DEPARTMEN1" OF HEALTH MITI H Ur-..1AN SERVICES 
OFFICE OF INSPECTOR GENERAL 
WASHINGTON, DC  20201 
JUL 2 9 2013 
TO: 	 Marilyn Tavenner 
Administrator 
Centers for Medicare & Medicaid Services 
FROM:  Stuart Wright-
Deputy Inspector General 
for Evaluation and Inspections 
SUBJECT: 	 M emorandum Report: Hospitals' Use ofObservation Stays and Short 
Inpatient Stays for Medicare Beneficiaries , OEI-02-12-00040 
This memorandum report describes hospitals ' use of observation stays and short inpatient 
stays in 2012 . The Centers for Medicare & Medicaid Services (CMS) and others have 
raised concerns about these types of stays.  To address these concerns, CMS recently 
proposed policy changes-through a Notice of Proposed Rulemaking (NPRM)- that, if 
promulgated as proposed, would substantially affect how hospitals bill for these stays. 1 
SUMMARY 
When beneficiaries enter the hospital, hospital physicians often need to decide whether to 
admit them as inpatients or to provide observation services.  Observation services are 
short-term treatments and assessments provided to outpatients to determine whether 
beneficiaries require further treatment as inpatients or can be discharged . CMS policy 
states that observation services are usually needed for 24 hours or less. 
CMS, Members of Congress, and others have raised concerns about hospitals' use of 
observation stays and short inpatient stays.  They are concerned about beneficiaries 
spending long periods of time in observation stays without being admitted as inpatients. 
In particular, they are concerned that beneficiaries may pay more as outpatients than if 
they were admitted as inpatients.  Moreover, beneficiaries who are not admitted as 
inpatients may not qualify under Medicare for skilled nursing facility (SNF) services 
following discharge from the hospital.  Beneficiaries who do not qualify for SNF services 
may choose to receive them, but are then responsible for the SNF charges.  In addition, 
CMS is concerned about improper payments for short inpatient stays when the 
beneficiaries should have been treated as outpatients. 
1 See 78 Fed. Reg . 27485 , 27644-27650 (May 10, 2013).  Page 2  Marilyn Tavenner 
We found that Medicare beneficiaries had 1.5 million observation stays in 2012; these 
beneficiaries commonly spent 1 night or more in the hospital.  Beneficiaries had an 
additional 1.4 million long outpatient stays; some of these may have been observation 
stays.  Beneficiaries also had 1.1 million short inpatient stays, which were often for the 
same reasons as observation stays.  On average, short inpatient stays cost Medicare and 
beneficiaries more than observation stays.  Some hospitals were more likely to use short 
inpatient stays, whereas others were more likely to use observation or long outpatient 
stays.  Beneficiaries had over 600,000 hospital stays that lasted 3 nights or more but did 
not qualify them for SNF services.  For 4 percent of these stays, beneficiaries received 
SNF services for which they did not qualify; Medicare inappropriately paid $255 million 
for these services. 
 
BACKGROUND 
 
When a beneficiary enters a hospital, hospital physicians often need to decide whether to 
admit the beneficiary as an inpatient.  The decision to admit is a complex medical 
judgment.  It is made by the treating physician, who must consider several factors 
including the beneficiarys medical history, the severity of the beneficiarys symptoms, 
and the expected care.  Physicians are also directed to consider whether beneficiaries are 
expected to need at least 24 hours of hospital care.2   
 
During observation stays, treating physicians use short-term treatments and assessments 
to determine whether a beneficiary should be admitted as an inpatient or discharged.3  
During these stays, physicians may use a variety of outpatient services, such as laboratory 
tests, drugs, minor procedures, x-rays, and other imaging services, to inform this 
decision.  Observation stays can occur anywhere in the hospital, including the emergency 
department, a separate observation unit, or an inpatient unit.  According to CMS policy, 
the decision to admit or discharge usually can be made within 24 hours and should rarely 
take longer than 48 hours.4   
 
Concerns About Observation Stays and Short Inpatient Stays  
CMS, Members of Congress, and others have raised concerns about hospitals use of 
observation stays and short inpatient stays.  They are concerned about beneficiaries 
spending long periods of time in observation stays without being admitted as inpatients.5  
In particular, they are concerned that beneficiaries may pay more as outpatients than if 
they were admitted as inpatients.  Moreover, beneficiaries who are not admitted as 
inpatients may not qualify under Medicare for SNF services following discharge from the 
hospital.  Beneficiaries who do not qualify for SNF services may choose to receive them, 
but are then responsible for the SNF charges.  Notably, there have been reports of 
                                                           
2 CMS, Medicare Benefit Policy Manual (MBPM), Pub. No. 100-02, ch. 1,  10.  
3 CMS, MBPM, Pub. No. 100-02, ch. 6,  20.6. 
4 Ibid. 
5 See, for example, CMS, Listening Session:  Hospital Observation Beds, Aug. 24, 2010.  Transcript 
available at https://www.cms.gov/hospitaloutpatientpps/downloads/94244031HosptialObservationBeds 
ListeningSession082410.pdf [sic].  Accessed on May 8, 2013.  Charles Fiegl, Lawmakers try to eliminate 
Medicare coverage technicality, American Medical News, Nov. 7, 2011.  Accessed at 
http://www.amednews.com/article/20111107/government/311079953/7/ on May 8, 2013.     
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 3  Marilyn Tavenner 
beneficiaries in observation stays who incurred bills from SNFs for tens of thousands of 
dollars because they did not qualify for SNF services under Medicare.6 
 
