CMS Addresses Observation Status Again… And Again, No Help for Beneficiaries

As part of the annual update to inpatient hospital reimbursement under the Medicare program, the Centers for Medicare & Medicaid Services (CMS) is again considering observation status.  This time CMS is proposing “a time-based presumption of medical necessity for hospital inpatient services based on the beneficiary’s length of stay.”  78 Fed. Reg. 27486, 47644 (May 10, 2013).[1]

Under the proposed rules, Medicare would presume that an individual is an inpatient if the physician documents that the patient requires more than two midnights in the hospital following an inpatient admission.  The “starting point for this time-based instruction would be when the beneficiary is moved from any outpatient area to a bed in the hospital in which the additional hospital services will be provided.”  Id.27648. On the other hand, Medicare would presume that hospital services spanning fewer than two midnights should be considered outpatient observation.  For patients whose inpatient stay was fewer than two midnights, CMS would pay for inpatient care only if the services were identified on Medicare’s inpatient-only list or “in exceptional cases such as beneficiary death or transfer.”  Id. 27649.

The proposed time-based presumptions significantly change current practice, but would not help many beneficiaries who are currently caught in observation status.  It might, in fact, make matters worse.

Observation Status Defined

Observation status refers to the classification of hospital patients as “outpatients” receiving observation services even though, just like inpatients, observation patients stay for days and nights in the hospital, receive medical and nursing care, diagnostic tests, treatments, medications, and food.[2]  Patients in observation status may, and increasingly do, spend multiple days in the hospital.

Although care for such outpatients is often indistinguishable from the care provided to individuals who are called inpatients, the implications of outpatient status for Medicare beneficiaries are substantial.  Most significantly, patients who need medically necessary post-acute care in a skilled nursing facility (SNF) are unable to obtain coverage for that care under Medicare Part A solely because they were labeled outpatients by the hospital.  The Medicare statute requires that patients have an inpatient hospital stay of three or more consecutive days to meet Medicare coverage criteria for SNF care.[3]  At present, hospital stays that are classified as observation, no matter what types of services are provided and no matter how many days the patient remains hospitalized in a bed, are considered outpatient.  Observation stays do not qualify patients for Medicare Part A coverage of a subsequent SNF stay.  Patients who cannot afford to pay privately for their SNF stay (and who do not have another payment source for the SNF stay) may forego needed post-acute care in a SNF, although they could be eligible for either post-acute care in an inpatient rehabilitation facility, or for home health care, or both.

Increasing Numbers of Beneficiaries Affected by Extended Stays in Observation

CMS addresses observation status in a section of the proposed rules entitled “Policy Proposal on Admission and Medical Review Criteria for Hospital Inpatient Services under Medicare Part A.” CMS begins its discussion of its proposed changes by describing, again, the impact on Medicare beneficiaries of hospitals’ increasing use of extended observation status.

CMS acknowledges that increasing numbers of Medicare beneficiaries are spending more than 48 hours in a bed in an acute-care hospital in observation status.  As before, CMS reports that the percentage of patients in observation for more than 48 hours increased from 3% to 8% between 2006 and 2011.  Id. 27644.  However, as the Center for Medicare Advocacy (the Center) recently learned, not only has the percentage of patients in observation nearly tripled, but the total number of observation stays of any duration also increased by nearly 50% over the same five-year period.

There has actually been an enormous increase in the number of people who have been in observation status for more than 48 hours.

In 2006, approximately 920,000 Medicare beneficiary hospitalizations were in observation status.  3% of these 920,000 stays exceeded 48 hours – 27,600 people.

In 2011, approximately 1.4 million Medicare beneficiary hospitalizations were in observation status.  8% of these 1.4 million observation stays exceeded 48 hours – 112,000 people.

Between 2006 and 2011, there was a more than 400% increase in the number of patients in observation status for more than 48 hours.

