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FAQ: Hospital Observation Care Can Be Costly For Medicare Patients

This story has been updated.

Some seniors think Medicare made a mistake.  Others are stunned when they find out that being in a hospital even for a couple of days doesn’t always mean they were actually admitted.

Instead, they received observation care, considered by Medicare to be an outpatient service. The observation designation means they can have higher out-of-pocket expenses and fewer Medicare benefits. Yet, a government investigation found that observation patients often have the same health problems as those who are admitted.

Medicare officials are working to finalize a notice that will inform patients that they are receiving observation care. That is required under a federal law that went into effect in August, and hospitals will likely begin using the notices in January. Some states already require that patients be told about their status.

More Medicare beneficiaries are entering hospitals as observation patients every year. The number doubled since 2006 to nearly 1.9 million in 2014, according to figures from the Centers for Medicare & Medicaid Services. At the same time, enrollment in traditional Medicare grew by 5 percent.

Here are some common questions and answers about observation care and the coverage gap that can result. (Seniors enrolled in Medicare Advantage should ask their plans about their observation care rules since they can vary.)

Q. What is observation care? 

A. Hospitals provide observation care for patients who are not well enough to go home but not sick enough to be admitted.  This care requires a doctor’s order and is considered an outpatient service. The hospitalization can include short-term treatment and tests to help doctors decide whether the patient meets the medical criteria for admission. Medicare officials have issued the so-called “two-midnight rule:” Patients whose doctors expect them to stay in the hospital through two midnights should be admitted. Patients expected to stay for less time should be kept in observation.

Q. What effect does observation status have on patients’ care and expenses?

A. Because observation care is provided on an outpatient basis, patients usually also have co-payments for doctors’ fees and each hospital service, and they have to pay whatever the hospital charges for any routine drugs the hospital provides that they take at home for chronic conditions such as diabetes or high cholesterol.

Observation patients cannot receive Medicare coverage for follow-up care in a nursing home, even though their doctors recommend it.  To be eligible for nursing home coverage, they must have first spent at least three consecutive days (or through three midnights) as an admitted patient, not counting the day of discharge.

Q: Why are more Medicare patients receiving observation care instead of being admitted?

A. Medicare has strict criteria for admissions as an inpatient and usually won’t pay anything for admitted patients who should have been in observation care. Partly in response to stepped up enforcement of these rules, hospitals in recent years have been placing more patients in observation.

Q. Will the cost of my maintenance drugs be covered when I am in the hospital?

A. No, Medicare does not pay for these routine drugs for patients in the hospital in observation care. Some hospitals allow patients to bring these medications from home. Others do not, citing safety concerns.

If you have a separate Medicare Part D drug plan, the coverage decision will be up to the insurer. If the plan covers your maintenance drugs at home and agrees to cover them in the hospital, it will only pay prices negotiated by the plan with drug companies and in-network pharmacies. Most hospital pharmacies are out-of-network. So even if your plan covers these drugs, you may be left paying most of the bill. However, you can ask hospitals if they would consider waiving the charges.

Medicine to treat the symptoms that brought you to the hospital may be covered as an outpatient service under Part B.

Q: How do I know if I’m an observation patient?

A. The only way to know for sure is to ask. “Unless people are in an observation unit, the difference between observation and inpatient care is basically indistinguishable,” said Toby Edelman, a senior policy attorney at the Center for Medicare Advocacy. 

Q. Can I change my status in the hospital?

A. If your doctor says you are too sick to go home and you are receiving services that can be provided only in a hospital, ask your doctor to admit you to the hospital by changing your status to inpatient. However, even if your doctor does that, you can be switched back to observation status during your hospital stay.

Q. What can I do if I’m already in a nursing home and I find out Medicare won’t cover my nursing home care?

A. You have two options, Edelman said. You can agree to pay the bill but continue to seek coverage through a Medicare appeal or you can leave the nursing home.

If you opt to stay in the nursing home, follow these steps to see if Medicare will reimburse you, she said. Ask the nursing home to fill out a form called the “Notice of Exclusions from Medicare Benefits Skilled Nursing Facility.” The form will show what services you need, the estimated cost and the reason why Medicare will probably not pay. The facility will check off the first reason, “no qualifying 3-day inpatient hospital stay.” Then you can check  off the form’s option one, asking the facility to submit it to Medicare along with documentation supporting your need for these services. You will not be billed until Medicare issues a decision.

If Medicare does not pay the bill, you will receive information on how to appeal that decision. Although Medicare officials caution that hospital patients cannot appeal their observation status, the “notice of exclusion” applies to the nursing home charges and clearly states in bold type: “I understand that I can appeal if Medicare decides not to pay.”

For more information on filing an appeal, visit the Center for Medicare Advocacy’s observation care website.

This is an updated version of a article first published Sept. 4, 2013.

This article was produced by Kaiser Health News with support from The SCAN Foundation.

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