CMS and others also have raised concerns about short inpatient stays, which are inpatient 
stays that lasted less than 2 nights.  CMS found that a significant portion of payments for 
these stays were improper because the services should have been provided in the 
outpatient setting.7  CMS contractors, such as Recovery Audit Contractors, seek to 
recoup these improper payments.  According to hospitals and others, these recoupment 
efforts have contributed to a shift from short inpatient stays to extended observation 
stays, which are increasing.8 
 
Proposed Changes to the Payment Policies for Inpatient and Outpatient Stays 
To address these concerns, in April 2013, CMS proposed policy changes through an 
NPRM that, if promulgated as proposed, would substantially affect how hospitals bill for 
observation stays and short inpatient stays.9  If these changes are implemented, CMS 
contractors would presume that inpatient hospital stays lasting 2 nights or longer were 
reasonable and necessary and would qualify for payment as inpatient stays.  Conversely, 
CMS contractors would presume that stays lasting less than 2 nights would not qualify 
for payment as inpatient stays and instead would be paid for as outpatient stays.10  In the 
NPRM, CMS proposed that time spent in any outpatient area of the hospital would not 
count towards this 2-night presumption.11  It also solicited comments on this proposal.  
 
CMS expected these policy changes to reduce the number of observation stays lasting 
2 nights or longer and to reduce the number of short inpatient stays.12  Overall, it 
expected a net shift from outpatient to inpatient stays.  To offset the costs of additional 
inpatient stays, CMS proposed implementing an across-the-board reduction in Medicare 
payments for all inpatient stays. 
 
In addition, in March 2013, CMS implemented a ruling regarding payments for inpatient 
services when a CMS contractor or a hospital determines that an inpatient admission was 
not reasonable and necessary.13  Specifically, CMS revised its Part B inpatient billing 
                                                           
6 See, for example, Susan Jaffe, Medicare rules give full hospital benefits only to those with inpatient 
status, Washington Post, Sept. 7, 2010: HE01.  Drew Armstrong, Medicare Fraud Effort Gives Elderly 
Surprise Hospital Bills, Bloomberg, Jul. 12, 2010.  Accessed at http://www.bloomberg.com/news/2010-
07-12/hospital-fraud-audits-spur-unintended-cash-penalty-to-elderly-on-medicare.html on May 8, 2013. 
7 CMS reports an improper payment rate of 36 percent in 2012 for inpatient stays lasting 1 night or 
less.  See 78 Fed. Reg. at 27647. 
8 See, for example, American Hospital Association, letter to CMS regarding extended observation services, 
October 27, 2010. Accessed at http://www.aha.org/advocacy-issues/letter/2010/101027-let-pollack-cms.pdf 
on April 23, 2013.  CMS indicated that it received similar comments from various stakeholders.  See 
77 Fed. Reg. 45061, 45156 (July 30, 2012). 
9 See 78 Fed. Reg. at 2764427650. 
10 See 78 Fed. Reg. at 2764527649. 
11 See 78 Fed. Reg. at 27648. 
12 See 78 Fed. Reg. at 2764927650. 
13 CMS Rulings, CMS-1455-R (March 13, 2013).  Simultaneously, CMS issued a proposed rule about 
billing inpatient services under Part B; the proposed rule differs in some ways from the ruling and, if 
finalized, would supersede the ruling once it is in effect.  78 Fed. Reg. 16632 (March 18, 2013).   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 4  Marilyn Tavenner 
policy to allow payment for all hospital services that were provided and would have been 
reasonable and necessary if the beneficiary had been treated as an outpatient.  This 
revision substantially reduces hospitals financial risk when admitting beneficiaries if 
CMS contractors later deny or recoup payments for inpatient claims.  Prior to this ruling, 
if an inpatient claim was denied, hospitals received payment for only a limited set of 
services even if all the services provided would have been reasonable and necessary in 
the outpatient setting.   
 
Payments for Observation Stays, Inpatient Stays, and SNF Stays 
An observation stay is a type of outpatient stay.  Medicare Part B pays hospitals for 
outpatient stays under the Outpatient Prospective Payment System (OPPS).  When a 
hospital bills Medicare, the claim typically includes many services.  For most services, 
Medicare pays 80 percent of the cost, while the beneficiary is responsible for the 
remaining 20 percent.14  Because payments are made per service, Medicare and 
beneficiary payment amounts both increase as the number of services provided increases. 
 
During both observation and other outpatient stays, beneficiaries may receive services 
such as laboratory tests, drugs, minor procedures, x-rays, and other imaging services.  
Hospitals distinguish observation stays from other outpatient stays by adding a specific 
code to the claim.15  This code indicates that a hospital provided services in order to 
determine whether beneficiaries should be admitted as inpatients or discharged.  
Although hospitals typically receive a separate payment for each outpatient service, they 
are not always paid a separate amount for coding a claim as an observation stay. 
 
