Hospitals evade audits, penalties with observation status

Observation stays at hospitals jumped 25 percent in three years, raising concerns about the growing use of observation status. Patient advocates have criticized hospitals' calling patients outpatients instead of inpatients and therefore exposing them to higher out-of-pocket costs.

Researchers from Brown University looked at Medicare data from 2007 to 2009. They found that even though hospitals are documenting more observation services in the fee-for-service population, inpatient admissions have gone down, according to a new study in Health Affairs.

The controversial hospital strategy may be a loophole in Medicare cost-containment efforts on admissions. By documenting observation status rather than admissions, hospitals can avoid the Medicare penalties associated with readmissions and the close scrutiny of auditors on admission claims, Kaiser Health News noted.

"From a policy perspective, the purpose is to crack down on improper or fraudulent inpatient admissions. [T]here are many short-stay admissions that turn out to be not medically necessary, and it costs taxpayers a lot," lead study author Zhanlian Feng, an assistant professor at the Center for Gerontology and Health Care Research at Brown's Warren Alpert Medical School, told California Watch.

Patients who are under observation status rather than admitted are covered by Medicare Part B instead of Part A, which can leave patients eating more of the costs, Politico reported.

For example, Loretta Jackson spent five days in a Santa Rosa, Calif., hospital and received an MRI, intravenous narcotics and physical therapy, according to California Watch. When she was released into a skilled nursing facility, she was asked to pay $7,000 up front.

"If you're in a hospital for a week, what do mean you're not an inpatient?" said Toby Edelman, senior policy attorney for the Center for Medicare Advocacy and an attorney in the class-action lawsuit, according to California Watch.

Medicare recommends observation status to last 24 to 48 hours.

Jackson's experience may highlight one of the hardest-hit populations affected by the observation status strategy. Medicare does not reimburse for patients not admitted who then go into a skilled nursing facility for post-hospitalization.

Jackson is one of the plaintiffs in a class-action lawsuit against U.S. Department of Health & Human Services Secretary Kathleen Sebelius. The Center for Medicare Advocacy and the National Senior Citizens Law Center, which filed the lawsuit last year, argues that inappropriate use of observation status illegally denies patients Medicare coverage and burdens them with hospital bills that rack up to hundreds or even thousands of dollars.

For more information:
- check out the study abstract
- see the Kaiser Health News article
- read the Politico article
- here's the California Watch article