Loretta Jackson spent five days in a Santa Rosa hospital in April 2009 for severe back and leg pain, and as a Medicare beneficiary, she expected the federal program for the elderly would cover her medical treatment.
At the hospital, she was given an MRI, intravenous narcotics and physical therapy. She was released five days later, and her doctor recommended that she check into a skilled nursing facility to recuperate.
But when Jackson, then 73, and her husband arrived at the nursing facility, they were asked to pay $7,000 up front; Medicare would not pay for the post-hospitalization care because the Santa Rosa hospital never officially admitted her as a patient.
Instead, the hospital labeled her an outpatient on an “observation stay,” which meant Medicare would not help cover the month of convalescent care she required.
"I was shocked," Jackson said. "They did an awful lot of stuff to me at the hospital to be considered an outpatient."
Jackson and her husband still are contesting the bill and are part of a class-action lawsuit over the use of observation stays.
According to research released today by Brown University, hospitals across the country are using observation stay classifications among Medicare patients with greater frequency.
The researchers theorized that changes to Medicare policy in the past decade have contributed to the rise in observation-status patients. For example, since 2003, there has been a federal focus on detecting Medicare fraud and curbing costs through audits of hospital practices, including short hospitalizations. Hospitals can avoid some of this scrutiny, however, if a patient is held on an observation stay, which is not counted as an inpatient hospitalization.
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These policies have effects on Medicare patient care, said the study's lead author, Zhanlian Feng, an assistant professor at the Center for Gerontology and Health Care Research at Brown's Warren Alpert Medical School.
"From a policy perspective, the purpose is to crack down on improper or fraudulent inpatient admissions – there are many short-stay admissions that turn out to be not medically necessary, and it costs taxpayers a lot," he said. "But then you see unintended consequences. Whenever we come up with a policy measure aimed at one thing, like containing medical costs, it may have the unintended cost of limiting patient access."
Advocacy organizations have criticized the practice of classifying patients who are treated in a hospital over several days as observation stays, which has left some Medicare patients with large, unexpected expenses.
“If you’re in a hospital for a week, what do mean you’re not an inpatient?” said Toby Edelman, a senior policy attorney for the Center for Medicare Advocacy, who is one of the attorneys representing Jackson in the class-action lawsuit. “The (financial) consequences are serious.”
The Brown researchers analyzed Medicare claims data between 2007 and 2009 and found a 34 percent increase in the ratio of observation stays to inpatient hospitalizations.
Medicare policy guidelines state that observation stays ideally are concluded within 24 hours and should rarely go beyond 48 hours. But the number of observation stays of three or more days also has grown, researchers found. In 2009, 44,843 Medicare patients were held for observation stays for 72 hours or longer, an 88 percent increase from 2007.
Nearly 55,000 California Medicare patients were held for observation in 2009, which is among the lowest rates in the country. Texas, Florida and West Virginia had among the highest rates of observation stays.
Outpatient observation services are provided so hospitals can assess whether a patient should receive more treatment or be discharged. Hospitals use criteria like illness severity and the intensity of medical services to determine whether a patient qualifies for inpatient care or an observation stay.
The California Hospital Association declined to comment for this story, but its website notes that hospitals “face criticism from patients and CMS (Centers for Medicare & Medicaid Services) over the perceived use of observation status as a substitute for inpatient admissions, but risk penalties from CMS auditors and prosecutors when auditing admissions of short inpatient stays.”
Jackson, the Santa Rosa hospital patient, joined a national class-action lawsuit in April against Kathleen Sebelius, secretary of the U.S. Department of Health and Human Services, who oversees Medicare. Filed by the Center for Medicare Advocacy and the National Senior Citizens Law Center, the suit claims that Medicare recipients have been harmed by the use of hospital observation status because it results in the denial of one type of Medicare coverage, which then triggers out-of-pocket costs for prescription drugs and post-hospitalization care in skilled nursing facilities.
Federal policy permits hospitals to change an inpatient designation to an outpatient observation status before the patient is released. The lawsuit claims that patients aren't given proper notice when they are on observation stays or when their status is changed from inpatient to outpatient, and it alleges that patients don't have a clear-cut right to appeal their observation status.
The U.S. Department of Health and Human Services declined to comment, due to the pending litigation.
Federal legislation introduced last year would treat observation status as an inpatient stay for the purpose of obtaining Medicare coverage in a skilled nursing facility after receiving care at a hospital.
But patient advocates predict that the reliance on observation stays will continue to increase as the Affordable Care Act, which penalizes hospitals for "excessive readmissions ratios," is fully implemented.
“We are going to see even more of this (observation status) as hospitals worry about readmitting people,” the Center for Medicare Advocacy’s Edelman said. “They will be calling these patients ‘observation stays’ left and right.”