Medicare Part A pays hospitals for inpatient stays under the Inpatient Prospective 
Payment System (IPPS).  Each beneficiary is classified into a Medicare severity 
diagnosis related group (MS-DRG).  These groups are based on the beneficiarys primary 
and secondary diagnoses, the procedures the hospital performed, and other factors.16  
Medicare pays hospitals a different payment rate for each MS-DRG.17 
 
In contrast to Medicare payments for outpatient stays, Medicare payments for inpatient 
stays do not depend on the number of services provided or the length of stay.  While the 
OPPS is designed to reflect the cost of caring for each individual beneficiary, the IPPS is 
designed to reflect the cost of caring for an average beneficiary.  Likewise, beneficiary 
cost-sharing for inpatient stays also does not depend on the number of services provided 
                                                           
14 42 CFR  419.40(b); CMS, Medicare Claims Processing Manual, Pub. No. 100-04, ch. 4,  30. 
15 Hospitals include a revenue center code of 0760 or 0762 to identify the claim as an observation stay.  
16 Each MS-DRG generally falls into one of three severity levels, depending on the beneficiarys secondary 
diagnoses.  For example, a beneficiary with no secondary diagnoses that increase the complexity of care 
would be in a low-severity MS-DRG; a beneficiary with asthma would be in a medium-severity MS-DRG; 
and a beneficiary with pneumonia would be in a high-severity MS-DRG. 
17 Payment rates are adjusted by a variety of facility-level factors, such as a geographic factor to account for 
differences in labor costs. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 5  Marilyn Tavenner 
or the length of stay.  Instead, beneficiaries are responsible for an inpatient deductible; in 
2012, the deductible was $1,156.18 
 
Medicare Part A pays SNFs for services under the SNF Prospective Payment System.  
Medicare pays SNFs a daily rate that is determined by the beneficiarys needs.  
Beneficiaries incur no cost-sharing during the first 20 days, after which they pay a daily 
copayment ($145 in 2012).  To qualify for SNF services, a Medicare beneficiary must 
have had an inpatient hospital stay of at least 3 nights.19  Beneficiaries may choose to 
receive SNF services when they do not qualify for them under Medicare, but the 
beneficiaries are then responsible for SNF charges. 
 
METHODOLOGY 
 
We based this study on an analysis of:  (1) paid Medicare Part A and Part B hospital 
claims from the National Claims History file with dates of service in 2012 and (2) SNF 
Part A claims for beneficiaries who received hospital services in 2012.  We excluded 
hospitals that are not paid under both the OPPS and the IPPS, such as long-term care 
hospitals, critical access hospitals, and hospitals in Maryland that are paid under different 
systems. 
 
Analysis of Observation Stays.  We first identified all of the Part B hospital claims that 
were coded as observation stays.20  We then determined the top 10 reasons for 
observation stays (e.g., chest pain).  Specifically, we calculated what the MS-DRG would 
have been if the beneficiary had been admitted by using the information on the Part B 
hospital claim regarding the beneficiaries primary and secondary diagnoses, procedures,  
age, and gender.21  We based our method on the MS-DRG Manual and tested the method 
on short inpatient claims.22  Based on the results of the testing, we corrected the number 
of observation stays associated with each reason.23  See Appendix A for descriptions of 
the reasons for stays included in this report.   
 
Next, we described how the observation stays beganthat is, we calculated the 
percentage of observation stays that began:  (1) in the emergency department, (2) with an 
operating room procedure, and (3) in other ways, such as a scheduled clinic visit.  For the 
                                                           
18 Beneficiaries are responsible for paying the deductible once per benefit period, even though a benefit 
period may include multiple hospital stays.  A benefit period ends when the beneficiary has not received 
Medicare-covered hospital or SNF services for 60 consecutive days. 
19 This qualifying hospital stay typically must occur within the 30 days prior to the SNF admission.  See 
42 CFR  409.30.   
20 For the purposes of this report, we considered each hospital claim to be a hospital stay.  We identified all 
claims that had a claim line item with a revenue center code of 0760 or 0762.   
21 We also identified the procedures on the non-institutional Part B claims that were provided to the 
beneficiary during the observation stay.  We converted the Current Procedural Terminology procedure 
codes to procedure codes in the International Classification of Diseases, Ninth Revision, Clinical 
Modification using information from MediRegs and other sources. 
22 Medicare Severity Grouper with Medicare Code Editor Software, Installation and Users Manual, 
October 2012.  Manual appendixes accessed at http://www.codingupdates.com/wp-content/uploads/ on 
May 31, 2013. 
23 The tests showed that the method somewhat underestimated certain MS-DRGs and overestimated others.  
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 6  Marilyn Tavenner 
observation stays that began with an operating room procedure, we determined the most 
common procedure.24  For all observation stays, we calculated the length of stay and 
determined which of the top 10 reasons were most likely to lead to an observation stay 
that lasted 2 nights or longer.  Throughout this report, a 0-night hospital stay means a stay 
that began and ended on the same calendar day; a 1-night hospital stay spans 2 calendar 
days; a 2-night stay spans 3 calendar days; etc. 
 
We determined total Medicare and beneficiary payments for all observation stays.  In 
addition, we determined average Medicare and beneficiary payments per stay for all 
stays, and we estimated average payments for each of the most common reasons for 
stays.25  We also calculated the percentage of all observation stays that included charges 
for self-administered drugs, which are not covered by Medicare during outpatient stays, 
and the average payment per observation stay including these charges. 
 
