Observation Status and Surprise Medical Bills

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The Center for Medicare Advocacy frequently hears from Medicare beneficiaries and their families about patients who receive treatment, tests, and services for multiple days while they are in a hospital bed but who are called “outpatients.” If these patients need post-hospital care in a skilled nursing facility (SNF), Medicare Part A will not pay for their stay and they must pay out-of-pocket, solely because the hospital did not call them “inpatients” for three consecutive days.[1]  Three consecutive inpatient days is a prerequisite for most Medicare SNF coverage.

Coincidentally, there is growing momentum in Congress to address the issue of “surprise medical bills” – unexpected bills for medical care that patients could not have predicted or prevented, but nevertheless receive.[2] Congressman Joe Courtney (D, CT) has described observation status as “surprise medical bills on steroids.” He is absolutely correct. One of the most surprising medical bills that many beneficiaries receive is the bill for a SNF stay after they have been hospitalized for multiple days.

The issue of how hospitals bill Medicare for a patient’s stay – whether the hospital submits the bill to Medicare Part A (inpatient) or to Medicare Part B (outpatient) for medically necessary hospital care – deprives potentially hundreds of thousands of Medicare patients each year of their Part A SNF benefit. A 2016 report by the HHS Office of Inspector General found that 633,148 patients in Fiscal Year 2014 had spent three or more midnights in the hospital that did not include three inpatient midnights.[3] There is nothing that patients can do about their status in the hospital. Although the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) requires hospitals to inform patients of their status as outpatients,[4] Medicare regulations expressly prohibit patients from appealing observation status.[5]

The Center supports a comprehensive approach to surprise medical bills that includes addressing outpatient observation status for beneficiaries and incorporating the Improving Access to Medicare Coverage Act of 2019 (H.R. 1682/ S. 753).[6]

Three Recent Calls to the Center Illustrate the Absurdity of Observation Status

  • A 94-year old man was sent by his assisted living facility to the hospital when staff were concerned that he might have had a stroke. The World War II veteran remained hospitalized for three days – two days in observation and one day as an inpatient. Since he did not have a three-day inpatient hospital stay, he had to pay out-of-pocket for his SNF stay. The facility required payment of $11,861, in advance, for one month. His total bill, for little more than two months, was nearly $35,000. Since the hospital classified the man as an inpatient, the hospital received the full inpatient hospital payment rate for his care. If it had classified him as an inpatient for all three days, Medicare would have also covered his SNF stay, some or all of it.
  • A woman had knee replacement surgery and was hospitalized for three days as an “observation status” patient. Despite her three-day hospital stay, she had to pay for her subsequent 10-day SNF stay, at $455 per day (total $4550). Ten years earlier, knee replacement surgery on her other knee – by the same physician at the same hospital – was done on an inpatient basis. Medicare covered her care in the hospital and for three weeks of rehabilitation in a SNF.
  • An older woman fell. With a bone sticking out of her leg, she was hospitalized – the first day (when she had surgery) in observation, followed by two days as an inpatient. Lacking a three-day inpatient stay, she had to pay $7000 for admission to a SNF. Her total SNF bill was more than $18,000. The hospital was paid the inpatient rate for her stay, but Medicare did not pay for her SNF stay because her first day in the hospital was classified as outpatient observation.

Too many Medicare beneficiaries are paying for SNF stays, or foregoing necessary care, because of how hospitals bill Medicare for their patients’ stays. Congress needs to comprehensively address the issue of surprise medical bills to include outpatient observation status issues and the Improving Access to Medicare Coverage Act.

July 11, 2019 – T. Edelman


[1] See the Center’s materials on observation status at https://www.medicareadvocacy.org/?s=observation+status&op.x=0&op.y=0
[2] CMA, “Congressional Hearing on Surprise Medical Bills; Center for Medicare Advocacy Submits Statement on Observation Status” (CMA Alert, May 23, 2019), https://www.medicareadvocacy.org/congressional-hearing-on-surprise-medical-bills-center-for-medicare-advocacy-submits-statement-on-observation-status/.
[3] OIG, Vulnerabilities Remain Under Medicare’s 2-Midnight Hospital Policy, 13, OEI-02-15-00020 (Dec. 2016), https://oig.hhs.gov/oei/reports/oei-02-15-00020.pdf.
[4] 42 U.S.C. §1395cc(a)(1)(Y).
[5] 42 C.F.R. §405.926(u).
[6] The Center’s statement to the Ways and Means Committee is available at https://www.medicareadvocacy.org/wp-content/uploads/2019/07/Surprise%20Medical%20Bills%20Statement%20Center%20for%20Medicare%20Advocacy%20May%202019.pdf

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