After Ann Callan, 85, fell and broke four ribs, she spent six days at Holy Cross Hospital in Silver Spring. Doctors and nurses examined her daily and gave her medications and oxygen to help her breathe. But when she was discharged in early January, her family got a surprise: Medicare would not pay for her follow-up nursing home care, because she did not have the prerequisite three days of inpatient care.

“Where was she?” asks her husband, Paul Callan, 85, a retired U.S. Army colonel. “I was with her all the time. I knew she was a patient there.”

But Holy Cross had admitted her only for observation. Observation services include short-term treatment and tests to help doctors decide if the patient should be admitted for inpatient treatment. Medicare’s guidance says it should take no more than 24 to 48 hours to make this determination.

Yet some hospitals keep patients under observation for days, and that decision can have severe consequences. Medicare considers observation services outpatient care, which requires beneficiaries to cover a bigger share of drug costs and other expenses than they would when receiving inpatient care.And unless patients spend at least three consecutive days as an inpatient, Medicare will not cover follow-up nursing home expenses after discharge.

The Callans owe $10,597.60 to Renaissance Gardens, the Silver Spring nursing home where Ann Callan spent three weeks.

“I’m going to fight this,” Paul Callan says. “I don’t care how long it takes, because I don’t think it’s right.”

The Callans have since retained an attorney to pursue the matter, and hospital officials would not discuss details of the case “in anticipation of possible legal action,” a spokeswoman said. However, Karen Jerome, a physician who is an adviser on care management at Holy Cross, said in a statement that the hospital has a policy of informing patients when they are in observation care and that patients receive a thorough review to determine their status.

While patients generally stay in observation status for no longer than 48 hours, she said, it is the patient’s condition and need for medical care that doctors have to consider most, not the clock. Sometimes the patient does not meet criteria for inpatient care after 48 hours but hasn’t improved enough to go home. When that happens, the hospital will keep the patient until he or she has “a safe discharge plan.”

Conflicting Mandates

Claims from hospitals for observation care have grown steadily and so has the length of that care, says Jonathan Blum, deputy administrator at the Centers for Medicare and Medicaid Services (CMS), the federal agency that runs Medicare. The most recent data show claims for observation care rose from 828,000 in 2006 to more than 1.1 million in 2009. At the same time, claims for observation care lasting more than 48 hours tripled to 83,183.

In a report  to Congress in March, the Medicare Payment Advisory Commission said the increase may be explained by hospitals’ heightened worries of more-aggressive Medicare audits of admissions and Medicare’s decision in 2008 to expand criteria that allow patients to be placed in observation status. Yet the number of people admitted to inpatient status remained stable, the report said.

The trend is emerging as hospitals cope with increasing constraints from Medicare, which is under pressure to control costs while serving more beneficiaries. In addition to more stringent criteria for inpatient admissions, hospitals face more pressure to end over-treatment, fraud and waste.

In this environment, doctors have to make difficult judgments about their elderly patients, says Steven Meyerson, medical director for care management at Baptist Hospital of Miami.

“Under a set of rather arbitrary definitions, which are very vague and difficult to understand and apply, we have to decide who’s an inpatient and who’s an outpatient when sometimes the distinction can be two or three points in their sodium level or the amount of IV fluids they are receiving,” he told CMS officials at an information-gathering session Aug. 24.

If the distinction isn’t always clear to doctors, it’s even more elusive for patients.

Toby Edelman, a senior policy attorney at the Center for Medicare Advocacy in the District, has received dozens of complaints from seniors who assumed they would have the fuller coverage provided to inpatients.

“People have no way of knowing they have not been admitted to the hospital,” says Edelman. “They go upstairs to a bed, they get a band on their wrist, nurses and doctors come to see them, they get treatment and tests, they fill out a meal chart – and they assume that they have been admitted to the hospital.”

