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From Health Law Daily, April 21, 2015

AARP study: observation status is costly Medicare purgatory

By Mary Damitio, J.D.

Despite the fact that a Medicare beneficiary stays in a hospital overnight and sleeps in an in-patient hospital bed for observation, he or she may still be considered an outpatient, which severely limits coverage under Medicare and can result in severe financial consequences. A study performed by the AARP Public Policy Institute and Social & Scientific Systems, Inc.’s Center for Health Research & Policy found that the practice of placing patients on “observation status,” rather than fully admitting them, has increased dramatically in recent years. This increase has caused a rise in beneficiary out-of-pocket expenses and may also ultimately limit the type of aftercare that the beneficiary seeks.

Inpatient vs. outpatient coverage. Medicare Part A provides that post-observation patients (or “inpatients”) are required to pay only a single deductible for services performed within hospitals. However, Part B requires beneficiaries to pay an outpatient deductible and a percentage of a Medicare-allowed charge for each outpatient service, with no limit on charges for multiple outpatient services. Also, patients who spend fewer than three days in the hospital are not eligible for Medicare coverage of post-hospital care in a skilled nursing facility (SNF). The financial consequences can be severe—even CMS warns of the significance of being designated an inpatient versus an outpatient. AARP reported that some beneficiaries have been shocked as a result of outpatient hospital bills.

Findings. The study discovered that one in 10 outpatient beneficiaries paid more for medical treatment than if they had been considered an inpatient. Only one-third of discharged observation patients who were referred to SNFs sought treatment. Surprisingly, however, the study found that Medicare paid the vast majority of claims for SNF treatment, even for those patients who did not meet the three-day inpatient stay requirement. Such findings were backed up by an HHS Office of Inspector General (OIG) report that identified $255 million in overpayments for such services. This suggested that, but for the mistaken overpayment, many beneficiaries would not seek post-hospital care at SNFs due to concern over cost because beneficiaries without Medicare coverage paid, on average, over five times the amount that covered beneficiaries paid.

Suggestions. The study contained a number of policy suggestions, including the capping of out-of-pocket costs for outpatients at the Part A deductible amount, and crediting time spent in observation status and other settings such as emergency departments toward the three-day stay requirement for skilled nursing care coverage. Bipartisan legislation is pending in the House and Senate that would provide for such credit.

The study also recommends the eventual replacement of the blanket three-day stay provision with “more appropriate clinical criteria,” such as individual consideration of beneficiary characteristics and of the appropriateness of treatment at a SNF. Implementing such changes may not add much cost since Medicare has already, often erroneously, reimbursed over 92 percent of skilled nursing claims. The authors also concluded that such changes may also lead to lower readmission rates for Medicare beneficiaries.

Companies: AARP Public Policy Institute; Social & Scientific Systems, Inc.

TopStory: MainStory ReimbursementNews PartANews PartBNews IPPSNews OPPSNews SNFNews

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