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Efforts are Ongoing to Address Problems for Patients and Providers Arising from Classification of Overnight Hospital Stays as Observation Status Rather than Inpatient Admissions.

      Upon discharge from a hospital, Medicare patients are often surprised to find that they were not considered inpatients, but rather were in the hospital under “observation status,” even though they had stayed in the hospital over one or more nights. These observation status patients often face unexpected charges because they are covered under Medicare Part B rather than under Medicare Part A. This means that observation status patients are responsible for Part B’s 20% co-payments for physician and other services and that Medicare does not pay for prescription drugs provided in the hospital. Compounding the problem, Medicare does not count time spent in a hospital under observation as part of the three day prior hospital inpatient stay required for post-discharge coverage of skilled nursing facility (SNF) care, meaning that patients can be held responsible for the entire SNF cost.

      Over the last several years, the number of patients treated under observation status in hospitals has been steadily increasing. For example, Centers for Medicare and Medicaid Services (CSM) reports show that 112,000 patients had observation hospital stays of more than 48 hours in 2011, up from just 27,600 such patients in 2006. A key factor driving this increase has been the Recovery Audit Contractors’ (RAC) denials of reimbursement to hospitals for in-patient admissions as not reasonable or medically necessary.

      In an attempt to address this issue, in 2013 CMS issued rules that it stated “were designed to … reduce the frequency of extended observation care when it may be inappropriately furnished and provide payment to hospitals for the reasonable and necessary services they provide to inpatients.” Often referred to as the “two midnight rule,” the rules would require RAC auditors to presume that patients expected to remain in the hospital for two overnights are appropriate for inpatient admission, and hence covered under Part A. However, CMS indicated that it would not consider hospital stays expected to last less than 48 hours to be appropriate for inpatient admission. In addition, the rules did not change the requirement that patients be admitted for three days in order to be eligible for post-discharge care. The American Medical Association, the American Hospital Association and other provider groups protested that the rules undermined medical judgment and sought a delay in implementation. Originally intended to be implemented in October, 2013, the rules are now scheduled to take effect on October l, 2014.

      In a further effort to stop implementation of the two midnight rule, on January 22, 2014, the American Hospital Association and several hospital systems took the first steps towards challenging the two midnight rule in federal court by filing appeals with the Provider Reimbursement Review Board of the rules’ .2% payment cut. Because the Provider Reimbursement Review Board does not have jurisdiction to consider the issue, the hospitals expect expedited review in federal court. In addition, litigation brought by the Center for Medicare Advocacy seeking to force CMS to change its observation status policy is ongoing and bills have been introduced in both chambers of Congress which would require Medicare to count all overnight stays in a hospital towards the three night minimum for subsequent SNF coverage.

      WhatleyKallas will continue to follow issues relating to Medicare observation status, which issues are important to both providers and patients.