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 WrightDeputy 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). 
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 beneficiary’s medical history, the severity of the beneficiary’s 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. 
Page 3 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 27644–27650. 10 See 78 Fed. Reg. at 27645–27649. 11 See 78 Fed. Reg. at 27648. 12 See 78 Fed. Reg. at 27649–27650. 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). 
Page 4 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 beneficiary’s 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 beneficiary’s 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.
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 beneficiary’s 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 began—that 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 User’s 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. 
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 services—that 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.
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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.
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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. 
Page 9 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 stays—like 

chest pain—were 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

Most Common Reasons for Observation Stays Number of 

Observation Stays

Percentage of 

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.
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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

Length of Stay Number of 

Observation Stays

Percentage of All 

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 

services—i.e., services to determine whether a beneficiary should have been admitted or 

discharged—without appropriately coding these claims. 
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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

0%

20%

40%

60%

80%

100%

Lowest

(n=333 hospitals)

Low

(n=499)

Medium

(n=1,665)

High

(n=500)

Highest

(n=333)

Use of observation stays

Long Outpatient Stays Observation Stays

Percentage of 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 stays—that 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. 
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

Table 4: Most Common Reasons for Observation and Short Inpatient Stays, 2012

Top Reasons for Stays*

Rank

Observation 

Stays

Short Inpatient 

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.
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Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 exceptions—coronary stent insertions and circulatory 

disorders—beneficiaries 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 

Short Inpatient Stays**

Difference in Average 

Medicare Payments

Difference in Average 

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.
Page 14 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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

0%

20%

40%

60%

80%

100%

Lowest

(n=333 hospitals)

Low

(n=499)

Medium

(n=1,666)

High

(n=499)

Highest

(n=333)

Use of short inpatient stays 

Observation and Long Outpatient Stays Short Inpatient Stays

Percentage of 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.
Page 15 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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 changes—through an NPRM—that, 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 hospitals—given strong financial 

incentives and few barriers—would 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. 
Page 16 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040) 

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.
Page 17 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)

APPENDIX A

Descriptions of Reasons for Stay*

Reason Description

Chest pain Chest pain

Circulatory disorders Circulatory disorders except acute myocardial infarction, with cardiac 

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

Musculoskeletal signs and symptoms Signs and symptoms of musculoskeletal system and connective tissue 

(e.g. muscle inflammation, joint pain)

Nutritional disorders Nutritional and miscellaneous metabolic disorders (e.g. vitamin 

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 level—i.e., without 

secondary diagnoses that can increase the complexity of care.

Source: OIG, 2013.
Page 18 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)

APPENDIX B

Percentage of Observation Stays Lasting 2 Nights of Longer, 2012

Most Common Reasons For Observation Stays

Percentage of 

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.
Page 19 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)

APPENDIX C

Most Common Reasons for Long Outpatient Stays, 2012

Most Common Reasons for Long Outpatient 

Stays

Number of Long 

Outpatient Stays

Percentage of 

Long Outpatient 

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.
Page 20 – Marilyn Tavenner

Hospitals’ Use of Observation Stays and Short Inpatient Stays (OEI-02-12-00040)

APPENDIX D

Most Common Reasons for Short Inpatient Stays, 2012

Most Common Reasons for 

Short Inpatient Stays

Number of Short 

Inpatient Stays

Percentage of 

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.