The Department of Health and Human Services Office of Inspector General (OIG) found that Medicare was reimbursing hospitals significantly less for short observation visits, with average payments in 2012 of $1,741, compared to what it paid for brief inpatient visits, which averaged $5,142. This shows the financial incentive Medicare to encourage hospitals to classify patients under observation from a financial perspective. Medicare sets the admissions criteria under which hospitals are allowed to make an inpatient admission under Part A, and Medicare auditors commonly deny hospital inpatient claims on the grounds that a patient’s medical condition didn’t require them to be admitted.
This has caused hospitals to increasingly err on the side of classifying patients under observation status, where claims are less likely to be questioned. If this happens to you, it means you could have large Part B coinsurance costs and would be ineligible for Medicare SNF coverage.
Due to concerns about the consequences for beneficiaries classified under observation status, Congress passed the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) in 2016. The legislation required hospitals to notify patients if they are classified under observation for more than 24 hours. But HHS interpreted the law as applying only to certain patients, which means there is a chance you won’t be notified depending on your specific status. The NOTICE Act also did not create any appeals rights for Medicare beneficiaries to request that their status be changed – although you can still advocate for this informally.
The bipartisan Improving Access to Medicare Coverage Act of 2019 (S. 753/H.R. 1682) would require Medicare to count the entire time spent in the hospital toward satisfying Medicare’s “three-midnights rule” regardless of a beneficiary’s classification as observation or inpatient, which would mean you could qualify for Medicare SNF coverage after spending three midnights as an observation outpatient (or after a combination of time as an outpatient and inpatient). The Center for Medicare Advocacy has also proposed requiring only a one-night inpatient stay before Medicare will cover SNF care – or eliminating the inpatient stay requirement altogether.
A number of states, including New York and Connecticut, have enacted their own legislation to address challenges with observation status.