Medicare officials have proposed changes in hospital admission rules that they say will curb the rising number of beneficiaries who are placed in observation care but are not admitted, making them ineligible for nursing home coverage.

“This trend concerns us because of the potential financial impact on Medicare beneficiaries,” officials wrote in an announcement last week. Patients must spend three consecutive inpatient days in the hospital before Medicare will cover nursing home care ordered by a doctor.

Observation patients don’t qualify, even if they have been in the hospital for three days, because they are outpatients and have not been admitted. They also have higher out-of-pocket costs than admitted patients while in the hospital, including higher
co-payments and sometimes paying exorbitant charges for non-covered drugs.

Under the proposed changes, with some exceptions, if a doctor expects a senior will stay in the hospital for less than two days (or through two midnights), the patient would be considered an outpatient receiving observation care. If the doctor thinks the patient will stay longer, the patient would be admitted.

Setting deadlines for observation stays would also limit the growing length of time of observation visits, another trend officials said was troubling.

Reaction from patient advocates, doctors and hospitals has been swift and unanimous: It’s a bad idea.

The number of observation patients has jumped 69 percent in the past five years, to 1.6 million in 2011, according to federal records. They also are staying in the hospital longer, even though Medicare suggests that hospitals admit or discharge them within 24 to 48 hours. Observation visits exceeding 24 hours have nearly doubled, to 744,748.

Officials said extended observation stays occur because hospitals are not sure Medicare will pay if patients are admitted. The proposed changes are intended to address these questions.

The proposed admission changes are part of a 1,400-page annual hospital payment update released last Friday. If adopted, the new admission rules would apply to more than 3,400 acute-care hospitals, and Medicare estimates that the change would result in 40,000 more inpatient hospital stays.

To offset the expected additional cost of $220 million, Medicare would cut hospital payments by 0.2 percent.

Joanna Kim, vice president for payment policy at the American Hospital Association, called the time factor “somewhat arbitrary.” The association also objects to the pay cut, asserting that the projected inpatient increase is not certain.

“I can’t imagine anyone is going to like this proposed rule because it makes time the determining factor in whether the services are provided on an inpatient or observation basis,” said Toby Edelman, senior policy attorney at the Center for Medicare Advocacy. “It is not about what the hospital is actually doing for you, what kinds of care you need and are receiving.”

Edelman said the proposal does nothing to help observation patients because it maintains
the three-inpatient-days requirement, doesn’t require hospitals to tell patients when they are held for observation and doesn’t give patients a right to appeal their observation status. The center is representing 14 seniors who have filed a lawsuit against the government to eliminate the observation care designation.

A federal judge is holding the lawsuit’s first hearing Friday in Hartford, Conn., to consider the government’s request to throw out the case because the seniors should have followed Medicare’s lengthy appeals process before going to court. On Tuesday, government lawyers submitted the proposed rules change to the judge to bolster the argument for dismissal, claiming that it clarifies “when we believe hospital inpatient admissions are reasonable and necessary, based on how long beneficiaries have spent or are reasonably expected to spend, in the hospital.”

The American Medical Association is still reviewing the proposed changes, which don’t include steps it asked Medicare to take last year: either drop the three-day policy or count observation days toward the requirement.

“This policy is of great concern to the physician community because it has created significant confusion and tremendous, unanticipated financial burden for Medicare patients,” James Madara, the AMA’s executive vice president, wrote to Medicare. He also criticized a hospital’s ability to overrule the doctor’s decision to admit a patient, which creates more confusion when the doctor bills Medicare for inpatient services and the hospital bills for observation services.

— Kaiser Health News

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.