Martha Kern
Shay Jacobson, RN, MA, NMG, LNCC, CNLCP

Original Article

Early in 2013, we published this article covering the many changes to Medicare already underway as the Affordable Care Act unfolded.  Since that time, we’ve spoken widely on this topic and diligently followed the many additional changes that have occurred, particularly as the private sector responds to the new model of healthcare introduced by the ACA.  Read on to learn about several new developments in the Medicare push to reduce re-admissions, and some of the less favorable ways Medicare recipients are being affected


The Medicare 30-Day Readmission rules have already inspired two law suits, one action filed by a class of Medicare patients (Bagnall vs. Sebelius) and the other filed by the American Hospital Association for non-payment of claims.

Update: Bagnall versus Sebelius, a class action suit through which a group of patients sued Medicare for denying them access to their Medicare A benefits, was dismissed in September, 2013.  The patients, all seniors, were hospitalized as “Observation” patients without their being informed, shifting their stays from Medicare A to Medicare B.  The premise of their suit was that they were denied access to benefits to which they are entitled and for which they have paid.  The Judge dismissed the suit on the basis that hospitals and doctors determine the patient’s status, not Medicare.  Medicare, however, audits hospitals and doctors in real time, and penalizes them for admitting patients who Medicare feels should be merely “observed”.

They have put hospitals and doctors squarely in the middle of uncomfortable government mandates and the patients who ultimately pay the bills.

The rules have further caused considerable consternation on the part of Medicare recipients, who now find themselves having to repeatedly ask what their hospital status might be (Inpatient? Observation?) on a day-to-day basis.

Suffice to say, the Medicare 30-Day Readmission rules, and the Affordable Care Act that inspired them, have only just begun to change the health care landscape.

Farewell, Simplicity
Hospitalization used to be a fairly straightforward proposition.

Upon reporting to the emergency room, or having been sent to the hospital by a physician, a patient would be admitted to the hospital, a few days of testing and treatment would commence, and then a discharge would be planned and executed.  Charges were forwarded along to Medicare and/or a private insurer for consideration and payment and, soon enough, the entire chapter concluded quietly with payment of a deductible, perhaps, and evidence that the hospital had been paid by insurance.

The days of simplicity are over, however, particularly for Medicare recipients.  For them, a hospital stay may no longer be an actual inpatient experience, despite the fact that it looks, smells and behaves precisely like one.  That stay just might be an “observation” period, in which case it will conclude somewhat less quietly with a sizeable bill for the patient.  Or, it may start out as an inpatient admission and then, without fanfare or announcement, toggle over to “observation” status.  This toggling might even happen after the fact, when the patient has gone home or to a skilled nursing facility for rehab services they might wrongly have assumed would be covered by Medicare.

Update: The use of Observation status has grown exponentially.  While hospitals generally prefer to admit patients and receive the corresponding higher reimbursement rate, Medicare audits them in real time and levies penalties when medical necessity for inpatient status is not deemed to be adequate. Patients must have inpatient status for three consecutive midnights in order to be eligible for post-acute Medicare coverage.  If they are not labelled “inpatient” for three consecutive midnights, any post acute rehabilitative services must be funded privately.

Observations on Observation
Hospitals did not just decide one day to complicate their operations where Medicare patients are concerned.  The trend toward observation stays is a direct result of the government’s new 30-Day Readmission Rules.  These rules stem from the Affordable Care Act of 2010 and represent an effort to minimize fraudulent claims and unnecessary hospitalizations, and hold hospitals responsible for the quality and quantity of care they offer.   Patients should not, in the government’s estimation, just boomerang back to the hospital after an inpatient stay, and neither should be they be re-admitted and worked up all over again, simply because Medicare will pay the bills and fatten the bottom line.  The new rules operate on the premise that patients should be given appropriate and necessary care, discharge plans and home follow up that is thorough enough to enable them to stay out of the hospital for at least 30 days.

If the hospital fails in this regard and a patient returns in fewer than 30 days, Medicare will levy a penalty.  This is true now for all Medicare patients with an admitting diagnosis of congestive heart failure, pneumonia or myocardial infarction (heart attack).  Soon, it will also be true for those admitted with chronic obstructive pulmonary disease (COPD) or for knee/hip replacements.

