Where Medicare Fails

A friend of mine was hospitalized recently. What really worried her, she told me the day before she went in, was not the procedure she was about to have but her medical bills if the hospital decided not to admit her and instead placed her under observation.

Supposedly, patients are kept under observation when they’re too sick to be sent home but not sick enough to be admitted to the hospital. Sounds reasonable, right? But from a patient’s point of view, there are serious problems, beginning with the fact that the Centers for Medicare and Medicaid Services (CMS) classifies all those who are under observation as outpatients and doesn’t cover their costs as fully as if they’d been admitted.

Today, twice as many Medicare patients are being consigned to observation care as in 2006—almost 2 million in 2014. And that’s not because of a huge growth in the ranks of those on Medicare. The number of Americans enrolling in original Medicare rose by just 5 percent over the same period.

Though Medicare says patients shouldn’t be kept under observation for longer than 48 hours—beyond that, they should be admitted—some have been on observation status for as long as two weeks, according to the nonprofit Center for Medicare Advocacy. And a government investigation found that observation patients often have the same health problems as those who are admitted.

Why do so many people end up in observation care these days? Medicare hires auditors—private companies—to review claims to ensure that CMS doesn’t overpay providers. Since 2006, those auditors have increasingly challenged doctors’ decisions to admit patients. Hospitals have been forced to return some of the money CMS has paid them.

When that happens, the auditors are allowed to keep a percentage. Doctors and hospitals complain that the auditors operate like bounty hunters, but it’s the patients who are literally paying the price. And they often don’t find out they were never admitted until they get a bill for outpatient, observation care. Even those savvy enough to have asked about their status sometimes get a nasty surprise because the hospital, after initially admitting them, switched their status without telling them.

There are a number of ways in which Medicare pays less—and you pay more—when you’re under observation. Though CMS may pay for drugs prescribed to treat the problem that brought you to the hospital, it won’t cover the cost of medications you’ve been taking for a chronic condition—a heart problem, for example. Those meds will be supplied by the hospital while you’re there, and you may be billed at its sometimes exorbitant rates. Something as simple as a baby aspirin could be priced at $18 a pill. If you have a Medicare Part D drug plan or are in a Medicare Advantage plan, it may (or may not) cover the cost. Some patients bring their own drugs from home, but not all hospitals allow this.

The biggest financial setback created by a stay in observation care—the one that most worried my friend—is that, if you’re sent to a skilled nursing facility to recuperate after you leave the hospital, Medicare won’t pay for that unless you were admitted for three consecutive days. If you were under observation for two days and then were admitted for another two, only the time after you were admitted counts, so you’ll have to pay for the nursing-home care yourself. According to the Genworth Cost of Care survey, the median cost of a private room in a skilled nursing facility in 2015 was $250 a day

There’s been some slight improvement in the situation. In 2015, Congress passed the NOTICE Act, requiring that when patients are held in observation care for more than 24 hours, hospitals must tell them what their status is and what the cost might be. They must also be warned that if they need to go to a skilled nursing facility, Medicare will only pay for it if they are admitted to the hospital for at least three consecutive days. The NOTICE Act went into effect on March 8, 2017, and CMS estimates that more than a million Medicare patients will get formal warnings about their observation status every year.

In the meanwhile, the Center for Medicare Advocacy advises patients to try to stop observation before it starts. At the beginning of your hospital stay, ask whether you’ve been admitted as an inpatient. If you haven’t been, urge the doctor in charge to admit you. Use the argument that your care is “medically necessary” and that you need an “inpatient, hospital level of care.”

Ask your regular doctor to support your request. If the hospital still refuses to admit you, get that in writing so that you can appeal the decision later to Medicare—though it’s hard to win such appeals. The Center has a self-help packet that explains what to do.

There’s one other thing you can do, whether or not you expect to be hospitalized any time soon. Lobby your members of Congress to pass the Improving Access to Medicare Coverage Act of 2017 (H.R.1421/S.568). It requires CMS to count all the time patients spend in a hospital—including time in observation care—toward the three consecutive days Medicare requires before it will pay for a stay in a nursing home.

My friend who was worried about observation status explored her options ahead of time and decided that, if her procedure went well, she’d come straight home instead of going to a skilled nursing facility. That way, it wouldn’t matter as much if the hospital refused to admit her. That’s what she did, and while she recovered, her husband looked after her with some help from home health aides.

The first few days were more difficult than she’d expected. This is not a solution that works for everybody, but in her case, ultimately it did. I strongly believe CMS should not use a dubious distinction between “observing” and “admitting” patients to reduce its costs.