Patient classification is complex, but also a big deal

The wife of a retired Atlanta physician recently got a stunning lesson when her husband spent some time in a hospital.

“We realized there might be a problem when he was not served breakfast along with the other patients,” she said.

Hospital Outpatient Entrance Sign

That was when they were told he had not actually been admitted to the hospital.

“But he’s in a hospital bed, and he’s here in the hospital,” responded the wife.

“Yes,” a nurse explained. “It can be confusing.”

The wife, who is requesting anonymity due to privacy concerns, got another shock when the hospital bill arrived. During her husband’s hospital stay, he had received the same routine medications he took at home, but the amount the couple was being charged for those drugs far exceeded what they paid at their pharmacy.

The lesson the couple learned is that being “hospitalized” can mean different things.

Many Medicare patients are placed under “observation status’’ when they arrive at a hospital. That means they are considered outpatients and are not formally admitted, even if they are given a bed.

For a patient under observation status, Medicare reimburses the hospital differently. And that may increase the out-of-pocket costs that Medicare patients face. (But if the patient has a Medicare Advantage Plan, such as an HMO, cost and coverage may vary.)

Hospitals may get an indirect financial benefit when they place people on observation status.

For instance, a patient who is formally admitted to a hospital counts as a readmission if he or she has recently been discharged from that facility. An outpatient does not count as a readmission even if he or she has been discharged recently. This is important because readmission statistics affect a hospital’s bottom line. If the facility records a high number of Medicare patients being readmitted within 30 days of a discharge, it faces federal penalties on its reimbursements.

As hospitals try to avoid the costly problem of too many readmissions, the patient may be caught in the middle.

The vanishing inpatient

Keith Lind, senior policy adviser for AARP Public Policy Institute, said recently that a national study found that both one-day inpatient stays and inpatient stays of all lengths declined by about 16 percent during the study period. But at the same time, the report said, “the ratio of observation use to inpatient stays per 1,000 beneficiaries increased by 94 percent.”

corridor in hospital / Flur im Krankenhaus

Sometimes financial complications arise for patients, as when a Medicare patient is transitioned from being “observed” in the hospital to being treated in a skilled nursing facility, such as a nursing home or a rehabilitation unit.

The patient must first have been an inpatient for at least three full days for Medicare to pay toward the skilled nursing facility stay.

To help Medicare beneficiaries, CMS urges patients to question every hospital stay and find out if they are listed as inpatients or outpatients. But often a patient may be too ill to ask Medicare-related questions, and the family will sadly discover the difference when the skilled-care bill arrives.

Dr. Cheryl McGowan, a Georgia family medicine physician, recalls the situation at a hospital where she trained. Sometimes residents would admit a Medicare patient from the emergency room to an inpatient unit, but then learn that the patient did not meet the hospital’s criteria for inpatient admission. The physician would then be asked to change the patient’s status to observation.

A patient kept for observation may later qualify for inpatient admission, depending on the results of tests or changes in physical status during his or her stay, McGowan said. Such changes in patient designation can lead to confusion for everyone.

One CMS example illustrates some of the many variables: If a Medicare patient arrives in the emergency room with chest pain and the hospital keeps the patient two nights for observation, Medicare Part A, for inpatient hospital care, pays nothing. But Medicare Part B, for outpatient care, covers lab tests, EKGs, and certain other items, just as if the patient had been seen in a physician’s office.

Part A and Part B have been referred to as a full menu vs. à la carte. The à la carte or individually charged items can add up rather quickly under Part B. Hospitals get lower rates for room and board. But services such as X-rays, MRIs and the like are reimbursed individually, which helps the hospital.

To further complicate things, there is the two-midnight rule.

Last year, the federal Centers for Medicare and Medicaid Services issued a new policy on observation status. When a physician expects to keep the patient in the hospital for a period of time that does not cross two midnights, the services should be paid under Part B, or outpatient services.

Carol Levine, who heads the United Hospital Fund’s Families and Health Care Project, said at a recent Washington briefing that this two-midnight rule “continues to leave patients and families exposed to high and unexpected costs associated with what seems like an ordinary hospital stay.”

That’s because stays lasting less than two midnights will not be presumed to qualify as inpatient stays — and instead will be paid under Part B, which covers only outpatient services.

The co-pay for an individual service under Part B won’t be higher than Part A, but an overall total of the Part B patient co-pays might be. Costs can rise when they are individually billed, as opposed to the “package” pricing found under Part A.

Observation wards?

Today, hospitals must make patients aware of their inpatient or outpatient status. For example, if the physician writes an inpatient admission order and a hospital review changes the status to outpatient, there must be written notification of the change.

But do Medicare patients always understand the significance of a changed classification? As noted above, even some medical professionals admit it’s confusing.


Physicians who are trying their best to deliver good care can be as frustrated as patients with the current situation. Dr. William Silver, the president of the Medical Association of Georgia (MAG), said the organization joined a number of state and national medical societies to push through a resolution urging the AMA to press for repeal of the two-midnight rule “because it only exacerbates the heavy and unreasonable administrative burden that’s been placed on physicians by the federal government and other third-party payers.”

In a joint letter to CMS in November, the American Medical Association and the American Hospital Association suggested a delay in enforcing the new two-midnight rule until Oct. 1, 2014. In the meantime, CMS has extended the delay in enforcement through March 31.

A potential solution that may protect the interest of hospitals and physicians is the establishment of hospital observation units.

On a recent PBS NewsHour program, Dr. Michael Ross, associate professor of emergency medicine at Emory University School of Medicine, and co-author of a study published in Health Affairs, said patients may require less than 24 to 48 hours of observation. The article suggests a unit just for those being observed may actually cut costs for the patient and the hospital, depending on the individual’s diagnosis and treatment.

But a further concern was brought up by Susan Reinhard, senior vice president at AARP: How will a hospital cover the cost of increased observation nurses if nurse-patient staffing is based on inpatient beds?

Reinhard says about a third of the hospitals in America already have dedicated observation units.

Ross and Reinhard, based on their research, say the majority of hospitals send patients to empty beds somewhere in the facility, a situation that offers less than the optimal setting for observation. They both wonder whether some of these patients are observed for far too long and should be formally admitted earlier.

Judi Kanne, a registered nurse and freelance writer, combines her nursing and journalism backgrounds to write about public health. She lives in Atlanta.