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President's Message: Hospitalization or Observation? The Difference in Medicare Patients’ Cash Outlay is Significant
Posted on: 3/1/2013
Werner - regular
ISMS President

William N. Werner, MD

When you admit a patient covered by Medicare to the hospital, are you asked whether you want that patient covered under Part A or Part B? Probably not.

But in reality, that is what should happen at the time a physician determines if a patient should be a full inpatient admission as opposed to being admitted on an observation or outpatient status. What may seem to be an administrative decision, rather than a clinical determination, can end up with surprising financial consequences for a Medicare patient.

Unless patients are in a dedicated observation unit, it may appear to the patient, family members, hospital staff and physicians that they are admitted to the hospital. After all, they are in a hospital bed receiving nursing and supportive care, having tests done, taking medication and being fed. But if they are being observed rather than admitted, Medicare considers their care to be a Part B benefit with different coverage than Part A.

Medicare regulations determine whether a patient is kept in observation status versus being admitted. For Medicare, presenting symptoms and a physician’s ability to support medical necessity of the inpatient admission are what determine a patient’s path.

For inpatient admission, Medicare will bill the patient under Part A. The senior will usually pay a one-time deductible for all hospital services in the first 60 days of being hospitalized. Part B will cover most of the physician services provided during an admission, although the patient pays 20 percent of the Medicare approved amount after paying a Part B deductible.

With observation status, the patient will be billed for care under Part B. That can mean a copayment for each individual service because it is considered an outpatient level of care. Seniors may find a hefty bill awaiting them after discharge, with all care services and medications billed separately.

The situation can get more complicated if the patient requires rehabilitation services in a skilled nursing facility following an observation stay. Medicare requires a "three midnight inpatient stay" in order to qualify for coverage in skilled care. That means an observation stay would not meet the coverage requirement and this places even more financial and placement pressure on the patient during recovery.

Medicare and other third party payers have increased the scrutiny of short-stay, one- and two-day inpatient admissions, denying payment after the fact by determining that the care provided did not meet the standard for inpatient coverage.

The distinction between inpatient and observation care has rapidly become an audit issue for the Centers for Medicare and Medicaid Services (CMS) via its contractors for the Recovery Audit Contractor (RAC) programMedicare Administrative Contractors (MACs); and Comprehensive Error Rate Testing (CERT).

Hospitals, physicians and patients must communicate

Hospitals are increasing the use of observation status to provide care in a safe environment while still being able to bill for services as outpatient. Unfortunately, all too often the patient experiences sticker shock after receiving the bill for hospital services not covered by insurance. Medicare offers resources to help patients understand their obligations, but is this enough?

Hospitals should be advising patients of their observation status, but notification may be overlooked by a worried and confused patient, who may not understand whether their status is Part A or Part B.

Only physicians can determine and order the appropriate level of hospital services. We must direct the best care possible amidst the realities of payers’ restrictions, and we must ensure that patients know about that important distinction: whether their care is being considered as Part A or Part B.

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