Medicare claims for observation care rose from $828,000 in 2006 to more than $1.1 million in 2009. At the same time, claims for observation care lasting more than 48 hours tripled to $83,183. Arcane and confusing Medicare payment rules have left some beneficiaries on the hook for huge out-of-pocket payments for skilled nursing care they receive on release from the hospital, as well as copayments for “self-administered” drugs and other services.

These policies have beneficiaries hopping mad, resulting in the Centers for Medicare and Medicaid Services (CMS) hosting a “listening session” in August in which they got an earful from beneficiaries and their advocates, physicians, and hospitals. The Medicare Payment Advisory Commission (MedPAC) put the issue on its September agenda, and Commissioners reacted strongly to the lack of logic in CMS policy.

A variety of factors created this unfortunate situation. First, the increase in observation volume has occurred for several reasons:

• A steady shift from inpatient care to outpatient care has occurred over the past few decades – for example, as has been documented for chest pain.
• Over the past decade, Medicare has changed its hospital payment policy from no separate payment for observation, to payment for only three approved conditions (chest pain, asthma, and congestive heart failure) with several clinical restrictions, then to lifting the clinical restrictions, and finally to paying a composite payment for all conditions starting in 2008. This is a change that ACEP strongly supported. This should have led to a doubling of volumes, but was associated with only about a 36% increase. However, this is still a substantial increase.
• Medicare hired Recovery Audit Contractors (RACs) to recoup money from hospitals for “overpayment” for health care services – such as an inpatient who should have been an observation patient. This scares hospitals and may be driving more observation utilization.
• Elderly patients who are too sick to go home but not sick enough to be admitted – even after a prolonged period of observation. As hospitals become stricter regarding the use of criteria such as “Interqual” (to avoid RAC penalties) to decide who can be admitted as an inpatient, there are more and more “lost patients” in the system and many of them have a painful condition, such as back pain. These probably account for part of the growing percentage of Medicare patients whose length of stay is more than 48 hours (it is up to 7% nationally).

In its annual Report to Congress in March 2010, MedPAC representatives said the increase may be explained by hospitals’ heightened worries about more aggressive Medicare audits of admissions and Medicare’s decision in 2008 to expand criteria that allow patients to be placed in observation status. However, the number of people admitted to inpatient status remained stable, according to the report.