Study: CMS definition of 'observation status' inaccurate; reimbursement lacking

The 566-bed University of Wisconsin Hospital and Clinics in Madison, Wisc., loses an average of $331 for every patient in observation care compared to a net of $2,163 for patients who are admitted, according to a new study published in the Journal of the American Medical Association.

The researchers, who looked at 43,853 stays--about 10 percent of which were for observation--said hospitals lost money primarily because reimbursement for observation stays didn't cover the cost of care.

The data also suggests that the reality of observation status is quite different from the Centers for Medicare & Medicaid Services definition of "a well-defined set of specific appropriate services" that usually last less than 24 hours.

In fact, patients in the study had an average of 1,141 diagnoses--leading to a greater number of services--and an average stay length of 33.3 hours.

The information fuels the debate over observation audits and the government mandate for Medicare coverage. The main sticking point is that observation status patients are considered outpatients, even if they stay in a hospital bed for two or three nights for treatment and tests.

Critics charge hospitals sometimes use observation status to avoid Medicare readmission penalties, as well as potential RAC audits and fines, FierceHealthcare previously reported.  

In September, a federal court judge dismissed a lawsuit brought by 14 Connecticut hospitals seeking to eliminate observation status in hospitals or at least require hospitals to inform patients when they are in observation so they can challenge Medicare coverage decisions, according to FierceHealthcare. Observation stays increased 25 percent from 2007 to 2009 as inpatient admissions declined, a Brown University study published last year in Health Affairs found.

To learn more:
- here's the JAMA study