Medicare favors observation over inpatient status.  When a patient is classified as “observation”, their time in the hospital becomes a Medicare Part B stay.  Medicare Part B is technically outpatient, and involves co-pays for the patient.

Update: Patients classified as “Observation” are also responsible for paying for any medications received while hospitalized. Medicare Part D is not applicable when a patient is hospitalized under Medicare Part B.

In short, observation status saves Medicare quite a bit of money.

Beginning in October, 2013, a new rule was implemented called the “Two Midnight Rule”.  The aim of this rule is to reduce or eliminate occasions where patients are kept in the hospital for several days under “Observation”. The rule holds that any patient anticipated to be in the hospital for fewer than two midnights will be tagged as “Observation”.  Any patient expected to be hospitalized for more than two midnights will be admitted.  If a patient initially identified as an “Observation” patient does, ultimately, become an inpatient and stay in the hospital for more than two midnights, any time spent in the hospital on Observation status will not count toward the three midnights needed to be eligible for post-acute coverage in a skilled rehab facility.

Medicare’s most substantial savings likely accrue from no longer having to cover lengthy post-acute stays in rehabilitative settings.

Method in the Madness
Inspiring the concern about Medicare readmissions are the following startling facts:

  • Twenty percent of Medicare beneficiaries are readmitted to the hospital within 30 days of discharge.
  • Thirty-four percent are readmitted within 90 days.
  • Hospital readmissions cost the federal government $17 billion annually.  Medicare believes that $12 billion of this sum is preventable and entirely unnecessary.
  • Health care spending for people with five or more chronic conditions is 17 times higher than for those with no chronic conditions.
  • A high percentage of health care expenditures are made on behalf of a small sector of the population.
  • Thirty percent of discharged patients discharge with a medication discrepancy that has the potential to cause them harm.

With the enormous swell of Baby Boomers steadily marching toward their Medicare years, the federal government determined that steps had to be taken to circumvent a crushing financial burden.

The Doctor is In…..the Middle
Doctors may be feeling some pain.  They used to determine whether or not a patient should be admitted to the hospital, based on their history with that patient and their medical assessment of the situation at hand.

Now, however, their judgments are second-guessed and sometimes reversed.

The admission status of every Medicare recipient is closely scrutinized in real time by off-site auditors called Recovery Audit Contractors (RACs).  All those decisions about inpatient versus observation status are reviewed and often overruled, sometimes in hindsight, by these government-employed nurses.  They can and do change patients’ status from inpatient to observation, sometimes after the patients have discharged.

RACs receive a commission from the government based on the amount of money they save for Medicare.  It might be safe to assume, then, that their overall orientation will be to deny claims and choose observation status over inpatient at every opportunity.

Doctors must be ever mindful of the auditing process – they can be prosecuted for fraud if found to be admitting patients to the hospital when the RAC feels the patients should be merely observed.

Because the standards for inpatient versus observation status are not clearly defined, doctors and hospitals sometimes struggle to make determinations that will coincide with the RACs’ decisions.  Many hospitals, in fact, now employ full-time professionals who review Medicare charts in an attempt to re-classify admissions that the RACs may challenge.

Hospitals can file appeals when inpatient Medicare claims are denied, based on RAC proclamations that the stay should have been observation.  Hospital attorneys tell us they document and “prove up” inpatient stays with medical evidence of a patient’s illness or instability, and they frequently prevail when they appeal Medicare’s decisions.

Update: Some hospitals are now charging “facility fees”.  These flat fees may appear on invoices stemming from “Observation” stays and essentially charge patients for the use of the facility while they were there – technically — as outpatients. These fees are not covered by Medicare or other insurance.  Furthermore, if a physician practice is owned by a hospital, patients may be charged a facility fee when visiting the doctor in his/her office.  The hospital, having acquired the physician practice, may now view the physician office as an extension of the hospital, and thus can levy a fee for use of the space.

