Practice Management

Observation versus inpatient status

A dilemma for hospitalists and patients


A federal effort to reduce health care expenditures has left many older Medicare recipients experiencing the sticker shock of “observation status.” Patients who are not sick enough to meet inpatient admission criteria, however, still require hospitalization, and may be placed under Medicare observation care.

Dr. Isha Puri, a hospitalist at Lahey Hospital and Medical Center, Beth Israel Lahey Health, in Burlington, Mass

Dr. Isha Puri

Seniors can get frustrated, confused, and anxious as their status can be changed while they are in the hospital, and they may receive large medical bills after they are discharged. The Centers for Medicare & Medicaid Services’ “3-day rule” mandates that Medicare will not pay for skilled nursing facility care unless the patient is admitted as an “inpatient” for at least 3 days. Observation days do not count towards this 3-day hospital stay.

There has been an increase in outpatient services over the years since 2006. The 2018 State of Hospital Medicine Report (SoHM) highlights the percentage of discharges based on hospitalists’ billed Current Procedural Terminology codes. Codes 99217 (observation discharge) and 99238-99239 (inpatient discharge) were used to calculate the percentages. 80.7% of adult medicine hospitalist discharges were coded using inpatient discharge codes, while 19.3% of patients were discharged with observation discharge codes.

In the 2016 SoHM report, the ratio was 76.0% inpatient and 21.1% observation codes and in the 2014 report we saw 80.3% inpatient and 16.1% observation discharges (see table 1). But in both of those surveys, same-day admission/discharge codes were also separately reported, which did not occur in 2018. That makes year-over-year comparison of the data challenging.

Table 1. Adult medicine hospitalist discharges by patient status

Interestingly, the 2017 CMS data on Evaluation and Management Codes by Specialty for the first time included separate data for hospitalists, based on hospitalists who credentialed with Medicare using the new C6 specialty code. Based on that data, when looking only at inpatient (99238-99239) and observation (99217) codes, 83% of the discharges were inpatient and 17% were observation.

Physicians feel the pressure of strained patient-physician relationships as a consequence of patients feeling the brunt of the financing gap related to observation status. Patients often feel they were not warned adequately about the financial ramifications of observation status. Even if Medicare beneficiaries have received the Medicare Outpatient Observation Notice, outlined by the Notice of Observation Treatment and Implication for Care Eligibility Act, they have no rights to appeal.

Currently Medicare beneficiaries admitted as inpatients only incur a Part A deductible; they are not liable for tests, procedures, and nursing care. On the other hand, in observation status all services are billed separately. For Medicare Part B services (which covers observation care) patients must pay 20% of services after the Part B deductible, which could result in a huge financial burden. Costs for skilled nursing facilities, when they are not covered by Medicare Part A, because of the 3-day rule, can easily go up to $20,000 or more. Medicare beneficiaries have no cap on costs for an observation stay. In some cases, hospitals have to apply a condition code 44 and retroactively change the stay to observation status.

I attended the 2019 Society of Hospital Medicine Annual Conference in Washington. Hospitalists from all parts of the country advocated on Capitol Hill against the “observation bill,” and “meet and greets” with congressional representatives increased their opposition to the bill. These efforts may work in favor of protecting patients from surprise medical bills. Hospital medicine physicians are on the front lines for providing health care in the hospital setting; they have demanded a fix to this legislative loophole which brings high out of pocket costs to our nation’s most vulnerable seniors. The observation status “2-midnight rule” utilized by CMS has increased financial barriers and decreased access to postacute care, affecting the provision of high-quality care for patients.

My hospital has a utilization review committee which reviews all cases to determine the appropriateness of an inpatient versus an observation designation. (An interesting question is whether the financial resources used to support this additional staff could be better assigned to provide high-quality care.) Distribution of these patients is determined on very specific criteria as outlined by Medicare. Observation is basically considered a billing method implemented by payers to decrease dollars paid to acute care hospitals for inpatient care. It pertains to admission status, not to the level of care provided in the hospital. Unfortunately, it is felt that no two payers define observation the same way. A few examples of common observation diagnoses are chest pain, abdominal pain, syncope, and migraine headache; in other words, patients with diagnoses where it is suspected that a less than 24-hour stay in the hospital could be sufficient.

Observation care is increasing and can sometimes contribute to work flow impediments and frustrations in hospitalists; thus, hospitalists are demanding reform. It has been proposed that observation could be eliminated altogether by creating a payment blend of inpatient/outpatient rates. Another option could be to assign lower Diagnosis Related Group coding to lower acuity disease processes, instead of separate observation reimbursement.

Patients and doctors lament that “Once you are in the hospital, you are admitted!” I don’t know the right answer that would solve the observation versus inpatient dilemma, but it is intriguing to consider changes in policy that might focus on the complete elimination of observation status.

Dr. Puri is a hospitalist at Lahey Hospital and Medical Center in Burlington, Mass.

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