LeadingAge Calls for Solution to "Observation Stays"

Legislation | August 28, 2017 | by Marsha R. Greenfield

Thousands of Medicare beneficiaries fail to meet the three-day hospital stay requirement for coverage of post-acute care because they were classified as outpatients, hospitalized "for observation".

A Medicare beneficiary must be admitted to a hospital as an in-patient for 3 nights to be eligible for Part A coverage of skilled nursing benefits following the hospital stay.  Beneficiaries who are classified as “under observation” or “outpatients” are not eligible for Part A skilled care, and must pay for such care out of pocket even if they would have been eligible if they had been “admitted”. 

Beneficiaries have no control over whether they are classified as under observation or admitted as inpatients. The classification consequences, however, fall directly on beneficiaries – if they are admitted to the hospital as in-patients, Medicare will pay under Part A for post-acute skilled nursing.  If they are considered “under observation”, regardless of their medical condition, they are solely responsible for the cost of any post-acute skilled nursing they may need. There is no appeal from the hospital’s classification, and even though hospitals are now required to inform patients of their status under the NOTICE Act, beneficiaries have no effective recourse.

The Health and Human Services Office of Inspector General has noted that there is virtually no medical difference between beneficiaries who are “in-patients” and those who are “out-patients” or “under observation”, rendering the classification arbitrary and eminently unfair. 

We believe the Centers for Medicare and Medicaid Services (CMS) has the authority to treat all nights spent in the hospital as qualifying the beneficiary for Part A skilled nursing.  The underlying three-day inpatient hospital stay requirement can be waived when the Medicare beneficiary is an enrollee in Medicare Advantage and under certain Center for Medicare and Medicaid Innovation demonstrations and programs such as Comprehensive Care for Joint Replacement Bundled Payments or Accountable Care Organizations.  In Estate of Landers v. Leavitt, 545 F.3d 98 (2d Cir. 2008), the Second Circuit Court of Appeals noted that the Medicare statute does not prevent CMS from including all time spent in a hospital towards satisfying the 3-day requirement, and that neither the statute nor implementing regulations define the word “in-patient”, which CMS in fact defined in the Medicare Benefit Policy Manual.

Related Statute/Regulation:

Section 1861(i) of the Social Security Act (42 U.S.C. 1395x(i))

Proposed Solution:

For the purpose of determining Part A eligibility for skilled nursing care, treat all nights that a beneficiary stays in a hospital as counting toward the three-day stay requirement.  This could be done administratively, as CMS created the category of “under observation” and has been allowing exceptions for Medicare Advantage plans, for ACOs and other coordinated care models. If CMS is unwilling to make this change, then Congress should pass HR 1421/S 568, the Improving Access to Medicare Coverage Act of 2017.