Also of note, while patients can file appeals for hospital activity they feel was inappropriately labeled “Observation”, they may be successful only if they can demonstrate that they received services that cannot be offered outside of the hospital environment, thus showing the need for an inpatient classification.  A rather significant down side to appealing Medicare decisions is that patients must incur costs and then attempt to recover them through the appeals process.  Most experts agree it is preferable to fight for inpatient status while the client is still in the hospital, rather than trying to get that status changed after the fact and after charges have accrued.

Testing the Patient’s Patience
Much has been made of the penalties paid by hospitals, but a less heralded fact is that patients are now being saddled with higher costs and very few file appeals when their hospital stays have been classified, perhaps wrongly, as “observation”.

If all or part of a Medicare recipient’s hospital stay is categorized as “observation”, they may well be denied access to coverage for much-needed rehabilitative treatment at a skilled nursing facility after discharge.  Private payment of these costs can be staggering.  It is in the patient’s best interest to understand what is happening and to take an active role in tracking the manner in which Medicare is classifying their stay.

Patients and their advocates should ask hospital personnel for an update on their admission status on each day of their hospital stay.  If one’s status is “inpatient” for at least three consecutive days, post-discharge rehabilitative costs will likely be covered.  If, however, any part of that stay is classified as “observation”, these post-discharge services may not be covered, resulting in significant outlays on the part of the patient.

Advocates should be prepared to offer up evidence, to the greatest degree possible, that their patient needs to be admitted versus observed.  Documentation of recent instability, salient medical history, co-morbidities, medication issues and other potentially overlooked factors may give the doctor and hospital the evidence they need to re-classify a stay as “inpatient”.

Advocates should also be prepared to file an appeal with Medicare when a patient’s admission status has been deemed “observation”, particularly when complications are present to such a degree that the patient needs skilled rehabilitation services upon discharge.

The Professional Edge
Lifecare Management has long been regarded as an essential form of advocacy for Medicare recipients who have little or no access to family-based support.  It is relatively rare that family members are in positions to travel and/or take leave from work to closely monitor the circumstances of hospital admissions and ensure that support services run smoothly thereafter.  Never has this monitoring been more critically important.

Lifecare Managers can further ensure that post-discharge services contributing to safety, wellness and a low likelihood of hospital re-admission are also in place.  Skilled, supervised, professional caregivers, home modifications, medical equipment and other needs can all be coordinated and managed by these savvy professionals.

Family members have historically shown themselves to be reluctant at times to engage professional services when their loved ones encounter serious health setbacks.  Owing to a desire to conserve assets and to assuage their own guilt, they sometimes attempt to manage it all on their own.  Increasingly, this approach will fall short as the health care environment grows more and more complex.  Hospitals will likely find some recourse to protect themselves from Medicare penalties when families repeatedly refuse to hire in-home care for loved ones who then go back to the hospital over and over.  Before long, patients and their families will also be held accountable for their efforts to stay healthy and out of the hospital.

Professional Lifecare Managers can consult with families over the course of a hospitalization to ensure that any documentation supporting an inpatient stay is properly presented and the patient is given the best odds of an inpatient classification.  They can also take the lead in filing appeals for those whose stays have been tagged “observation”, often to the financial detriment of the patient.

Proactivity must replace passivity.  Asking the right questions and cogently presenting the facts of a case can make all the difference in the way a hospitalization is handled and how much it ultimately costs the patient.  Professional care at home can forestall potentially costly re-hospitalizations and the skilled rehabilitative stays that often follow.

The new system is all about staying out of the system.  The rules of health care are changing, and so must our strategies for managing the health of our family members and clients.

Update: There are at least three bills in the House of Representatives pending as of this writing that pertain to Inpatient versus Observation status. H.R. 1179, introduced in March, 2013, proposes to count all time in the hospital, whether observation or inpatient, toward meeting the three midnight inpatient requirement.

H.R. 3144, introduced in September, 2013, proposes to eliminate the three-midnight inpatient requirement to be eligible for Medicare-covered post-acute care. H.R. 3531, introduced in November, 2013, seeks to eliminate the three-midnight inpatient requirement for post-acute coverage if the patient discharges to a skilled nursing facility with an overall rating of three or a rating of four stars or higher on Quality Measures or Staffing.

©Lifecare Innovations, Inc.