Hospitals increasingly use 'observation stay' loophole, data shows

Over 2,000 hospitals will be targeted for readmission penalties starting Oct. 1

Physicians and hospitals increasingly are admitting more Medicare beneficiaries for observation stays rather than as hospital inpatients, new research concludes.

Although the rate of observation stays varies widely by state and by hospital, the nationwide ratio of Medicare patients who are "held for observation" to those who are admitted for inpatient stays increased 34% between 2007 and 2009, according to Brown University analysts.

This data supports concerns raised by long-term care groups, which say the hospitals are preventing Medicare beneficiaries from access to skilled nursing care following a hospitalization.

Called the Medicare loophole by nursing home advocates, in order for a beneficiary to receive care in a skilled nursing facility following a hospitalization, he or she must be considered an inpatient. If the beneficiary is admitted for an observation stay, Medicare can deny coverage.

"The dual trends of increasing hospital observation services and declining inpatient admissions suggest that hospitals and physicians may be substituting observation services for inpatient admissions — perhaps to avoid unfavorable Medicare audits targeting hospital admissions," investigators wrote.

The findings were published in the June issue of Health Affairs.