It’s Time to Finally Resolve Observation Status Payment Discrimination and Pay for Outcomes

A big Medicare issue in recent years has been the proliferation of situations where patients were not “admitted” to a hospital but are put into “observation status.”  This situation did not just happen because hospitals determined that fewer people were as sick as in the past and didn’t need to be admitted.  Rather, it was caused by overzealous audits by Medicare private contractors looking for fraud and being paid for recovery of funds who would retroactively deny reimbursement for admissions they later didn’t think were appropriate.  Hospitals were also facing penalties for two many re-admissions.  So, they started putting more and more people in observation status.

This large increase has led to a lawsuit filed by the Center for Medicare Advocacy and hundreds of complaints of people who had to pay thousands of dollars for short term nursing home rehabilitation.  The most notable case was one I worked on and involved Ike Cassuto of Columbia County near Albany.  Mr. Cassuto was a World War II bomber pilot who flew over 30 missions into Germany.  He was still working as an attorney at age 88 in Albany back in 2011 when he fell and fractured his pelvis on a city street.  He went into an Albany hospital and stayed more than three nights but was in observation status and not admitted.  Medicare requires a three night stay, admitted into the hospital, in order to pay for the short term nursing home rehab.  Mr. Cassuto ended up paying over $6,000 of his own money for his stay.

This case got coverage on the front  page of the Albany Times Union and Senator Charles Schumer came to Albany and held a press conference with the Cassutos when he announced some legislation to change the rules.  Nothing has happened on the legislative front to change things.  Here in New York State Senator Kemp Hannon and Assemblywoman Crystal Peoples-Stokes led the effort with New York Statewide Senior Action Council to get a bill passed that requires hospital to now notify patients of their status within twenty hours after they are in the hospital.

Medicare has been tinkering and working on some flexibility.  It put in place a “two midnight rule” that said that a patient should be considered admitted if he or she stayed two nights in the hospital.  There were complaints from the hospitals about this being too rigid.  Now, Medicare is seeking further changes to allow doctors more flexibility in determining whether a patient should be admitted.  And, they have  put the quality improvement organizations that they contract with in charge of the reviews, starting this October and reserved the private auditors only for reviews of hospitals with large numbers of admissions denials.  That is a good move, but all of this seems like a lot of bureaucratic wrangling when a better solution seems already at hand.

It seems long past time that all this should be resolved.  While all this going on, Medicare is moving away from the fee for service model and plans to give most payments to providers as “accountable care organizations” which work together to treat all of a patient’s medical needs, including following up with care coordination to prevent re-admissions.  For example when Mr. Cassuto went into the hospital and then needed rehabilitation in a skilled nursing facility for a short period of time, all of the providers should be paid a fee for caring for his whole illness.  In other words, all the rules about how long a person stayed in hospital and whether they didn’t stay long enough for Medicare to pay for the rehab would no longer be relevant.  That is the way this should be resolved.  You can’t talk about “accountable care” and “care coordination” and “treating the patient” while maintaining a set of payment rules that treat  separately each payment to the doctor, hospital and nursing home for the same illness.  It’s a ridiculous situation that continues to harm patients financially – the same patients who have paid into Medicare all their lives and should be able to count on it when they are in need of hospital care and short term rehabilitation.

Here is a link to the latest CM release on this issue and changes being implemented


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I have been a senior advocate for most of my career. I was Executive Director of the New York StateWide Senior Action Council and the New York State Alliance for Retired Americans. In 2007-2010 I was the Director of the New York State Office for the Aging

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