We also determined the number of Part A hospital claims in which the beneficiaries 
began as outpatients, received observation services, and were eventually admitted as 
inpatients; we refer to these stays as inpatient stays, rather than observation stays. 
 
Analysis of Outpatient Stays That Lasted at Least 1 Night but Were Not Coded as 
Observation Stays.  We identified all Part B hospital claims that lasted at least 1 night and 
were not coded as observation stays.26  We refer to these claims as long outpatient 
stays.27  As with observation stays, we determined:  (1) the top 10 reasons for these stays, 
(2) the percentage of these stays that began in the emergency department, and (3) the 
length of stay. 
 
Next, we identified the number of observation stays and the number of long outpatient 
stays for each hospital.  We calculated the percentage of these stays that were observation 
stays and the remaining percentage that were long outpatient stays to assess the variation 
in hospitals use of these stays. 
 
Analysis of Short Inpatient Stays.  We identified all Part A hospital claims that were 
1 night or less; we refer to these claims as short inpatient stays.28  We calculated the 
percentage of these stays that lasted 1 night and the percentage that lasted less than 
                                                           
24 We considered an outpatient procedure to be an operating room procedure if it would have led to a 
surgical MS-DRG if the beneficiary had been admitted.  Most MS-DRGs are considered either medical or 
surgical. 
25 These averages are estimates because of the method we used for determining the reasons for observation 
stays. 
26 We did not include claims for repetitive and recurring services, such as physical therapy and 
chemotherapy.  The dates on these claims may indicate, for example, a 30-day stay; however, the 
beneficiaries did not spend the night; instead they returned periodically (e.g., once a week) for the same 
services.  
27 While these claims did not include a claim line item with a revenue center code of 0760 or 0762, 
they may have included observation servicesthat is, services to determine whether the beneficiary should 
have been admitted as an inpatient or discharged. 
28 We excluded short inpatient stays in which the beneficiary died, was transferred to another acute-care 
facility, had an inpatient-only procedure, or left against medical advice. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 7  Marilyn Tavenner 
1 night.  We also calculated the percentage that included emergency department services 
before the beneficiary was admitted.   
 
In addition, we determined the top 10 reasons for short inpatient stays.29  We also 
calculated total and average Medicare and beneficiary payments for short inpatient stays 
and average payments for each of the most common reasons for short inpatient stays. 
 
Comparisons Between Short Inpatient Stays and Observation Stays.  We compared short 
inpatient and observation stays in several ways.  First, we compared the most common 
reasons for the two types of stays.  We determined how many of the top 10 reasons for 
each type of stay overlapped and how the order differed between observation and short 
inpatient stays.   
 
Second, we compared Medicare and beneficiary payments for the two types of stays.  For 
each of the most common reasons, we determined the differences between the average 
Medicare and beneficiary payments for short inpatient stays and the estimated average 
Medicare and beneficiary payments for observation stays.  Next, for all observation stays, 
we determined how often beneficiaries paid more than the inpatient deductible and how 
often they paid more than twice the inpatient deductible. 
 
Finally, we identified the number of short inpatient stays and the number of observation 
and long outpatient stays for each hospital.  We determined the percentage of these stays 
that were short inpatient stays to assess the variation in hospitals use of these stays. 
 
Analysis of SNF Stays for Beneficiaries Who Spent at Least 3 Nights in the Hospital But 
Did Not Qualify for SNF Services.  We first identified all hospital stays from 2012 in 
which beneficiaries spent at least 3 nights in the hospital but had fewer than 3 nights as 
inpatients.  A beneficiary with a hospital stay that is fewer than 3 inpatient nights does 
not qualify for Medicare SNF services.  These stays included observation and long 
outpatient stays; they also included short and 2-night inpatient stays when the beneficiary 
spent at least 1 night as an outpatient prior to admission.  We calculated the number and 
percentage of each type of these stays.  
 
Next, we determined the number of these hospitals stays in which the beneficiary 
received SNF services after the hospital stay.  Specifically, we identified all SNF services 
that began within 30 days of the discharge from the hospital stay.30  To verify that these 
SNF services did not have another hospital stay that qualified the beneficiary for SNF 
services, we matched the hospital dates reported by the SNF to all inpatient claims for 
each beneficiary and included only the SNF services that were not associated with 
3 inpatient nights.   
                                                           
29 We used the MS-DRG on the Part A claim to determine the reason for the stay. 
30 Typically, for beneficiaries to qualify for SNF services, these services must be provided within 30 days 
of the hospital stay.  In addition, SNFs must report the dates of the hospital stay on their claims, unless the 
beneficiary did not have a qualifying hospital stay.  We included only SNF services in which the reported 
hospital dates (1) matched at least one day of the hospital stay or (2) were blank and the Medicare 
payments were zero, indicating that the beneficiary did not have a qualifying hospital stay. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 8  Marilyn Tavenner 
 
We then determined the percentage of these hospital stays in which Medicare paid SNFs 
inappropriately for services.  We also determined the percentage of stays in which 
Medicare did not pay and the beneficiary was fully liable for the SNF charges.  For the 
hospital stays in which Medicare paid for SNF services, we calculated the total and 
average Medicare payments and beneficiary copayments.  Similarly, for the hospital stays 
in which the beneficiary was liable for SNF charges, we calculated the total and average 
charges.   
 
