Observation Care and the Medicare Program

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Observation Care and the Medicare Program


The Centers for Medicare & Medicaid Services (CMS) has strict rules that govern whether Medicare will pay for a patient’s admission to the hospital from the emergency department.  Medicare patients who do not meet these criteria may be treated and released from the emergency department.  Others may be placed in an in-between category and receive “observation services.”  Patients receiving observation services may remain in or adjacent to the emergency department in a dedicated observation unit, or they may be moved to inpatient floors of the hospital. Observation “status” can be confusing to patients and have financial implications, although this is rare.[i]

  • Emergency physicians support the use of dedicated observations units in the emergency department or use of protocols for short stay (less than 24 hours) observation in other parts of the hospital supervised by emergency physicians. 
  • All days spent receiving care in a hospital should count toward Medicare’s three-day hospital stay requirement, regardless of a patient’s status as an inpatient or outpatient.
  • Observation care supervised by emergency physicians:
    • Allows additional time to review results of tests and lab work (e.g., cardiac enzymes) to determine whether patients can safely go home or need admission to the hospital.
    • Is conducted with clinical protocols with frequent patient status reviews.
    • Reduces length of stays in observation (less than 24 hours) compared with patients being observed in inpatient settings. It also reduces overall lengths of stay for patients who are ultimately admitted.
    • Can reduce unnecessary hospital admissions and avoidable re-admissions. This also potentially reduces out-of-pocket costs for patients
    • Potentially saves millions of dollars in health care costs every year.
  • Patients in observation status on inpatient floors are not considered admitted patients, even though it may look and feel that way to them. 
    • Emergency physicians do not control or supervise patients on inpatient floors.
    • Even when a Medicare patient is admitted to the hospital, his or her status can change from “inpatient” to “observation” after the fact, which is not controlled by the emergency physician. 
  • Emergency physicians are patient advocates who are urging Congress and CMS to support changing the rules so that patients in observation longer than 1 day do not have to pay more than if they were admitted to the hospital. 
    • Medicare patients who are classified in “observation” status on an inpatient floor for several days can become responsible for greater portions of their hospital bills. 
    • If skilled nursing facility care is needed upon leaving the hospital, the patient may be responsible for the nursing home bill, because CMS requires that patients first be admitted to the hospital for 3 consecutive days in order for nursing care to be covered.  This is rare, but nursing home expenses can be considerable.
    • Time in observation status does not count toward the 3-day rule.  Emergency physicians support legislation in Congress to make this change:  H.R. 1179; S. 569 — “Improving Access to Medicare Coverage Act.”

[i] Medical Care  September 2014 “The Origin and Disposition of Medicare Observation Stays.” Feng, Z.; June, H.Y.; Wright, B; More, V. 52 (9): 796-800. 

NOTE:  This report found fewer than 1 percent of Medicare observation patients who have suffered financial penalties because their skilled nursing facility benefits were denied, and about 6 percent of Medicare observation patients have paid more under observation care than if they were admitted to the hospital.)   

(Last Updated 2015)