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New AARP research reveals that the use of hospital “observation” status is having a substantial impact on out-of-pocket healthcare costs and follow-up care decisions for many Medicare beneficiaries. The findings add fuel to the growing debate over how to lessen the overuse of observation stays, which can delay beneficiaries’ eligibility for skilled nursing care.

Medicare beneficiaries are required to have a three-day inpatient stay before skilled nursing care is covered, but many are unwittingly admitted to hospitals under observation status, which makes them ineligible for subsequent nursing home coverage. This forces many to “not only end up with unexpectedly large hospital bills, but also later owe thousands of dollars for skilled nursing facility care,” AARP’s research Public Policy Institute notes in a new report.

One particularly startling finding from AARP’s study of tens of thousands of claims from 2009: Observation patients who later received nursing home care while ineligible for Medicare coverage owed an average of $3,400. But a small proportion of observation patients whose nursing home claims were not paid by Medicare owed, on average, more than five times as much (over $12,000) as those whose care was covered by Medicare.

The research reveals a sometimes illogical web of coverage approvals and denials, many of which seem to contradict the Medicare agency’s own policies. To illustrate that, AARP researchers recall a 2012 OIG study that found Medicare mistakenly paid about 92% of skilled nursing facility claims for more than 25,000 beneficiaries who did not have an inpatient stay of three days but spent at least three days in a hospital setting.

“The report characterized the $255 million in payments as ‘mistaken’ and called for Medicare to recover them,” ARRP noted.

Other findings:

  • 10% percent of observation patients (about 167,000) paid more than if they had been admitted (i.e., their out-of-pocket costs exceeded the hospital inpatient deductible of $1,068 in 2009).
  • Only 7.4% of observation patients (about 160,000) were discharged to a skilled nursing facility. Almost one-third of these patients did not file claims and may not have been admitted to a skilled nursing facility, even though a hospital physician recommended such care.

A bill introduced in Congress in late March would count all time that Medicare beneficiaries spend under hospital “observation” status toward the three-day rule. A separate bill calls for Medicare inpatients to be notified of their observation status as well. The bill’s sponsor noted that the gap in coverage for prescribed nursing care leaves hundreds of thousands of Medicare beneficiaries and their families facing catastrophic medical bills each year.

Among the recommendations AARP tenders in its study is capping total beneficiary out-of-pocket costs for observation services and other outpatient services at the Medicare inpatient (Part A) deductible, and crediting time spent in observation, as well as time spent continuously in other hospital settings (such as the emergency department), toward the three-day stay requirement.