Standards 
This study was conducted in accordance with the Quality Standards for Inspection and 
Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. 
   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 9  Marilyn Tavenner 
RESULTS 
 
Medicare Beneficiaries Had 1.5 Million Observation Stays in 2012 
Hospitals provided observation services to Medicare beneficiaries in 1,511,875 stays.  
During these observation stays, hospitals provided short-term treatments and assessments 
and determined that the beneficiaries did not need to be admitted as inpatients.  For 
another 601,880 stays, hospitals provided observation services to beneficiaries who were 
then admitted to the hospital as inpatients.31 
 
Beneficiaries in observation stays were most often treated for chest pain.  During stays 
for chest pain, beneficiaries most commonly received electrocardiograms, chest x-rays, 
and other laboratory tests, such as troponin tests.  The second most common reason for an 
observation stay was digestive disorders.  During stays for digestive disorders, hospitals 
commonly provided various laboratory tests, most frequently a complete blood count.  
Notably, as shown in Table 1, many of the common reasons for observation stayslike 
chest painwere related to symptoms, rather than to a specific procedure or underlying 
condition.  For example, the third and fourth most common reasons were fainting and 
signs and symptoms, which includes general pain or malaise. 
 
Table 1:  Most Common Reasons for Observation Stays, 2012 
Number of  Percentage of  
Most Common Reasons for Observation Stays 
Observation Stays  Observation Stays 
Chest pain  340,484  22.5% 
Digestive disorders  93,091  6.2% 
Fainting  81,349  5.4% 
Signs and symptoms  47,439  3.1% 
Nutritional disorders  39,227  2.6% 
Dizziness  34,455  2.3% 
Irregular heartbeat  31,390  2.1% 
Circulatory disorders  31,163  2.1% 
Respiratory signs and symptoms  24,715  1.6% 
Medical back problems  23,846  1.6% 
Source:  Office of Inspector General (OIG) analysis of CMS data, 2013. 
 
Typically, observation stays began with the beneficiary being treated in the emergency 
department.  Seventy-eight percent of observation stays began this way, while another 
9 percent began with the beneficiary having an operating room procedure.  The most 
common operating room procedure was coronary stent insertion.  The remaining 
observation stays began in other ways, such as with scheduled clinic visits, minor 
procedures, or laboratory and imaging services. 
                                                           
31 We considered these stays to be inpatient stays, rather than observation stays. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 10  Marilyn Tavenner 
Beneficiaries in Observation Stays Commonly Spent 1 Night or More in the Hospital  
In 92 percent of observation stays, beneficiaries spent at least 1 night (2 calendar days) in 
the hospital.  As shown in Table 2, in 55 percent of observation stays, beneficiaries spent 
1 night in the hospital; in 26 percent of stays, beneficiaries spent 2 nights; and in 
11 percent of stays, beneficiaries spent at least 3 nights.   
 
Table 2:  Number and Percentage of Observation Stays by Length of Stay, 2012 
Number of  Percentage of All 
Length of Stay 
Observation Stays  Observation Stays 
0 nights (1 calendar day)  126,264  8% 
1 night  833,583  55% 
2 nights  385,830  26% 
At least 3 nights  166,198  11% 
     Total  1,511,875  100% 
Source:  OIG analysis of CMS data, 2013. 
 
Some beneficiaries were more likely than others to have longer observation stays.  
Among the most common reasons for observation stays, medical back problems were the 
most likely to result in beneficiaries having stays lasting 2 nights or longer, followed by 
signs and symptoms.  Chest pain was the least likely to result in stays lasting 2 nights or 
longer.  See Appendix B for the percentage of stays lasting 2 nights or longer for the most 
common reasons for observation stays. 
 
Beneficiaries Had an Additional 1.4 Million Long Outpatient Stays; Some of These 
Stays May Have Been Observation Stays 
Medicare beneficiaries had 1,386,090 outpatient stays that lasted at least 1 night, but were 
not coded as observation stays.  We refer to these as long outpatient stays.  As shown in 
Table 3, for 94 percent of these stays, beneficiaries spent 1 night in the hospital.  For the 
remaining 6 percent, beneficiaries spent 2 or more nights in the hospital. 
 
Table 3:  Number and Percentage of Long Outpatient Stays, by Length of Stay, 2012 
Length of Stay  Number of Stays  Percentage of Stays 
1 night  1,298,178  94% 
At least 2 nights  87,912  6% 
     Total  1,386,090  100% 
Source:  OIG analysis of CMS data, 2013. 
 
For some of these stays, hospitals may have provided observation services without 
coding the claims as observation stays.  Because hospitals are not always paid a separate 
amount for coding claims as observation stays, they may have provided observation 
servicesi.e., services to determine whether a beneficiary should have been admitted or 
dischargedwithout appropriately coding these claims. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 11  Marilyn Tavenner 
Long outpatient stays had similar characteristics to observation stays.  Like beneficiaries 
in observation stays, those in most long outpatient stays (63 percent) began their stays in 
the emergency department.  Also like beneficiaries in observation stays, those in long 
outpatient stays were most commonly treated for chest pain and digestive disorders.  See 
Appendix C for the top 10 reasons for long outpatient stays.   
Additionally, hospitals varied widely in their use of observation stays and long outpatient 
stays.  Nationally, 52 percent of these stays were observation stays, while the remaining 
48 percent were long outpatient stays.  As shown in Figure 1, for some hospitals, less 
than 5 percent of their stays were observation stays, while for others, over 90 percent of 
their stays were observation stays.  This variation may reflect differences in how often 
hospitals code claims as observation stays when observation services are provided. 
 