Setting a patient’s status is complicated. More than 3,700 U.S. hospitals use a tool created by McKesson Health Services to guide the decision. It provides criteria for medical conditions and treatment based on scientific evidence to identify “over 95 percent of all reasons for admission to any level of care,” Rose Higgins, McKesson’s president for care management, said in a statement. Higgins said that hospitals can tell patients the criteria used to assess their status, but the company’s recent filing with the Securities and Exchange Commission describes the decision-making tool, called InterQual, as a trade secret.

Many patients are not told by hospital officials that they haven’t been admitted. (Medicare does not require such notification.) And the designation can change during a person’s hospital stay. Sometimes a physician who hasn’t seen the patient will determine that the case does not merit inpatient status; Medicare requires that patients whose status is downgraded must be informed.

‘No Man’s Land’

Ed Timmins, 88, has been in a nursing home in Springfield since he was discharged from Inova Fairfax Hospital after falling in a restaurant parking lot in June. The Defense Department retiree was an observation patient during his four days at the hospital, where he was treated for extreme back pain and received an MRI and other treatment. But without the three-day inpatient stay, Medicare will not cover his nursing home bill, which reached $23,864 through the end of August.

On his first day in the hospital, Timmins, who has Alzheimer’s disease and was taking powerful painkillers, received a notice saying he was being “placed into an outpatient status for Outpatient Observation or Extended Recovery. You are still considered an ‘outpatient’ but are being cared for on a nursing unit for further evaluation of your symptoms by your physician. Within 24 hours, your physician should make a decision to either . . . Admit you for inpatient treatment or Discharge you for continued outpatient follow-up care.”

“For him to be treated at an Inova hospital for four days and then be considered an outpatient is ludicrous,” says his daughter, Lynn Hollway. She was in his room – on the phone updating her mother – when he received the notice but assumed they could deal with the issue once his condition stabilized.

Hospital officials say status decisions are often not in their hands. “Medicare rules require us to make sure that a patient meets what’s called medical necessity to be in an inpatient status,” says Linda Sallee, vice president for case management for the Inova Health System. A hospital spokeswoman said Inova physicians would not discuss details of Timmins’s care.

Even if patients know they are observation patients, there is little they can do to change their status. Medicare has covered their care on an outpatient basis, so they have not been refused benefits.

“There’s no official appeal,” says Edelman. “Medicare has not denied coverage. You’re in no man’s land.”

Following The Rules

Hospitals officials say they pay a price if they give inpatient status to a Medicare patient who should only be under observation. When that happens, the hospital is overcharging Medicare and can be required to refund some of the money the government paid.

During a three-year pilot project in six states, Medicare auditors, who received commissions based on overcharges they uncovered, forced hospitals and other health-care providers to return $1 billion in improper payments. The program is being expanded every state this year.

Pressure to increase the use of observation status may also come from the new federal health law, which includes penalties for hospitals that have unusually high rates of preventable readmissions. Because observation patients have not officially been admitted, they wouldn’t count as readmissions if they need to return.

The stepped-up audits and the new law’s financial incentives are intended to control skyrocketing Medicare costs and to reward better care. That could be jeopardized by an increase in costly inpatients. Easing the standard for inpatient status would also raise the agency’s nursing home spending.

“We’ve asked them to change it,” says Sallee. “But I would be very surprised if they did, because it would cost a lot of money.”

Blum says that many factors are involved in the increasing use of observation care. “It’s not clear to us whether or not this trend is due to financial incentives,” he says. “There could be lots of other things going on.”

For example, he says, doctors may be “doing the right thing” by keeping vulnerable seniors in the hospital for observation if they lack a support system at home.

Medicare officials are weighing changes to the admissions policy and sent letters to hospital associations in July soliciting suggestions. Among the options are requiring hospitals to notify patients that their stay is considered observation, setting a strict time limit for observation care and changing how the agency pays hospitals for such care, Blum says.

For some, changes may not come soon enough.

“This system is impracticable and just locks up patients in the hospital,” Meyerson told CMS officials last month. “They are not well enough to leave and not sick enough to admit. So what do you do with them?”

Susan Jaffe can be reached at jaffe.khn@gmail.com.

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