The Problem with Observation Status

4 Aug

Mat Keller headshot
By Mathew Keller RN JD, Regulatory and Policy Nursing Specialist

Last fall, my grandmother was admitted to the hospital after a TIA that left her oriented only x1.  Or, more correctly, we thought she was admitted.  As it turns out, she was in the hospital for several days in an outpatient status, known in Medicare parlance as “observation status.”

Unfortunately, what “observation status” meant for Grandma was that she did not meet the Medicare requirement for a 3-day inpatient stay at the hospital in order to qualify for discharge to a skilled nursing facility.  Thus, despite the fact that Grandma was certainly not in any shape to discharge home; and despite the fact that she had entered the hospital from a nursing home, she was not able to go back to the nursing home.

Such situations occur more frequently than you might think: according to a 2014 report by the Medicare Payment Advisory Commission, 1.8 million observation claims were submitted in 2012, an 88 percent increase from six years earlier.  While observation status was originally implemented to allow hospitalists to determine whether or not patients should be admitted, it has grown into a kind of purgatory that allows hospitals to reduce penalties from the Hospital Readmission Reduction Program (since observation status patients are not technically readmitted) and shift services to more profitable outpatient areas of the hospital.

On top of not counting toward the 3-day requirement for discharge to a skilled nursing facility, observation status stays are charged on an outpatient basis (i.e. under Medicare Part B). This can often mean higher out-of-pocket costs for Medicare beneficiaries—for example, Medicare Part B services have a deductible and 80/20 cost sharing (80 percent Medicare/20 percent beneficiary) that is applied to all services provided and does not cover the cost of pharmaceutical drugs used in the hospital.

So what can nurses do? The first step is to advocate for our patients.  Ask the hard questions – why are our patients in the hospital being charged for services if the physician is unsure whether or not a hospital admission is medically necessary?  Equally important is communicating with the patient.  Our patients deserve to know whether or not they are on observation status.  Furthermore, they absolutely must understand what “observation status” entails: they will be charged for services under Medicare Part B (80/20 cost sharing and a deductible), the cost of medications will not be covered, and the patient’s time in the hospital will not count toward the 3-day requirement for discharge to a skilled nursing facility.

As of July 1, such communication with a patient is in fact required under state law — but in order to properly communicate with and advocate for our patients under observation status, we must first understand it ourselves.  Read more about the issues with observation status here or here.

8 Responses to “The Problem with Observation Status”

  1. David Cheesebrow, MAPA, MA, RN August 4, 2015 at 3:09 pm #

    Have the nurse advocate? Have the patient/family ask more questions? The information needs to come from the admitting provider and followed up by the hospital either from fiscal or case manager. I do not disagree with nurse advocacy but responsibility is the provider (who is doing the admission and determining status) and the hospital who needs to be upfront with the patient/family. Blame on the nurse or patient/family is not the right place. Regulation come from someone who should be doing the correct thing is not doing it and needs a stick to behave in a social acceptable way. HC organizations need to be truthful and open of their actions or the result is more regulation.

    • Josh August 6, 2015 at 3:06 am #

      I really do like this reply. too often it is left to the nurse to try and fix what is wrong. these type of things should be common sense for physicians and not left familys and nurses.

  2. Molly Henderson August 4, 2015 at 8:54 pm #

    Great piece Mat! What are the implications for patients that are not on Medicare? TIA

    • Mathew Keller RN JD, Regulatory and Policy Nursing Specialist August 5, 2015 at 6:49 am #

      Thanks Molly! To my knowledge, this is almost exclusively a problem with Medicare. That is not to say private insurers could not write it into their policies– I just haven’t heard of it happening.

      • Barbara Nelson RN, BSN August 5, 2015 at 5:53 pm #

        I was injured in a car crash on 02/15/1952 and was hospitalized under observational status for less than 3 nights so my private insurance, Medica, would not cover my 2 week stay in a TCU. Fortunately, I had the means to pay out of pocket for this care. So yes, private insurances also subscribe to this racket.

  3. Barbara Nelson RN, BSN August 5, 2015 at 5:55 pm #

    I have to clarify the date of my accident: 02/26/2015. The other date is my birthday.

  4. Mila Joshi RN August 5, 2015 at 6:12 pm #

    Are outpatient services really more profitable for the hospitals?
    Should not the Medicare criteria for inpatient hospital stay be identified as well? Is not it time that Medicare and policy makers give more liberty to the physicians to determine the medical necessity instead of dividing them in inpatient and outpatient status? I find the article blaming the hospitals and the physicians for the Medicare policies instead of an informative piece.

  5. Linda Rae Carter, RN CA. August 8, 2015 at 4:01 pm #

    In our hospital patients are admitted on observation status to ICU. No way! If they need our care they are critical enough to be admitted and the hospital cannot get away from 2:1 staffing although they will try.

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