Figure 1:  Variation in the Use of Observation and Long Outpatient Stays Among 
Hospitals, 2012 
Long Outpatient Stays Observation Stays
100%
s  80%
y
a
st
of  60%
e 
g
nta 40%
e
c
r
e 20%
P
0%
Lowest Low Medium High Highest
(n=333 hospitals) (n=499) (n=1,665) (n=500) (n=333)
Use of observation stays 
 
Source:  OIG analysis of CMS data, 2013. 
 
Medicare Beneficiaries Had 1.1 Million Short Inpatient Stays in 2012; These Stays 
Were Often for the Same Reasons as Observation Stays 
In 2012, Medicare beneficiaries had 1,146,925 short inpatient staysthat is, inpatient 
stays lasting less than 2 nights.  For 90 percent of these stays, beneficiaries spent 1 night 
in the hospital, while beneficiaries spent less than 1 night for the remaining 10 percent of 
stays.  Like beneficiaries in observation stays, those in most short inpatient stays 
(67 percent) were first treated in the emergency department. 
 
Short inpatient stays were often for the same reasons as observation stays.  Similar to 
beneficiaries in observation stays, those in short inpatient stays were most commonly 
treated for chest pain.  Additionally, 6 of the 10 most common reasons for short inpatient 
stays were also among the 10 most common reasons for observation stays.  See Table 4 
for the top reasons for short inpatient and observation stays and Appendix D for more 
detailed information on the most common reasons for short inpatient stays. 
 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 12  Marilyn Tavenner 
Table 4: Most Common Reasons for Observation and Short Inpatient Stays, 2012 
Rank 
Top Reasons for Stays* 
Observation  Short Inpatient 
Stays  Stays 
Chest pain  1  1 
Digestive disorders  2  4 
Fainting  3  5 
Signs and symptoms  4  21 
Nutritional disorders  5  8 
Dizziness  6  28 
Irregular heartbeat  7  3 
Circulatory disorders  8  6 
Respiratory signs and symptoms  9  45 
Medical back problems  10  35 
Loss of blood flow to the brain  11  7 
Red blood cell disorders  13  9 
Coronary stent insertion  15  2 
Irregular heartbeat (medium severity)  21  10 
*This list includes the top 10 reasons for observation stays and the top 10 reasons for short inpatient stays. 
Source:  OIG analysis of CMS data, 2013. 
 
On Average, Medicare Paid Nearly Three Times More for a Short Inpatient Stay 
Than an Observation Stay and Beneficiaries Paid Almost Two Times More  
In total, Medicare paid $5.9 billion for short inpatient stays, an average of $5,142 per 
stay.  In contrast, it paid $2.6 billion for observation stays, an average of $1,741 per stay.  
For each of the most common reasons for the stays, the average payment was always 
higher for short inpatient stays than for observation stays.  As shown in Table 5, the 
average payment difference was lowest for chest pain, with Medicare paying $870 more 
for a short inpatient stay than for an observation stay, and was highest for red blood cell 
disorders, with Medicare paying $2,801 more for a short inpatient stay. 
 
Beneficiaries also paid more for short inpatient stays than for observation stays.  
Beneficiaries paid a total of $831 million for short inpatient stays, an average of $725 per 
stay.  In contrast, they paid a total of $606 million for observation stays, an average of  
$401 per stay.32 Beneficiaries typically paid more for short inpatient stays than for 
 
observation stays when they were treated for the same reason, although there were some 
                                                           
32 These payments for observation stays do not include charges for self-administered drugs, which are not 
covered by Medicare.  When these charges are added, beneficiaries paid an average of $528 per 
observation stay.  Fifty-one percent of observation stays included these charges.  Hospitals may not always 
bill beneficiaries for these charges.  For inpatient stays, beneficiaries are not charged for self-administered 
drugs. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 13  Marilyn Tavenner 
exceptions.  For all but two of the most common reasons, beneficiaries paid more for 
short inpatient stays, with these stays costing an average of $359 to $572 more than 
observation stays.  For the two exceptionscoronary stent insertions and circulatory 
disordersbeneficiaries paid more, on average, for observation stays than for short 
inpatient stays.  For these stays, the difference in average payments was $817 and $167, 
respectively.  See Table 5. 
 
Table 5:  Differences Between Average Payments* for Short Inpatient Stays and 
Observation Stays, by the Most Common Reasons for Treatment, 2012 
Top Reasons for Observation or   Difference in Average  Difference in Average 
Short Inpatient Stays**  Medicare Payments  Beneficiary Payments 
Red blood cell disorders  $2,801  $373 
Irregular heartbeat (medium severity)  $2,444  $457 
Circulatory disorders  $2,312  -$167 
Coronary stent insertion  $2,267  -$817 
Medical back problems  $2,085  $404 
Digestive disorders  $2,047  $425 
Nutritional disorders  $1,977  $474 
Fainting  $1,890  $417 
Signs and symptoms  $1,854  $359 
Respiratory signs and symptoms  $1,792  $396 
Loss of blood flow to the brain  $1,677  $415 
Dizziness  $1,320  $466 
Irregular heartbeat  $943  $572 
Chest pain  $870  $419 
*Average payments for observation stays are estimates because each reason is estimated based on information  
from the Part B hospital claim. 
**This list includes the top 10 reasons both for observation and short inpatient stays. 
Source:  OIG analysis of CMS data, 2013. 
 
