Admit or Observe: Where Do We Go from Here?

By Debra Wood, RN, contributor

March 15, 2014 - An older adult arrives at an acute-care hospital frail and in need of care. What happens next? Long gone are the old days when he would be admitted. In these times, he’s much more likely put on observation status--an action that will probably raise his out-of-pocket costs, affect reimbursements and could possibly have implications for his health outcome, as well.

Jordan Battani: Observation status problem may resolve with value-based reimbursement.
Jordan Battani said the change from fee-for-service to value-based reimbursement should solve the observation status problem in the long term.

“It’s an artifact of the fee-for-service system,” said Jordan Battani, managing director of CSC’s Global Institute for Emerging Healthcare Practices, headquartered in Falls Church, Va.

Observation care serves as a middle ground between the emergency department and inpatient care. It’s used while the clinician decides if the patient requires admission or is able to be discharged.

“A lot of things present in the emergency room, and you are not quite sure if they can go home or not,” Battani said. “It’s a way of being compensated for stuff in addition to the ED care.”

While patients covered by commercial payers and Medicare may fall into observation status, it’s become more problematic for Medicare beneficiaries, particularly those with comorbidities and difficulty caring for themselves at home, said Kathy Coburn, senior manager in the EY Health Advisory Practice in Detroit.

Coburn remembered in about 2000 seeing approximately the same number of patients come into a hospital but a greater percentage of them were classified as outpatient, or observation.

“When I was a young nurse, it was easy; if the patient spent the night, he was an inpatient,” Coburn said. Now that decision has become more complex. Patients must meet certain criteria for admission.

Medicare outpatient observation visits increased from 28 visits per 1,000 Medicare beneficiaries in 2006 to 47 visits per 1,000 beneficiaries in 2011, according to a March 2013 MedPAC report to Congress. It concluded that in the past some of the observation visits would have been short inpatient stays. Inpatient stays lasting one day decreased by more than 15 percent. The Office of Inspector General found Medicare beneficiaries had 1.5 million observation stays in 2012, often lasting more than one night.

Observation status is an outpatient service, even if the patient is there for days. Hospitals can bill for each test and treatment. The patient often must pay more out of pocket, and the stay does not qualify toward the three-day inpatient stay required for skilled nursing facility care.

“There are tremendous patient implications for the practice of observation,” Battani said. “The benefits for the patient in observation status are different than for an acute admission. The out-of-pocket costs are higher.”

The practice has led to a class-action lawsuit, a Congressional briefing, the two-midnight rule and the introduction of bills to address the concerns.

The two-midnight rule

The Centers for Medicare and Medicaid Services (CMS) introduced the “two-midnight rule” in an effort to curb the practice of observation status. The rule indicates inpatient admission is generally appropriate when the physician expects the beneficiary to require a stay that crosses at least two midnights. But its implementation has been fraught with problems.

“It had great intentions, but many times when we try to fix something by putting a Band-aid on it, it creates another problem,” Coburn said.

The problem with the two-midnight rule is the arbitrary timeframe and the lack of guidance from CMS, said Priya Bathija, senior associate director of policy at the American Hospital Association (AHA).

“CMS is not only looking at the medical judgment but also the time,” Bathija said. “It’s very complicated.”

The two-midnight rule also may end up costing hospitals revenue. Moody’s Investment Services released a Sector Comment on March 12, 2014, saying it expected the rule will increase observation stays and “will weaken hospital operating profitability in calendar year 2014 because it will lower Medicare reimbursement for these cases.” Moody’s determined the ruling could reduce revenue by an average of $3,000 to $4,000 per case.

What’s driving the increase?

The primary reason for the increase in observation is the Recovery Audit Contractors audit program, said Bathija.

“Instead of being denied down the road for an admission, they are putting the patient in observation,” Bathija said. “It’s a risk-aversion behavior.”

Even though hospitals win on appeal 72 percent of the time, they do not want to fight an audit.

“These audits are an administrative burden on hospitals, and they are already stretched trying to meet all of the other regulatory requirements,” Bathija said.

Battani agreed that the audit process reclassifying patients as not meeting the admission criteria has led to a greater use of observation status.

“The audits are in place because of cost pressures, and there have been abuses,” Battani said.

Bathija added that contributing to the problem is a lack of clear definition of what CMS considers an inpatient admission.

Additionally, there has been some discussion that hospitals are using observation status more aggressively to avoid getting penalized for readmissions. In some hospitals, patients who may have been admitted a few years ago are now being placed on observation status, if they had been discharged within the past 30 days or were likely to return to the hospital again, according to Ashish Jha, MD, PhD, a professor at the Harvard School of Public Health in Boston, as he notes in his health policy blog.

Bathija declined to comment on this. However, Nancy Foster, vice president for quality and patient safety for the American Hospital Association, told Modern Healthcare in June 2013 that “there does appear to be some statistical relationship between falling readmission rates and rising use of observation. It would be unfortunate,” she said, “if Medicare readmissions penalties on hospitals were causing some clinicians to use observation status more.”

Patient satisfaction

“It’s a public relations nightmare, because patients and families do not get it,” Battani said. “You are in an observation bed, and it’s right next to an acute bed. If you are a patient, you cannot tell the difference.”

If they are receiving hospital services and sleeping at the hospital, patients often think they have been admitted.

“That’s problematic for hospitals,” Battani said. “Recovering more money from patients in the Medicare space is not good financial news. Cost shifting to the patient is about the last thing hospitals want to do.”

Additionally, the stay may have gone through as an admission, only to be overturned during a RAC audit, leading to a substantial bill perhaps two or three years later.

What to do about observation status?

The AHA is supporting S. 2082, the Two-Midnight Rule Coordination and Improvement Act of 2014, introduced in early March by Senators Robert Menendez (D-NJ) and Deb Fischer (R-NE). The legislation would delay enforcement of the Medicare inpatient admission and review criteria for the two-midnight policy. The legislation directs CMS to take a more thoughtful approach by developing a new standard that will provide clarity on whether a patient should be billed as inpatient or outpatient.

Coburn said the bill includes the suggestion that the Secretary of Health and Human Services talk with stakeholders to come up with a payment strategy for short-stay patients, something she supports.

“The long-term solution is to get away from fee-for-service reimbursement,” Battani said. “Under value-based or prospective reimbursement, the incentive is to do the least costly intervention that will get the right result.”

Related articles:
Hospital Performance Can’t Be Fully Measured by Readmission Rates
Study Highlights Hospital Readmission Rates from Post-acute Care

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