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Medicare Watch

Your Weekly Medicare Consumer Advocacy Update

Amount of Medicare Observation Services on the Rise

November 21, 2013

AARP Reports on Growth in Medicare Hospital Observation Services 

A new report from the AARP Public Policy Institute looks at the rise in observation services (OS) in Medicare. OS occurs when a hospital asks a patient to stay under observation status before they are either admitted as an inpatient or sent home. Medicare makes distinctions between observation and inpatient status when determining payment or eligibility for services like skilled nursing care. For instance, Medicare requires a three-day inpatient stay at a hospital before it will pay for skilled nursing care—a three-day observation stay would not fulfill this requirement, which could result in increase out costs for patients. Due to an increase in complaints about high out-of-pocket costs related to OS and concern about the clinical benefit of long OS visits, AARP sought to assess its usage.

To evaluate the rise of OS, the report looks at growth in the amount and length of OS by people with Medicare between 2001 and 2009. According to the report, Medicare claims for OS increased by more than 100 percent between 2001 and 2009, and in most cases, the OS did not result in an inpatient admission. While the number of OS visits was on the rise, the duration of OS visits also increased significantly. OS visits lasting 48 hours or longer increased by 250 percent for visits that did not result in inpatient admission and increased by more than 100 percent for OS visits that did result in inpatient admission, while inpatient stays of all lengths decreased by 16 percent.

According to the report, there is concern that observation stays are being used in place of inpatient stays. The factors that lead to the growth of OS include:

  • Medicare payment policy changes
  • Increased scrutiny by both public and private payers of short inpatient stays
  • Efficiency advantages for hospitals of OS over inpatient admission
  • Increased reporting
  • Incentives to reduce hospital admissions by increasing OS use to avoid readmission penalties. Since readmission penalties took effect in 2012, incentives to avoid them appear likely to drive up the use of OS even more.

To address the concerns of increased OS, the report recommends the following potential policy solutions:

  • Eliminate the requirement of Medicare’s 3-day prior stay for SNF coverage
  • Until the 3-day prior stay rule is eliminated, credit time spent in OS toward the 3-day prior stay requirement
  • Cap total beneficiary liability for OS and other outpatient services at the inpatient deductible amount

Read the report.

Senators Rockefeller and King Push for Support of Medicare Drug Savings Act

The Medicare Drug Savings Act proposes to permanently fix a long-standing Medicare budgetary issue—the sustainable growth rate (SGR)—in a way that does not increase Medicare’s costs. Senator Jay Rockefeller (D-WV) and Senator Angus King (I-ME) have urged more than 65 hospital, physician, and provider groups to lend their support to a bill that can “create needed certainty and stability for both physicians and hospitals.”

The SGR is a formula used to calculate Medicare’s payment to providers. It was originally created in an effort to manage Medicare’s increasing costs and was scheduled to gradually cut Medicare payments to providers, but Congress has delayed these largely unpopular cuts every year. Due to the continued postponement, if Congress does not act by the end of this year, 2014 Medicare physician payments will be cut by 25 percent. If this happens, there is concern that many doctors will no longer accept Medicare patients. So far, Congress has spent approximately $150 billion by continually postponing the cuts, and the Congressional Budget Office (CBO) estimates that permanently fixing the SGR will cost about $140 billion over 10 years.

The Medicare Drugs Savings Act proposes to permanently fix the SGR by using drug rebates to fund this change. Before the Medicare Part D prescription drug benefit was established in 2006, the government had a drug rebate agreement with pharmaceutical companies and received a rebate from pharmaceutical companies for drugs provided to individuals who had Medicare and Medicaid. When Part D was implemented, these rebates were discontinued. Reinstating this rebate program would save Medicare approximately $141.2 billion over 10 years, which would cover the amount needed to fix the SGR.

The Medicare Drug Savings Act is a prime example of how to make Medicare more financially sound without shifting costs to beneficiaries. These relatively simple changes will allow hospitals and medical providers to have more certainty in their Medicare reimbursements, in a way that does not create a burden on the Medicare program’s finances.

Read the full press release.

Volume 4, Issue 45

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Medicare Reminder

Observation stays typically happen when patients go to the emergency room and have symptoms that require hospital physicians to monitor them. If you are in the hospital for an observation stay, you are considered an outpatient. Your costs are different if you are in a hospital as an inpatient or an outpatient.

Your inpatient hospital costs are usually covered under Medicare Part A. If you have Original Medicare, you generally have no copayments for the first 60 days, once you reach the deductible. Your costs may be different if you have a Medicare Advantage private plan. The hospital benefit includes nurse’s services, medically necessary medications, X-rays, supplies, appliances, and equipment the hospital provides for you to use during your inpatient hospital stay.

Outpatient hospital costs are usually covered under Medicare Part B. For outpatient stays, you typically pay a coinsurance or copay for each medical service you receive after you meet the Part B deductible. Original Medicare generally covers 80 percent of the cost of most doctors’ services you receive, after you have met your yearly deductible. You or your supplemental insurance are usually responsible for the remaining 20 percent. Your costs may be different if you have a Medicare Advantage plan. Either way, when Part B covers your hospital care, you may have higher costs than if Part A covered your stay.

It is also important to note that you need a three day inpatient hospital stay for Medicare to cover skilled nursing facility care once you leave the hospital. An observation stay is an outpatient hospital stay, and will not help you qualify for skilled nursing facility coverage.

Read more about hospital coverage on Medicare Interactive.

Read more about skilled nursing facility coverage on Medicare Interactive.



This week, members of the Leadership Council of Aging Organizations, including the Medicare Rights Center, Alliance for Retired Americans, National Committee to Preserve Social Security and Medicare and the Center for Medicare Advocacy, held a briefing on the consumer perspective of Medicare reform. Sponsored by the Congressional Seniors Task Force and addressing members of the U.S. House of Representatives, the briefing provided an overview of Medicare beneficiary characteristics and their current health care costs, and also covered various proposals that would positively impact people with Medicare and others that would shift costs to people with Medicare, increasing their financial burden.

Positive proposals that were discussed include restoring Medicare prescription drug rebates and advancing delivery system reforms and those that would impose increased costs. Proposals that would harm beneficiaries include further means testing of Medicare premiums and discouraging Medigap “first dollar” coverage.


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