Beneficiaries in observation stays sometimes paid more than the deductible charged to 
beneficiaries in inpatient stays.33  For 6 percent of all observation stays, or 83,747 stays, 
beneficiaries paid more than the inpatient deductible.  Notably, for 3,439 observation 
stays, beneficiaries paid more than two times the inpatient deductible. 
 
Some Hospitals Were More Likely To Use Short Inpatient Stays While Others Were 
More Likely To Use Observation or Long Outpatient Stays 
Of the three types of stays, nationally, 28 percent were short inpatient stays, while the 
remaining 72 percent were either observation or long outpatient stays.  However, the use 
of short inpatient stays varied widely among hospitals.  Some hospitals used short 
                                                           
33 The inpatient deductible was $1,156 in 2012.  There is no cap on beneficiaries 20-percent cost-sharing 
for observation stays. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 14  Marilyn Tavenner 
inpatient stays for less than 10 percent of their stays, while others used them for over 
70 percent of their stays.  See Figure 2 for the variation in hospitals use of short inpatient 
stays and their use of observation and long outpatient stays. 
 
Figure 2: Variation in the Use of Short Inpatient Stays and the Use of Observation and 
Long Outpatient Stays Among Hospitals, 2012 
Observation and Long Outpatient Stays Short Inpatient Stays
100%
s  80%
y
a
st
of  60%
e 
g
a
nt 40%
e
c
r
Pe 20%
0%
Lowest Low Medium High Highest
(n=333 hospitals) (n=499) (n=1,666) (n=499) (n=333)
Use of short inpatient stays  
 
Source:  OIG analysis of CMS data, 2013. 
 
Beneficiaries Had Over 600,000 Hospital Stays That Lasted 3 Nights or More, But 
Did Not Qualify Them for SNF Services  
Beneficiaries had 617,702 hospital stays that lasted at least 3 nights, but did not include 
3 inpatient nights; these beneficiaries did not qualify for SNF services under Medicare.  
These hospital stays included observation and long outpatient stays.  They also included 
stays in which the beneficiary began as an outpatient and was eventually admitted into a 
short or 2-night inpatient stay.  See Table 6 for the types of hospital stays lasting at least 
3 nights without 3 inpatient nights. 
 
Table 6:  Types of Hospital Stays Lasting at Least 3 Nights but With Less Than 3 Inpatient 
Nights, 2012 
Type of Hospital Stay  Number of Hospital Stays  Percentage of Hospital Stays 
Outpatient only     
   Observation  166,198  27% 
   Long outpatient  18,072  3% 
Inpatient that began as outpatient     
   Short inpatient  78,795  13% 
   2-night inpatient   354,637  57% 
     Total  617,702  100% 
Source:  OIG analysis of CMS data, 2013. 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 15  Marilyn Tavenner 
For 4 percent, or 25,245, of the 617,702 hospital stays, beneficiaries received SNF 
services following their discharge from the hospital, even though they did not qualify for 
these services under Medicare.  For 23,148 of these hospital stays, Medicare 
inappropriately paid for the SNF services, for a total of $255 million.  Beneficiaries paid 
a total of $63 million in copayments, for an average of $2,735 for the SNF services 
following each hospital stay.  For the remaining 2,097 hospital stays, Medicare did not 
pay for the SNF services and the beneficiary was fully liable for the SNF charges.  These 
charges totaled $22 million, for an average of $10,503. 
 
CONCLUSION 
 
In 2012, Medicare beneficiaries had 1.5 million observation stays; these beneficiaries 
commonly spent 1 night or more in the hospital.  Beneficiaries had an additional 
1.4 million long outpatient stays; some of these may have been observation stays.  
Beneficiaries also had 1.1 million short inpatient stays, which were often for the same 
reasons as observation stays.  On average, short inpatient stays cost Medicare and 
beneficiaries more than observation stays.  Some hospitals were more likely to use short 
inpatient stays, whereas others were more likely to use observation or long outpatient 
stays.  Additionally, beneficiaries had over 600,000 hospital stays that lasted 3 nights or 
more but did not qualify them for SNF services.  For 4 percent of these stays, 
beneficiaries received SNF services for which they did not qualify; Medicare 
inappropriately paid $255 million for these services. 
 
CMS recently proposed policy changesthrough an NPRMthat, if promulgated as 
proposed, would substantially affect how hospitals bill for observation stays, long 
outpatient stays, and short inpatient stays.  Our results may be useful to CMS as it 
considers policy changes.  Our results indicate that under the policies proposed in the 
NPRM, the number of short inpatient stays would be significantly reduced; however, the 
number of observation and long outpatient stays may not be reduced if outpatient nights 
are not counted towards the 2-night presumption.  Our results further indicate that, under 
the policies proposed in the NPRM, some hospitals would likely follow the provisions 
and continue to bill these as outpatient stays; other hospitalsgiven strong financial 
incentives and few barrierswould likely not follow the provisions and would admit 
beneficiaries as inpatients as soon as possible to meet the 2-night presumption.   
 
