Simmering controversy over observation care heats up with OIG doubts

As hospitals and federal health offices struggle with how to determine inpatient versus observation status, a new report from the Office of Inspector General questions whether proposed changes to how hospitals bill for observation stays will actually work.

The Centers for Medicare & Medicaid Services and Congress have raised concerns about observation and short inpatient stays. While CMS policy considers observation services needed for 24 hours or less, observation care stays typically exceed the 24-hour limit.

The OIG's report comes days before the CMS plans to issue final regulations on the issue, Kaiser Health News reported. The agency's proposed rules would require hospitals admit patients held under observation longer than two nights--a requirement criticized by hospital, physician and consumer groups as being unlikely to reduce the number of observation stays, according to the article.

The proposal would significantly reduce short inpatient stays but, according to the report, the agency may not see a drop observation and long outpatient stays if outpatient nights don't count towards the two-night presumption.

The CMS proposal is just part of the controversy surrounding observation status. Critics have been claiming hospitals use observation status to avoid Medicare readmission penalties and potential RAC audits and fines. But hospitals defend the practice, saying they use clinically based criteria to determine whether to admit a patient or place them on observation status.

Adding to the controversy, some patients want the observation care label removed entirely, and they're going to legal lengths to do so. A group of Medicare patients filed a lawsuit against U.S. Department of Health & Human Services Secretary Kathleen Sebelius to eliminate the term, FierceHealthFinance previously reported.

The OIG report also showed that hospitals and even Medicare officials have trouble distinguishing between the two classifications, KHN noted.

For example, just this week, Beth Israel Deaconess Medical Center agreed to pay a $5.3 million settlement over allegations that it improperly billed Medicare for inpatient admissions that should have been billed as observation. The feds suggested the hospital may have submitted improper inpatient claims to reap higher Medicare reimbursements, but Beth Israel's denied wrongdoing, calling the distinction between inpatient and observation stay "an extremely technical issue."

For more:
- here's the OIG report (.pdf)
- read the KHN article