For Hospital Patients, Observation Status Can Prove Costly

By Ina Jaffe

Published September 4, 2013 at 3:40 AM EDT

The next bed could cost you a lot if the hospital says you're there on observation.

If you're on Medicare and you're in the hospital for a few days, you may think you're an inpatient. The hospital may have other ideas. Increasingly, hospitals are placing older patients on "observation status." They may be there for days, but technically they're still outpatients.

This is a big deal for someone on Medicare because follow-up treatment in a nursing home isn't covered unless someone has been an inpatient for at least three days. That's leaving some seniors on the hook for thousands of dollars in nursing home bills.

One of them is 74-year-old Rosalie Winkworth of Dunellen, N.J. She went to the hospital in February for the same reason that many older frail people do: She fell. But she already had a lot of physical impairments stemming from a stroke she suffered when she was just 21 years old. She was pregnant then.

Rosalie Winkworth spent four days in the hospital after a fall. After discharge, she went to a nursing home, but because the hospital considered her on observation status, her family had to pick up the bill.

Because of the stroke, Winkworth has weakness on the right side of her body and paralysis. Her daughter, Donna Maxcy, says, "My whole life, that's how I've known her."

And Winkworth also has other health issues. She has peripheral vascular disease, has had a heart valve replaced, had a stent implanted and more.

So when her mother spent four days in the hospital, Maxcy says, there was no reason to think that she was anything other than an inpatient. When a social worker told her that her mother was on observation status, it really didn't register. "I thought she was being watched," says Maxcy. "Observed."

After Winkworkth's discharge, her doctors said she needed to go to a nursing home. But since the hospital considered her an observation patient, not an inpatient, the family had to pick up the bill. And they're not rich. So they cashed in Winkworth's life insurance policy at a loss. "The payment upon death would have been over $14,000, and the early surrender amount was $9,954," Maxcy says.

It was money that was supposed to be used for Winkworth's funeral some day.

Toby Edelman, a senior attorney with the Center for Medicare Advocacy, has talked to hundreds of people with similar stories. She says, "to deny people coverage in the nursing home because the hospital called them outpatients makes absolutely no sense."

That's why the Center for Medicare Advocacy is suing the Department of Health and Human Services. "Our lawsuit challenges the use of observation status," says Edelman, who argues that long observation stays are not authorized by the Medicare statute.

In fact, Medicare recommends that observation status should be used for just a day or two.

But in the past six years, the use of observation status has roughly doubled. And according to a government study, last year more than 600,000 Medicare patients were in the hospital for at least three days, but still couldn't qualify for coverage of nursing home care.

Hospitals blame that on the government. Specifically, on a program called RAC. That stands for recovery audit contractors. The auditors go through old hospital records and decide if the hospital should have classified a patient as in or out.

"The recovery audit contractors can go back three years, and in fact do go back three years," says Joanna Hiatt Kim, vice president for payment policy at the American Hospital Association.

Kim explains that if the recovery auditor decides that an inpatient should have been an outpatient, the hospitals must return the funding that they had received years earlier, and they then often get little or no reimbursement, "even though there's no dispute whatsoever that the care [the patient] received was reasonable and necessary."

So hospitals increasingly use observation status to make sure Medicare pays them something that they won't have to give back. Meanwhile, the American Hospital Association also has sued HHS over payments for observation status.

The Department of Health and Human Services wouldn't talk about the issue because of the pending lawsuits.

HHS has issued some new rules designed to make things better for patients and hospitals. But critics say it's not enough. Really fixing this will take an act of Congress, says Rep. Joe Courtney, D-Conn. "It was not really an issue that could be resolved easily by Medicare through an administrative change," he says.

So Courtney has proposed legislation that would require Medicare to pay for follow-up treatment in a nursing home for any patient who had been in the hospital for at least three days, no matter if they're an inpatient, outpatient or on observation status.

Courtney's bill has more than 90 co-sponsors, including 20 Republicans. "This is an issue that has a life of its own," he says. "It is not an issue that ... falls into traditional partisan playbooks."

Though that may not matter in a Congress as gridlocked as this one.