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Medicare patients: Beware of ‘observation’ status in hospitals

By Judith L. Kanne RN

NEW YORK (Reuters Health) - People on Medicare who spend one or two nights in the hospital are finding out, and often too late, that they weren’t really “admitted” to the hospital. This can be a costly discovery.

Even though they were in a bed in a hospital room, the hospital may have categorized them as being there for “observation,” rather than being formally “admitted.”

But patients being “observed” might face some unpleasant surprises when they leave the hospital.

For example, Medicare might not pay the tab for a rehab facility or a nursing home, even if a physician releases the patient to an outside facility to recover from a fall or stroke. Or Medicare might not pay for a visiting nurse when the patient goes home.

The problem: to get full benefits from Medicare after hospitalization, patients must be admitted as “inpatients” for at least three midnights (this is called the “three night rule”) and any nights spent under observation do not count.

“If you're in the hospital more than a few hours, you or a family member should always ask your doctor or the hospital staff if you're an inpatient or an outpatient,” Medicare warns on its website. “Make sure to ask each day during your stay.” (Read more here: http://1.usa.gov/1jhXfo1.)

The idea of hospitals admitting someone for observation isn’t new.

The reasoning behind observation was to make sure that patients too ill to go home would be watched closely for a period of time. In most cases, there was a good chance they would be discharged within 24 to 48 hours, but doctors thought it would be safer to monitor them for awhile. For example, some Medicare patients lived alone and a short observation stay became a safety precaution.

Today, however, the theory and the reality seem to be very different.

Hospitals’ use of observation status is rising. The Center for Medicare Advocacy, Inc. reports that between 2006 and 2011, the number of patients held for observation for more than 48 hours rose by more than 400 percent (from 27,600 in 2006 to 112,000 in 2011).

Why is this important?

The hospital stands to be penalized in reduced reimbursement if a patient is admitted for certain conditions (for example, a heart attack, heart failure or pneumonia), discharged and then readmitted soon afterward for the same problem. Patients in observation status have not been formally admitted in the first place, so if they go home and return soon for further care involving specific ailments, the hospital can escape a likely financial penalty.

Another monetary advantage for hospitals is that they aren’t required to pay for prescription and over-the-counter medications that patients usually take at home but that aren’t part of their observation treatment. Patients may be billed for those medications. If patients are admitted, the hospital has to pay for the drugs.

Today, complaints about high out-of-pocket costs for Medicare patients have “attracted the attention of the media, courts and policy makers,” said Keith Lind, Senior Policy Advisor for the AARP (formerly known as the American Association of Retired Persons).

“There are conflicting findings about the advantages of observation that suggest two distinct models of observation care may coexist,” Lind told Reuters Health.

One model of observation care is the dedicated observation unit, which improves efficiency by briefly monitoring patients who aren’t sick enough to be on a regular patient floor but who can’t safely go home yet. The other model is care delivered in inpatient areas, which represents merely a change in billing status without changes in the way health care is delivered.

It is critical to know your patient status with any hospital stay. Being “observed” may lead to high and unexpected charges for which patients are responsible.

As Medicare warns on its website: “Find out if you're an inpatient or an outpatient—it affects what you pay.”

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