Some hospital-based physicians have raised warnings about possible adverse consequences of the notifications.


July 30—Congress cleared for the president’s signature this week a bill to require hospitals to notify patients when they are placed in observation status.

The legislation, which cleared the Senate unanimously July 27 after breezing through the House of Representatives, will require hospitals to notify Medicare patients in observation status for more than 24 hours. The legislation will also require notification of potential financial consequences by discharge or within 36 hours (whichever is sooner). The new requirement will go into effect one year after President Barack Obama signs it into law.

The Centers for Medicare & Medicaid Services (CMS) had previously encouraged hospitals to provide these notifications voluntarily, a CMS official testified at a May Senate hearing.

The Notice of Observation Treatment and Implication for Care Eligibility Act would require a written, explanation of the Medicare patient’s status as an outpatient under observation, why they are in that status, and outline the cost sharing and skilled nursing facility (SNF) implications.

Although Medicare’s cost sharing required for outpatient observation status is usually less than the inpatient deductible, according to Mark Miller, executive director of the Medicare Payment Advisory Commission (MedPAC), they will not have Medicare coverage of subsequent SNF coverage without three nights as inpatients. Additionally, beneficiaries in observation status may be liable for hospital charges related to self-administered prescription drugs received in the hospital and not covered by the Medicare outpatient prospective payment system.

This notification must be available in appropriate languages and signed by the patient or his or her representative. If a patient or designee declines to sign it, then the hospital staff must sign it.

Growing Issue

Although still a small share of total hospital stays, the number of patients treated in observation status has grown sharply in recent years.  The number of outpatient observation stays increased by 96 percent from 2006 to 2013, according to a June report by MedPAC. At the same time, the number of one-day inpatient stays declined by 28 percent and inpatient stays of two or more days declined by 15 percent. MedPAC concluded that about half of the 2013 decline in inpatient stays can be explained by the shift of some cases from inpatient to observation.

Hospitals have increased their use of observation status to avoid costly audits and subsequent payment denials by Medicare Recovery Audit Contractors (RACs), according to Miller. That development has led CMS to create a new short-stay payment policy, known as the two-midnight rule, which defers to a physicians judgment that a two-midnight stay will be required and exempts a hospital from audits for stays (including inpatient and outpatient settings) of at least two midnights. Hospital concerns have led to multiple delays in its enforcement, and a recent CMS proposal to tweak it. Enforcement of the two-midnight policy is scheduled to begin in October.

Limited Implementation

Many hospitals have voluntarily offered the observation status notifications. And several states, including Connecticut, have enacted laws in recent years to require such notifications.

Michele Sharp, vice president of communications for the Connecticut Hospital Association said in an email response that “implementation of Connecticut’s 2014 observation status law went smoothly, as hospitals in the state had already been communicating information to patients about their observation status, both verbally and in written form, even prior to that law.”

A 2014 survey of hospitalists from the Society of Hospital Medicine (SHM) found patients were overwhelmingly uninformed of their status. Forty-three percent of the 378 respondents did not know if their patients were notified of their status, and almost 10 percent reported their patients were not notified. Although the vast majority of hospitalists said they supported the notification, some worried that notification would not alleviate patient cost concerns and likely would confuse many patients.

“One of the hardest aspects of observation is when a Medicare patient realizes they are under observation and what that means,” Ann Sheehy, MD, a member of the Public Policy Committee at SHM, testified at 2014 Senate Aging Committee hearing. “Suddenly the anxiety over what they will have to pay out of pocket for hospital and nursing home care becomes an even greater concern for them than the medical problem that brought them in.”


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Thursday, July 30, 2015