A Renewed Call to Overhaul Hospital Observation Care

By Ann Sheehy, MD, MS, FHM |  January 16, 2017 | 

By Ann M. Sheehy, MD, MS, FHM

In response to concerns about Medicare beneficiary out-of-pocket financial risk, Congress unanimously passed the NOTICE Act, which President Obama signed into law August 5, 2015. This law states that all Medicare beneficiaries hospitalized for 24 hours or more as outpatients under observation must to be notified in writing that they are outpatients “…not later than 36 hours after the time such individual begins receiving such services…”, as well as the associated “…implications for cost-sharing…”. Last month, the Centers for Medicare & Medicaid Services (CMS) released the final Medicare Outpatient Observation Notice (MOON) that hospitals will start delivering to patients no later than March 8, 2017 to comply with the law. Patients or their representative must sign the form to acknowledge receipt.

There is no doubt transparency is important, and patients should be informed when hospitalized as outpatients instead of as inpatients. But the wisdom of the NOTICE Act essentially stops there. First, Medicare beneficiaries are notified after they have been hospitalized, certainly after they could make an informed decision about accepting observation care. Second, patients or their representative must sign the form, yet it is unclear if this signature holds the patient financially liable, particularly if signed by a representative with no legal authority over the patient’s financial affairs. Third, the form does nothing for a patient’s right to appeal their status. And because observation is a billing distinction, the field at the top of the form requiring hospitals to specify why the patient is not an inpatient is circular reasoning, as patients are outpatients only when they fail to meet Medicare inpatient billing criteria.

Perhaps most importantly, the primary purpose of the NOTICE Act—to inform beneficiaries of the “implications for cost-sharing” when hospitalized under observation—cannot truly be accomplished. On December 19, 2016, the Department of Health and Human Services Office of Inspector General (OIG) issued the best cost-sharing data available to date describing observation hospital care under the 2-midnight rule. In their report, the OIG used FY 2014 data to compare cost of short outpatient and inpatient stays with similar diagnoses. But because hospitalized outpatients under observation pay a copayment for each individual hospital service, financial risk is not directly correlated with a diagnosis but instead the result of the number, cost, and complexity of services rendered in the hospital, with no limit on the additive amount of per-service deductibles. In contrast, the inpatient deductible is finite per benefit period. As the OIG report does not provide an accounting of services rendered nor comparison based on equivalent services, it isn’t clear how these cost estimates will help inform discussions when my observation patients receive their MOON.

Further, the report only includes beneficiary stays at the “low-severity level”, and provides no accounting of out-of-pocket risk for patients with one or more observation stays within an inpatient benefit period. In addition, despite observation patients being ineligible for post-acute Medicare skilled nursing facility (SNF) coverage, out-of-pocket SNF costs are not included in the OIG’s comparative figures. Finally, the OIG cost comparisons do not include long observation stays (2 midnights or longer), omitting what could be the most costly out-of-pocket observation encounters.

What does the OIG report tell us with certainty? First, despite CMS’s expectation (and initial 0.2% inpatient payment reduction) that there would be a net increase in inpatient hospitalizations under the 2-midnight rule, the OIG confirms that even more patients are now hospitalized as outpatients. And although CMS expected the 2-midnight rule to decrease long observation stays, there were still three-quarters of a million (748,337) observation stays lasting 2 midnights or more in FY 2014, a meager 2.8% (21,248) reduction in comparison to FY 2013.

The irony of the NOTICE Act is a mandate to describe observation “implications for cost-sharing” when no suitable data exists. This irony accompanies the absurdity of observation hospital care altogether, a policy that allows patients to be hospitalized but not admitted. The OIG issued CMS four recommendations to improve observation, but I argue it is instead time for policy makers to stop trying to fix a conceptually flawed policy. Congress and CMS should instead focus on creating a budget-neutral solution to eliminate observation and ensure all hospitalized Medicare beneficiaries are inpatients.

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    James Franko January 16, 2017 at 6:40 pm - Reply


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About the Author: Ann Sheehy, MD, MS, FHM

Ann Sheehy, MD, MS, FHM, is a physician and associate professor at the University of Wisconsin (UW) School of Medicine and Public Health. She received her MD and MS in Clinical Research from Mayo Medical School and Mayo Graduate School, respectively, in Rochester, Minnesota. She completed her residency in internal medicine at Johns Hopkins Hospital in Baltimore, Maryland in 2005. The same year, Dr. Sheehy joined the Division of Hospital Medicine as a Clinical Assistant Professor of Medicine at the University of Wisconsin School of Medicine and Public Health. In 2011, she became a Clinical Associate Professor of Medicine. Dr. Sheehy held the position of Interim Director, prior to being appointed Division of Hospital Medicine Director in 2012. Dr. Sheehy has a background in academic medicine, with emphasis on diabetes screening practices and care of inpatients with hyperglycemia, as well as health care disparities and the effect of health care policy on patient care in the hospital. Dr. Sheehy is a member of the Society of Hospital Medicine Public Policy committee, and serves as Vice President of the University of Wisconsin Hospital and Clinics (UWHC) Medical Board and is chair of the Credentials Committee. Dr. Sheehy is a two-time recipient of the Evans-Glassroth Department of Medicine Inpatient Teacher of the Year Award and has also been awarded the University of Wisconsin Internal Medicine Residency Professionalism Award. Dr. Sheehy is an active SHM member in the Public Policy Committee and has found herself on Capitol Hill multiple times, testifying before Congressional committees focused on the U.S. healthcare system, on behalf of hospitalists and SHM.


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