Medicare Madness – How Americans Can Lose Benefits in a Hospital

Tuck away the many horror stories of the wrong limbs being amputated, things being left in surgery patients, terrible infections picked up in hospitals and totally wrong diagnoses.  More relevant is a bureaucratic hospitalization horror that far too few Americans covered by Medicare are aware of.

Odds are that you do not know a key question to ask if you ever find yourself in a hospital for an overnight stay that could last from one or two days, or perhaps much more.  What you and anyone accompanying you want to know is whether you are being classified as “under observation.”  This means that legally you are not an inpatient.  If the former, then you are likely to find yourself owing the hospital a large amount of money, because your Medicare or other health insurance will not provide the benefits associated with inpatient status.  Many, many Americans nationwide that were classified as under observation have faced unexpected bills of many tens of thousands of dollars.

So pay very close attention to what you are about to read.

If you are in a hospital, possibly in an emergency room, then you or family or friends should ask some tough questions of hospital staff if you are kept in the hospital after being handled in the emergency room.  Ask if you will be kept in as an inpatient.  If told that you will be in the observation category, then you might seriously consider whether you should stay in that hospital, or perhaps seek another one if you are not in immediate need of medical attention beyond what was received in the emergency department.

Indeed, ordinary Americans should recognize what Medicare does; namely, that the decision made by the hospital to classify a patient as under observation for billing purposes is a “complex medical judgment.”  What that means is that different interpretations and decisions can be made, either by someone else in the hospital or professionals in a different hospital.  The critical decision to use the observation classification, with so much potential negative impact for patients, is “open to widely variable interpretation” as physician Steven J. Myerson has noted.

Because you may be in a very stressful state resulting from facing some medical condition, it is imperative that family and friends also need to become educated.  Realistically, you may not be in a clear enough mental state when you enter a hospital to ask questions and demand good answers about how the hospital is classifying your stay.

Understand this: Nothing is crazier than entering a hospital for one or more nights and being designated as under observation, which amounts to being an outpatient, rather than an inpatient.  Despite coverage by Medicare you will not have expected benefits.

Beyond hours in the emergency department, you can spend days in a hospital bed, receive regular nursing care, be given drugs and all kinds of tests.  You might even spend time in a critical care or intensive care unit.  But you can still be officially designated an outpatient in observation status.  Even though you might stay in the hospital for more than just one or two nights, unless officially designated an inpatient you face major financial liability.

Under Medicare this means you are not covered by Part A which provides the best hospital coverage, but rather covered under Part B with far inferior coverage.  This practice is as bad as anything you have ever heard about awful health insurance coverage.  Furthermore, Medicare does not cover post-discharge care for Part B observation stays. For example, a patient in observation status for a broken bone will have to pay the full cost of rehabilitation or a nursing home.  But for an inpatient Medicare pays for skilled nursing care following at least three consecutive inpatient days.  Also, observation patients pay out-of-pocket for the medication they receive in the hospital and Subtitle D drug coverage may not cover these costs.

Hard to believe but your personal physician may not know that their patient has been classified by the hospital as outpatient or under observation.  Though it would be very smart for you to raise this issue and make it clear that you do not want to stay in a hospital unless you are being admitted as an inpatient.  But starting in an emergency room makes it difficult to push this issue, but not impossible.

Even the key public document from Medicare makes clear that:

You’re an outpatient if you’re getting emergency department services, observation services, outpatient surgery, lab tests, or X-rays, and the doctor hasn’t written an order to admit you to the hospital as an inpatient.

Regardless of what a doctor has said, however, hospitals have the power to classify you as under observation.  The government advises “If you’re in the hospital more than a few hours, always ask your doctor or the hospital staff if you’re an inpatient or an outpatient.”  Note the word “always.”  That is terrific, critically important advice.