CMS’s Description of Improper Short Inpatient Stays

CMS reports that in 2012, Comprehensive Error Rate Testing (CERT) Contractors found that 36.1% of inpatient admissions for hospital stays of one day or less were improper.  Two or three-day inpatient stays had error rates of 13.2% and 13.1%, respectively.  Id. 27647.  CMS reports that Recovery Auditors (RAs), formerly known as Recovery Audit Contractors (RACs), “have recovered more than $1.6 billion in improper payments because of inappropriate beneficiary patient status.”  Id. 27649.

Current and Proposed Rules

Current CMS policy relies on physician judgment and evaluation of a patient’s needs to determine inpatient admission status.  CMS’s Manual instructs physicians to use a 24-hour period as a benchmark for inpatient status.  Id. 27645.  While affirming its confidence in these criteria (and their continuing application by Medicare contractors who review an inpatient admission when the beneficiary remains hospitalized for fewer than two midnights, id. 27649), CMS proposes rules that would establish new time-based criteria, distinct from the physician’s judgment.

A new §412.3, “Admissions,” sets out the standards for inpatient admission.  The patient is considered an inpatient if:

  • The patient is “formally admitted as an inpatient pursuant to an order for inpatient admission,” §412.3(a);
  • The order is “furnished by a qualified and licensed practitioner who has admitting privileges at the hospital as permitted by State law, and who is responsible for the inpatient care of the patient at the hospital,” §412.3(b); and
  • The patient is expected to be in the hospital for at least two midnights.  The physician “expectation [of a two-midnight stay]. . . should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event.”  These factors “must be documented in the medical record in order to be granted consideration.”  The two-midnight rule applies to patients entering a hospital for a surgical procedure (unless the procedure is specified by Medicare as provided on an inpatient-only basis, §419.22(n)), a diagnostic test, or any other treatment.  §412.3(c).

However, the physician’s “order and certification regarding medical necessity” are not entitled to any “presumptive weight” and are “evaluated in the context of the evidence in the medical record.”  §412.46(b).  In other words, the physician’s order and certification are “granted consideration” but “are not considered by CMS to be conclusive evidence that an inpatient hospital admission or service was medically necessary.”  Id. 27647.  CMS explains that “the [admitting physician’s] order must be supported by objective medical information [in the medical record] for purposes of the Part A payment determinations.”  Id. 27645.  (See also the CMS statement that reviewers will consider “other documentation in the medical record,” id. 27647 – i.e., “objective medical information documented in the medical record about the patient’s condition and the services received.”  Id.)

CMS proposes “that medical review efforts will focus on those inpatient hospital admissions with lengths of stay crossing only 1 midnight or less.”Id. 27649.

The Proposed Rules Do Not Help Most Medicare Beneficiaries in Observation Status

The Center has several concerns about the proposed rules, which would not address the problems for beneficiaries who find themselves placed in observation status.

The Center’s major concerns are that CMS is basing coverage decisions on time rather than medical care, and is extending the time in the hospital that is needed to create a presumption of inpatient status – from overnight (current Manual) to two midnights (proposed rule).  Moreover, the proposed two-midnight rule begins to run only after the patient has been formally admitted as an inpatient.  Observation time before formal inpatient admission would not be counted as inpatient time.  Consequently, for the many observation patients whose entire hospital stay is classified as outpatient observation, the proposed rules make no change whatsoever.

Second, CMS is requiring new documentation from physicians about whether a patient arriving at the hospital needs to be an inpatient.  CMS explains its rationale:

As a result of the relationship that develops between a physician and his or her patient, the physician is in a unique position to incorporate complete medical evidence in beneficiary’s medical records, including his or her opinions and the pertinent medical history of the patient.  In creating the medical assessment, medical history, and discharge notes that become part of the medical record, we believe the physician has ample opportunity to explain in detail why the course of treatment was appropriate in the context of that patient’s acute condition.  In addition, the physician has the opportunity to describe and explain aspects of the beneficiary’s medical history that may not otherwise be apparent.