Lastly, our results raise concerns about SNF services for beneficiaries in observation 
stays, long outpatient stays, and short inpatient stays.  CMS should consider how to 
ensure that beneficiaries with similar post-hospital care needs have the same access to 
and cost-sharing for SNF services.  Allowing nights spent as an outpatient to count 
toward the 3 nights needed to qualify for SNF services may require additional statutory 
authority.  Ensuring that controls are in place so that Medicare does not inappropriately 
pay when beneficiaries do not qualify for SNF services is also critical.  We will refer to 
CMS in a separate memorandum the SNFs that received $255 million in inappropriate 
payments so that CMS can look into recoupment. 
 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 16  Marilyn Tavenner 
In addition, OIG plans to conduct future work on hospitals use of these stays.  We also 
plan to conduct future work on inappropriate Medicare payments for SNF services for 
beneficiaries who do not have a 3-night qualifying hospital stay.  We may issue formal 
recommendations to CMS in these future reports. 
 
This memorandum report is being issued directly in final form because it contains no 
formal recommendations.  If you have comments or questions about this report, please 
provide them within 60 days.  Please refer to report number OEI-02-12-00040 in all 
correspondence. 
 
   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 17  Marilyn Tavenner 
APPENDIX A 
 
Descriptions of Reasons for Stay* 
 
Reason  Description 
Chest pain  Chest pain 
Circulatory disorders except acute myocardial infarction, with cardiac 
Circulatory disorders 
catheterization 
Coronary stent insertion  Percutaneous cardiovascular procedures with stent 
Digestive disorders  Esophagitis, gastroenteritis, and miscellaneous digestive disorders 
Dizziness  Dysequilibrium 
Fainting  Syncope and collapse 
Headaches  Headaches 
Injuries to the skin or tissue  Trauma to the skin, subcutaneous tissue, and breast 
Irregular heartbeat  Cardiac arrhythmia and conduction disorders 
Irregular heartbeat (medium severity)  Cardiac arrhythmia and conduction disorders (medium severity) 
Kidney and urinary tract infections   Kidney and urinary tract infections  
Loss of blood flow to the brain  Transient ischemia 
Signs and symptoms of musculoskeletal system and connective tissue 
Musculoskeletal signs and symptoms 
(e.g. muscle inflammation, joint pain) 
Nutritional and miscellaneous metabolic disorders (e.g. vitamin 
Nutritional disorders 
deficiency) 
Red blood cell disorders   Red blood cell disorders (e.g. anemia, sickle-cell disease) 
Respiratory signs and symptoms  Respiratory signs and symptoms (e.g. coughing, shortness of breath) 
Signs and symptoms  Signs and symptoms (e.g. general pain, malaise) 
*Unless noted otherwise, throughout this report, all of the reasons for stays were for beneficiaries at the low severity leveli.e., without 
secondary diagnoses that can increase the complexity of care. 
Source:  OIG, 2013. 
   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 18  Marilyn Tavenner 
APPENDIX B 
 
Percentage of Observation Stays Lasting 2 Nights of Longer, 2012 
 
Percentage of 
Most Common Reasons For Observation Stays  Observation Stays Lasting 
2 Nights or Longer 
Medical back problems  54.5% 
Signs and symptoms  47.9% 
Nutritional disorders  47.2% 
Digestive disorders  46.7% 
Circulatory disorders  45.2% 
Dizziness  39.3% 
Fainting  38.3% 
Respiratory signs and symptoms  33.2% 
Irregular heartbeat  24.8% 
Chest pain  24.1% 
Source:  OIG analysis of CMS data, 2013. 
   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 19  Marilyn Tavenner 
APPENDIX C 
 
Most Common Reasons for Long Outpatient Stays, 2012 
 
Percentage of  
Most Common Reasons for Long Outpatient  Number of Long 
Long Outpatient 
Stays  Outpatient Stays 
Stays 
Digestive disorders  121,721  8.8% 
Chest pain  57,078  4.1% 
Coronary stent insertion  54,723  3.9% 
Injuries to the skin or tissue  49,384  3.6% 
Kidney and urinary tract infections  37,183  2.7% 
Medical back problems  31,418  2.3% 
Signs and symptoms  29,712  2.1% 
Circulatory disorders  28,853  2.1% 
Musculoskeletal signs and symptoms  28,024  2.0% 
Headaches  25,010  1.8% 
Source:  OIG analysis of CMS data, 2013. 
 
   
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)  Page 20  Marilyn Tavenner 
APPENDIX D 
 
Most Common Reasons for Short Inpatient Stays, 2012 
 
Most Common Reasons for   Number of Short  Percentage of  
Short Inpatient Stays  Inpatient Stays  Short Inpatient Stays 
Chest pain  49,716  4.3% 
Coronary stent insertion  45,658  4.0% 
Irregular heartbeat  38,961  3.4% 
Digestive disorders  37,649  3.3% 
Fainting  32,656  2.8% 
Circulatory disorders  29,515  2.6% 
Loss of blood flow to the brain  25,355  2.2% 
Nutritional disorders  24,624  2.1% 
Red blood cell disorders  20,977  1.8% 
Irregular heartbeat (medium severity)  20,064  1.7% 
Source: OIG analysis of CMS data, 2013. 
 
 
Hospitals Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)