You or your accompanying relative or friend must be prepared to challenge a decision of observation status and even raise the possibility of immediately leaving the hospital.  Remember, this is after any actions given in an emergency department.  Being prepared to challenge an observation status decision requires that you fully understand the considerable downside of this hospital classification.

Actually, Medicare maintains a one way communication street.  Medicare doesn’t require hospitals to tell patients they are “under observation,” though many will do so.  It only requires hospitals to tell patients they have been downgraded from inpatient to observation.

To be clear, if you are not classified as an inpatient, then you officially have not been admitted to the hospital though you have entered it.  Toby Edelman of the Center for Medicare Advocacy has noted that “People have no way of knowing they have not been admitted to the hospital.  They go upstairs to a bed, they get a band on their wrist, nurses and doctors come to see them, they get treatment and tests, they fill out a meal chart – and they assume that they have been admitted to the hospital.”

How much of a problem is observation status?  In recent years, hospitals have increasingly classified Medicare beneficiaries as observation patients instead of admitting them, according to a Brown University nationwide analysis of Medicare claims.  From 2007 through 2009, the ratio of Medicare observation patients to those admitted as inpatients rose by 34 percent.  Worse, more than 10 percent of patients in observation were kept there for more than 48 hours, and more than 44,800 were kept in observation for 72 hours or longer in 2009 — an increase of 88 percent since 2007.

A recent New York Times article noted that under Medicare: “the number of seniors entering the hospital for observation increased 69 percent over five years, to 1.6 million in 2011.”  And from 2004 to 2011, the number of observation services administered per Medicare beneficiary rose by almost 34 percent, according to the Medicare Payment Advisory Commission, while admissions per beneficiary declined 7.8 percent.  In other words, this observation issue is not a trivial or minor issue affecting just a few people.

Data showing far greater use of the observation status option than widely reported were in a 2013 report to Medicare by the Health and Human Services Inspector General for 2012 hospitalizations.  Some 2.1 million hospitalizations were designated observation status with 11 percent three nights or more and 80 percent originating in emergency departments, but another 1.4 million were long term outpatient stays that could and perhaps should have been coded as observation status.  There were also 1.1 million short term inpatient stays (less than two nights) that also could have been coded as observation status.  With increased enforcement by Medicare and penalties for hospitals, therefore, there is the possibility of 4.6 million or more annual observation status stays.  Medicare patients should be aware of large differences among hospitals.

AARP did its own study and found that from 2001 to 2009 both the frequency and duration of observation status increased.  Although only about 3.5 percent of Medicare beneficiaries were in this class in 2009, Medicare claims for observation patients grew by more than 100 percent, with the greatest increase occurring in cases not leading to an inpatient admission.  The duration of observation visits also increased dramatically.  Observation service visits lasting 48 hours or longer were the least common, but had the greatest increase, almost 250 percent for observation only and more than 100 percent for observation with inpatient admission.

According to a survey by the National Association of Professional Geriatric Care Managers (NAPGCM) in 2013 more than 80 percent of US geriatric care managers reported that “inappropriate hospital Observation Status determinations were a significant problem in their communities and 75 percent noted that the problem was growing worse.”

A University of Wisconsin study found that 10.4 percent of hospitalizations in 2010 and 2011 were in the observation status category and 16.5 percent of them exceeded 48 hours and concluded “observation care in clinical practice is very different than what CMS [the Medicare agency] initially envisioned and creates insurance loopholes that adversely affect patients, health care providers, and hospitals.”  In an Invited Commentary on the Wisconsin study, physician Robert M. Wachter of the Department of Medicine at the University of California, San Francisco, summed up the observation issue as having “morphed into madness.”

Note that Medicare guidelines recommend that observation stays be no longer than 24 hours and only “in rare and exceptional cases” extend past 48 hours.   Obviously, this is nearly meaningless in the real world.

Why are hospitals placing more patients in observation status?

Like so much in American society, the answer is money.