Id. 27648.  The problem with CMS’s explanation is that, at present, physician care at hospitals is often not provided by the patient’s primary care physician, but, instead, by hospitalists who work exclusively at the hospital and who may have never seen the patient before.[4]  Hospitalists are unlikely to be able to provide the extensive documentation about a patient’s medical history that CMS calls for.  Moreover, typically more than one hospitalist is likely to have treated the patient during the course of a hospital stay extended over several days.

Third, by declining to give the physician’s order and certification “presumptive weight,” CMS requires Medicare’s reviewers to make retrospective decisions about a patient’s need for inpatient care.  Instead of reviewers determining whether the patient appeared to need inpatient care at the time the patient was first seen at the hospital, CMS is requiring reviewers to look at patients after they have been treated and to decide, retroactively, based in part on the medical care that was provided while the patient was hospitalized, whether the patient needed to be an inpatient.  CMS reports that reviewers’ “final determination . . . for payment purposes would not be based solely on the physician’s order and certification, and would reflect equal weight and evaluation of all documentation contained in the medical record.”  Id. 27648.  This after-the-fact analysis second-guesses the physician’s decision, violating the first line of the Medicare statute, “Nothing in this subchapter shall be construed to authorize any Federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided…”[5]

Finally, there is a major disconnect between the way CMS describes observation status and the way observation status is used and applied by hospitals.  CMS repeats that short-stay claims errors occur when patients receive “minor surgical procedures or diagnostic tests” on an outpatient basis, are admitted overnight for observation, and are discharged the following morning. Id. 27647.  CMS does not explain how this description of observation status relates to the 400+% increase in observation stays exceeding 48 hours that occurred between 2006 and 2011.

The Center’s experience is also different from CMS’s description.  The Center frequently hears that patients are kept in the hospital as outpatients for multiple days, undergoing multiple diagnostic tests and experiencing multiple physician consultations, which are made in an effort to diagnose the cause of the problem that brought the patient to the hospital in the first place.  These diagnostic efforts are what a Part A inpatient hospital stay involves – the diagnosis and treatment of acute conditions.[6]

Comments on the Proposed Rules are Due June 25, 2013           

Written comments on the proposed rules must be received by CMS by June 25, 5 p.m., EDT.  Id. 27,486.  Comments may be submitted electronically, by mail, or by hand or courier.

Federal Legislation

Federal legislation pending in Congress, the Improving Access to Medicare Coverage Act of 2013, H.R.1179 (Congressman Joseph Courtney (D, CT) and Tom Latham (R, IA)) and S.569 (Senator Sherrod Brown (D, OH)) would require that time spent in observation be counted toward meeting the three-day prior inpatient stay.  The bills would qualify Medicare beneficiaries for Medicare coverage of their SNF care.  This legislation is more important than ever to protect the interests of Medicare beneficiaries and their families.  You can show your support for the Improving Access to Medicare Coverage Act of 2013 at:

[1]  In March 2013, CMS issued proposed rules that would allow hospitals to bill Medicare Part B after a Part A claim is denied, so long as the rebilling occurred within one year of the provision of services to the patient.  78 Fed. Reg. 16632 (March 18, 2013).  See CMA, “CMS’ Proposed Rules on Observation Status Would Not Help Beneficiaries” (Weekly Alert, March 28, 2013),
[2] See the Center for Medicare Advocacy’s extensive materials on observation status.
[3] 42 U.S.C. §1395x(i).
[4] The Society of Hospital Medicine estimated that in 2012, nearly 35,000 hospitalists practiced in hospitals.   Victoria Stagg Elliott, “Evolution of the Hospitalist,” American Medical News (Sep. 3, 2012), .  In 2007, when there were only 20,000 hospitalists nationwide, The New England Journal of Medicine reported in an Editorial that hospitalists had already “transformed the care of hospitalized patients.”   Laurence F. McMahon, Jr., “The Hospitalist Movement – Time to Move On,” N Eng J Med.  2007; 357; 2627-2629 (Dec. 20, 2007), Frequently Asked Questions, by the Society of Hospital Medicine,
[5]42 U.S.C. §1395x.
[6] 42 U.S.C. §1395f(a)(3).