Health Policy$ense

Repeated Hospital Observation Stays Could be Costly for Medicare Beneficiaries

New Study Analyzes Out-of-Pocket Costs

Hospital observation, instead of admission, is increasingly common for Medicare beneficiaries. This distinction is important because it means that the hospital stay is not covered by Medicare Part A, and it may mean higher out-of-pocket costs, according to a new study.

The study, published in Journal of Hospital Medicine by LDI Senior Fellow Shreya Kangovi and colleagues, including LDI’s Director of Policy David Grande, finds that over a quarter of Medicare beneficiaries with multiple observation stays in a 60-day period are liable for higher out-of-pocket costs than they would have been had they been admitted to the hospital. Although observation care is, on average, less expensive for beneficiaries than inpatient admission, beneficiaries lack protection from escalating financial liability over multiple visits.

Although observation is usually hospital-based, it’s considered an outpatient service, covered through Medicare Part B. As such it’s not subject to Medicare Part A inpatient deductible, which is only paid once in a 60 day benefit period, even if there are readmissions. In 2013, the Centers for Medicare & Medicaid Services (CMS) instated the ‘two-midnight’ rule to try and clarify when it would expect an individual to be admitted to the hospital. CMS had hoped this would curb the use of prolonged observation stays. 

A few states (e.g., Connecticut, New York, and Maryland) require that patients be notified in writing about their observation status.  Earlier this month, President Obama signed a bill that makes the written notification requirement a national one.

Kangovi and colleagues analyzed a 2010-2012 sample of the Medicare outpatient data files as well as publicly available data. Between 2010 and 2012, the proportion of beneficiaries receiving observation care rose from 4.1% in 2010 to 5.0% in 2012. Of these beneficiaries, 6.0% had multiple visits within a 60-day interval.

In general, beneficiaries with multiple observation stays during a 60 day period had a cumulative financial liability of $947, significantly lower than the standard $1100 inpatient deductible. However, 26.6% of beneficiaries had cumulative financial liability that exceeded the $1100 deductible they would have paid as inpatients.

Here’s a part from the study on why the findings should be cause for concern:

First, compared with general beneficiary population, Medicare beneficiaries who return to the hospital frequently are also typically of lower socioeconomic status, and may be disproportionately affected by any increased financial liability…Second, patients have little control over their classification as observation versus inpatients. In many hospitals, observation is simply an administrative classification for care that--from the patients’ perspective--is identical to inpatient care. It is problematic to expose patients to varying financial liability based on differences on administrative classification. Finally, we found that the number of patients with multiple observation visits rose by 22% between 2010 to 2012. This means the problem of excess cumulative financial liability is likely to be increasingly common over the coming years.

Kangovi and colleagues suggest that as CMS’s policies on observation care continue to evolve, they should consider measures to cap total out-of-pocket expenses within a benefit period to protect beneficiaries from higher than expected costs.