Hospitals are at risk from Medicare audits that declare patients wrongly defined as inpatients.  Payment is then rejected, potentially large amounts of money.  The government has increased audits to such a degree that since 2009 four recovery firms have reviewed bills from hospitals and physicians nationwide and recuperated $1.9 billion in overpayments.  Billion!

Two physicians writing in the prestigious New England Journal of Medicine said:

When observation is used as a billing status in inpatient areas without changes in care delivery, it’s largely a cost-shifting exercise – relieving the hospital of the risk of adverse action by the RAC [Recovery Audit Contractor] but increasing the patient’s financial burden.

To cut its spending, Medicare has accused hospitals of over-charging by “admitting” patients instead of putting them on “observation” status.   For example, in July 2013, Beth Israel New England Deaconess Hospital in Boston paid Medicare $5.3 million to settle claims over this issue.

A new wrinkle under Obamacare is that hospitals can be penalized for readmitting patients in less than 30 days.  But observation patients cannot be counted as readmissions if they happen to return because they were not officially admitted in the first place.  To avoid this risk of financial loss, more patients can be classified as under observation.

A new Medicare rule taking effect April 1, 2014 requires doctors to admit people they anticipate staying for longer than two midnights, but to list those expected to stay for less time as observation patients.  Many medical professionals doubt that this will improve things.  Physician Ann Sheehy of the University of Wisconsin closely examined how this rule will work and concluded:

We found that four of five diagnosis codes were the same across length of stay, indicating that the cut point is arbitrary and really does not distinguish different patient groups, even though insurance benefits will be different based on length of stay.

Time, not medical condition or hospital actions, is being used.  She also noted that the government will not count nights spent at different hospitals, and that 9 percent of their observation were transfers.

Dr. Sheehy made this great point:

Observation is an outpatient designation, which implies all services delivered could be done in an outpatient setting. This is totally not the case, which is why observation status is so frustrating.

Because there is essentially no upside to being put into observation status, it is critically important for you or your advocate to be very assertive when entering the hospital.  What actions can you take after you are in the hospital and you are likely in a better mental state to address this problem?  Nothing that is likely to work for you.

The imperative is to check your status each day you are in the hospital and remember that it can be changed (from inpatient to observation, or vice versa) at any time by various hospital doctors or officials.  Sadly, in many cases a patient may not be informed that they have been in observation status until the discharge process.  That is why it is very important to ask the hospital, either through a doctor or nursing staff, what your status is and, if observation, to formally reconsider your case.  Ask if there is a hospital committee that could review your status.  Definitely ask your own doctor whether they are willing to press your case for inpatient status based on medical factors.  In theory, you could appeal observation status with Medicare after you leave the hospital, but that is difficult and few have succeeded.

The Center for Medicare Advocacy makes available a Self Help Packet for Medicare “Observation Status.”  This is definitely worth keeping handy and it would be great if hospitals distributed it.  This group has an active legal case challenging the government’s policy of allowing hospitalized Medicare beneficiaries to be placed in “observation status,” rather than formally admitting them, and depriving them of their Part A coverage in violation of the Medicare statute and other laws.  This group makes this important observation:  “Neither the Medicare statute nor the Medicare regulations define observation services.  The only definition appears in various CMS manuals.”

What is really needed is action by Congress to eliminate observation status for any overnight stay, but this is unlikely unless many millions of Medicare beneficiaries demand it.  The ugly truth is that this observation status was a bureaucratic tactic to reduce Medicare spending.  It puts hospitals in the difficult position of putting their patients in a very bad financial situation.  In a real sense hospitals are being blackmailed into serving as agents to implement this awful observation policy.  A vigorous national campaign by AARP demanding congressional action is needed.

Joel S. Hirschhorn has a book, Delusional Democracy: Fixing the Republic Without Overthrowing the Government, which supports constitutional conventions and other peaceful ways to restore American democracy. Read other articles by Joel, or visit Joel's website.