Observation Units: Its About the Patients

By  |  May 11, 2012 | 

Recall your last credit card statement.  On it is the hotel charge from your last out of town CME excursion.  Below the total charge you were expecting, is a separate line item for a $75 “recreational fee.”  You call the hotel, and they inform you that because of your use of the gym and pool—accessed with your room key—they levied the fee.  No signs, alerts, or postings to denote policy, and you innocently expected inclusive use of the facilities as a price of your visit.

Capture the emotion of the moment, when you see that bill, feel your heart race, and think to yourself, “Get me the manager!”

Out of vigilance for penalties and fraud from recovery audit contractor (RAC) investigations, as well attentiveness to unnecessary readmissions, hospitals are increasingly categorizing patients under observational, rather than inpatient status to avoid conflict with regulators.  Beneficiaries are in the crosshairs because of this designation change, and much in the same way of our hotel charge, they also experience sticker shock when they get their bill.  It is leading to confusion amongst providers, and consternation within the Medicare recipient community.  Why is this occurring?

The dilemma stems from Medicare payment, and the key distinction between inpatient coverage (Part A), and outpatient coverage, including pharmaceuticals (Part B and D).  When a patient receives their discharge notification—without an “official” inpatient designation, sometimes staying greater than 24-48 hours in the emergency room or in a specially defined observation unit, beneficiary charges are different.  This could result in discrete and sometimes jolting enrollee copayments and deductibles for drugs and services.

Worse, if they require a skilled nursing facility stay (the “3 day stay” inpatient requirement), Medicare will not pay because they never registered “official” hospital time.  Patients and caregivers are not prepared for the unexpected bills, and consequently, tempers are rising.  The rules for Medicare Advantage enrollees (Part C— commercial payers receive a fixed sum from CMS, and oversee parts A, B, and D for an individual beneficiary) which comprise 25% of the program, differ from conventional Medicare.  However, commercial plans often shadow traditional fee-for-service in their policies, and consequently, no exemplar of success in this realm exits.

Hospitals have significantly increased both the number of their observation stays, as well as their hourly lengths (>48 hours). Because the definition of “observation status” is vague, and even the 1-2 day window is inflating, hospitals and hospitalists are often navigating without a compass.  Again, fear of fraud and penalties places hospitals, and indirectly hospitalists—who often make judgments on admission grade—in a precarious position.

The responsibility of hospitals to notify beneficiaries of their status hinges on this murky determination milieu, which may change in real time during the stay, and makes for an unsatisfactory standard.  Understandably, CMS is attempting to rectify this quandary, taking into account a hospital’s need to clarify its billing and designation practices, as well as the beneficiaries’ desire to obtain clear guidance on their responsibilities both during and after the stay.  Hospitalists of course, want direction on coding, and an understanding of the impact their decisions will have on patients and subspecialty colleagues.

To that end, Patrick Conway, MD, Chief Medical Officer at HHS, was kind enough to offer some enlightenment on this matter:

Q: Is it tenable to keep the current system in place?  However, as a fix, require payers and providers to inform beneficiaries of inpatient versus observation status at time zero in a more rigorous, yet to be determined manner?

Current regulations only require CMS to inform beneficiaries when they are admitted as an inpatient and not when they are outpatient receiving observation services.  There are important implications for coverage for beneficiaries post hospital stay, coverage of self-administered drugs and beneficiary coinsurance from this distinction.  As a hospitalist, I think it is best to inform the patient of their status, especially if it has the potential to impact beneficiary liability including coverage of post-acute care.  CMS prepared a pamphlet in 2009 “Are You a Hospital Inpatient or Outpatient?  If You Have Medicare, Ask!” to educate beneficiaries on this issue.  The pamphlet can found at the following hyperlink:


Q: Due to the nature of how hospital care is changing, are admission decisions potentially becoming too conflicted an endeavor for inpatient caregivers?

We want admission decisions to be based on clinical considerations.  The decision to admit a patient should be based on the clinical judgment of the primary care, emergency medicine, and/or hospital medicine clinician.

Q: Before the US healthcare system matures to a more full out integrated model with internalized risk, can you envision any near term code changes that might simplify the difficulties all parties are facing, in a budget neutral fashion?

CMS is currently investigating options to clarify when it is appropriate to admit the patient as an inpatient versus keeping the patient as an outpatient receiving observation services.  We understand that this issue is of concern to hospitals, hospitalists, and patients and we are considering carefully how to simplify the rules in a way that best meets the needs of patients and providers without increasing costs to the system.

I expect we will hear more from Medicare in the near-term on this matter.  Stay tuned.

For more, also see this prior post: http://blogs.hospitalmedicine.org/SHMPracticeManagementBlog/?p=4226

UPDATE: HEALTH AFFAIRS, JUNE 2012: the ratio of observation stays to inpatient admissions increased 34 percent.


  1. Dale Carroll May 11, 2012 at 12:37 pm - Reply

    To your comment – “hospitals are increasingly categorizing patients under observational, rather than inpatient status to avoid conflict with regulators.” Hospitals do not categorize patients to inpatient or OBV status. Docs make that decision, often with input form ED case managers but docs are ultimately accountable for admission vrs OBV status decisions.
    To your comment – “Hospitals have significantly increased … their (OBV) hourly lengths (>48 hours).” Hospitals do not determine OBV duration, docs admit and discharge patients from OBV just as they do from nursing units.
    Many hospitals with OBV units do a very good job of educating the patient and the family about the difference between OBV and admission status.

  2. Brad Flansbaum
    Brad Flansbaum May 11, 2012 at 1:08 pm - Reply

    Fair points, and rather than use the term “hospital,” a better proxy would be a term like “providers,” encompassing both institutions and physicians. I believe all parties are touched here, and the upshot of the uncertain payment policy is impacting all.

    I never implied that all facilities are peforming suboptimally in this realm. However, a good majority of folks are struggling with this issue, and again, its the beneficiaries who will suffer. The status quo cannot stand.


  3. […] Posted 5/11/12 on The Hospitalist Leader […]

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About the Author: Brad Flansbaum

Brad Flansbaum
Bradley Flansbaum, DO, MPH, MHM works for Geisinger Health System in Danville, PA in both the divisions of hospital medicine and population health. He began working as a hospitalist in 1996, at the inception of the hospital medicine movement. He is a founding member of the Society of Hospital Medicine and served as a board member and officer. He speaks nationally in promoting hospital medicine and has presented at many statewide meetings and conferences. He is also actively involved in house staff education. Currently, he serves on the SHM Public Policy Committee and has an interest in payment policy, healthcare market competition, health disparities, cost-effectiveness analysis, and pain and palliative care. He is SHM’s delegate for the AMA House of Delegates. Dr. Flansbaum received his undergraduate degree from Union College in Schenectady, NY and attended medical school at the New York College of Osteopathic Medicine. He completed his residency and chief residency in Internal Medicine at Long Island Jewish Medical Center in New York. He received his M.P.H. in Health Policy and Management at Columbia University. He is a political junky, and loves to cook, stay fit, read non-fiction, listen to many genres of music, and is a resident of Danville, PA.


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