use of observation stays and short inpatient stays in 2012 and the effects of observation stays on Medicare beneficiaries. OIG found that Medicare beneficiaries had 1.5 million observation stays in 2012 and an additional 1.4 million long outpatient stays, some of which may have also been observation stays. The report also revealed that beneficiaries had 1.1 million short inpatient hospital stays in 2012, and on average, these short inpatient stays cost Medicare and beneficiaries more than observation stays. OIG found that Medicare paid nearly three times more for short inpatient stays than observation stays, and beneficiaries ended up paying almost two times more.

Observation stays are opportunities for hospital physicians to determine whether or not a beneficiary should be admitted to the hospital as an inpatient. Although policies at the Centers for Medicare and Medicaid Services (CMS) state that observation services are usually needed for 24 hours or less, OIG found that 92 percent of beneficiaries spent one night or more in the hospital under observation. Observation stays are outpatient services covered under Medicare Part B—Medicare usually pays 80 percent of the cost of the claim, and the beneficiary is left to pay the remaining 20 percent, either through a supplemental insurance plan (or Medigap) or by paying out of pocket. As a result, CMS, Members of Congress and advocates have raised concerns that beneficiaries may pay more as outpatients than if they were admitted as inpatients. In addition, beneficiaries who are not admitted as inpatients may not qualify for Medicare-covered skilled nursing facility (SNF) services following discharge from the hospital.

To address these concerns, in April 2013, CMS proposed policy changes that would presume that hospital stays lasting two nights or longer would qualify as inpatient stays, and that stays lasting less than two nights would qualify as outpatient or observation stays. While OIG’s report did not contain any formal recommendations, the agency mentioned in its report that its findings do indicate that CMS may consider policy changes to address the issue of observation and inpatient stays. According to OIG, CMS should consider how to ensure that beneficiaries who need SNF services after a hospital stay are granted sufficient access to that care.

In New York, a bill passed in the State Assembly and Senate that would require hospitals to notify Medicare beneficiaries of their observation status within 24 hours of being treated under observation. It is not clear if and when the bill will be signed by the Governor; however the bill could potentially help beneficiaries access post-hospital care (i.e. SNF care) by giving them notification of the effect observation stays have on their costs and coverage. The notification of observation status is a definite step in the right direction. While it does not guarantee that a beneficiary will fully understand what an observation stay means for their costs and coverage, it provides them with information and resources to gain this understanding.

Read the OIG report.