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.

“I am concerned that the benefits of ‘good’ observation services in dedicated units may be overlooked,” said Dr. Michael Ross, Medical Director of Observation Medicine at Emory University, Chair of the CMS APC Panel’s Observation Subcommittee, and author of several published studies on use of observation units. “I realize that one concern is the percentage of patients whose length of stay in observation is over 48 hours. However, the average length of stay in a dedicated observation unit is 15 hours, with less than 1% having a LOS over 48 hours.”

Several well-done, randomized studies have shown that the length of stay in a dedicated unit is less than half that of care in a general inpatient bed. This more-efficient care addresses most of the issues currently raised. The 20% copay is much less when a decision is made in a timely manner (15 hours or less), and there is much less risk of using 3-day skilled nursing facility (SNF) qualifying time. Most of the observation failures reported in the news are for painful conditions in the elderly – a finding reported in Annals of Emergency Medicine 7 years ago. Elderly patients with painful conditions are more likely to fail observation and to return to the emergency department if discharged. Unfortunately, commercial admission criteria, such as those of Interqual, often are not based on strong evidence.

Well-performed observation services are good for the patients. Studies of observation protocols have shown improved patient satisfaction and quality of life relative to inpatient admission. Further, preventing avoidable admissions is very important for elderly patients, who are at a greater risk for decline in their functional status when they are hospitalized. Observation care has decreased diagnostic uncertainty. For example, chest pain observation protocols have been associated with a 90% reduction in the rate of missed heart attacks. Observation protocols have been shown to improve compliance with recommended diagnostic testing in conditions such as transient ischemic attack, syncope, or chest pain. Well-run dedicated observation units have been shown to decrease hospital admissions, ED crowding, ambulance diversion, and patients who leave the emergency department without being seen.

Finally, observation protocols have decreased unnecessary resource utilization and cost by 50%-70% of routine inpatient care costs.

The government should not focus on whether observation should occur, but on how and where it should occur and how to identify and encourage best practices for these patients. The overwhelming evidence from 2 decades of intense research in this area is that the setting should be in dedicated observation units. This is why ACEP’s 2008 policy on ED observation units considered this setting to be a “best practice” when done appropriately.

Costs

Medicare patients pay a 20% copay for all outpatient services. This includes physician office, clinic, and emergency department visits (not leading to admission), as well as observation visits (not leading to admission). If a patient is observed and discharged in a reasonable time frame (15-24 hours), the copay is reasonable. However, if the patient is in observation for several days, the copay will be higher. This trend is occurring nationally when a patient is admitted to a bed anywhere in the hospital.

Hospitals should observe patients in a dedicated observation unit, where the average length of stay is 15 hours, seldom more than 24 hours, and almost never more than 48 hours (the group causing the recent concerns).

Additionally, emergency physicians cannot simply “admit” observable patients to solve this problem. Most of these patients do not meet medical necessity criteria for inpatient admission, and a denied inpatient stay is very costly to the hospital.

During a 3-year pilot project in six states, the RACs, who receive commissions based on recoupment of overcharges they uncover, forced hospitals and other health care providers to return close to $1 billion in improper payments. The RAC program is now being expanded nationwide and will be examining physician billing and medical necessity decisions soon, as well.

Additional pressure for hospitals and emergency physicians to increase the use of observation status will undoubtedly come from the new health care reform law, which includes penalties for hospitals that have unusually high rates of “preventable” readmissions for certain conditions and diagnoses. Because observation patients have not been admitted officially, they would not count as readmissions.

Medications

In outpatient settings, Medicare does not cover self-administered drugs. Patients may take their own routine, self-administered drugs if indicated. With a 15-hour stay, this is seldom an issue.

Skilled Nursing Facility

Since its inception, Medicare has had a 3-day nursing home rule – if a patient qualifies as an inpatient and spends 3 or more days in the hospital, Medicare will pay the first 30 days in a skilled nursing facility (with the exception of beneficiaries who are enrolled in a Medicare Advantage program who can be directly admitted to SNFs). The 3-day period begins when the inpatient admission is ordered, not when the patient arrives. This would be a problem if a patient spent a prolonged period of time as an observation patient, then was admitted but was not an inpatient for 3 or more days (meaning the time in observation care did not count). These patients would then be ineligible for Medicare coverage for the first 30 days at the SNF and would have to pay out of pocket.

Medicare’s decision to not apply observation time to the 3-day rule is longstanding policy that was unsuccessfully challenged in a 2008 federal court ruling. Nonetheless, ACEP has strongly urged the CMS to change this rule for the past 5 years, and perhaps the recent national attention, particularly from beneficiary advocates, will provide an impetus for change. Further, the CMS must reconcile its coverage policies with its auditing and program integrity policies to avoid unintended negative consequences for beneficiaries and providers.

For more on reimbursement for observation care, visit the ACEP Web site Practice Resources section and click on Reimbursement FAQs. Under that tab, choose Observation – Physician Coding, and Observation Care Payments to Hospitals FAQ.