Print Friendly, PDF & Email

August 9, 2012

Note to Alert readers: This Posted version contains additional information beyond that in the emailed version.

As part of a notice of proposed rulemaking published in the Federal Register on July 30, 2012, the Centers for Medicare & Medicaid Services (CMS) is asking for public comments on potential policy changes related to observation status.  This Alert describes observation status, CMS's discussion in the Federal Register, a summary of the comments that the Center will submit, and information about how to submit comments to CMS.

Observation Status

Observation status refers to the classification of a patient in an acute care hospital as an outpatient, even though, just like an inpatient, the person is placed in a bed in the hospital, stays overnight, and receives medically necessary nursing, medical care, diagnostic tests, treatments, therapy, prescription and over-the-counter medications, and food.  However, classification as an outpatient may make a patient ineligible for Medicare coverage of subsequent SNF care because the Medicare statute requires three days of inpatient status (not counting the day of discharge) as a precondition to Medicare coverage of care in a SNF.[1]

The Center for Medicare Advocacy has written about observation status many times in the last few years as the increasing use of observation status has presented a growing barrier for Medicare beneficiaries who need SNF care.[2]

Proposed Rules

In proposed rules on the hospital outpatient prospective payment system, CMS provides information on an ongoing demonstration called Medicare Part A to Part B Rebilling (AB Rebilling) Demonstration and solicits public comments on observation status.  77 Fed. Reg. 45061, 45155-45157 (July 30, 2012). 

CMS first discusses the increasing use of observation and its impact on both hospitals and beneficiaries.

CMS describes hospitals' concern with inadequate payment for outpatients.  Hospitals also report that they often do not have utilization review staff available "after normal business hours" to address patient classification decisions.  Id., at 45156. 

Others have told CMS that "hospitals appear to be responding to the financial risk of admitting Medicare beneficiaries for inpatient stays that may later be denied upon contractor review, by electing to treat beneficiaries as outpatients receiving observation services, often, for longer periods of time, rather than admit them."  Id.  CMS reports that the number of beneficiaries in observation for more than 48 hours increased from 3% in 2006 to 7.5% in 2010, a trend it describes as "concerning because of its effect on Medicare beneficiaries."  Id.

CMS acknowledges that "hospital inpatients have significantly different Medicare benefits and liabilities than hospital outpatients."  Id. 45155.  Patients classified as outpatients must pay co-payments for each outpatient service provided and must pay for their drugs while hospitalized and may not qualify for Medicare coverage of their SNF care.  Id.

            Medicare AB Rebilling Demonstration

Under the AB Rebilling Demonstration,[3] which runs from calendar year 2012 through calendar year 2014, hospitals voluntarily participating in the Demonstration may rebill Medicare for Part B after a Part A claim is denied.  They may receive 90% of the allowable payment for all Part B services that would have been payable as medically necessary for outpatient care, but they cannot rebill Medicare for observation services themselves.  Hospitals in the Demonstration must also waive "any appeal rights associated with the denied inpatient claims eligible for rebilling."  Id., at 45156.  However, "Medicare beneficiaries are protected from any adverse impacts of expanded rebilling."  Id.  CMS clarifies that hospitals may not bill beneficiaries for self-administered drugs or additional cost-sharing.  Id.

The Demonstration will "evaluate potential impacts of expanding rebilling on admission and utilization patterns, including whether expanded rebilling would reduce hospitals' incentive to make appropriate initial admission decisions."  Id.

Observation Status

CMS identifies several possible policy changes for observation status:

  • Time limits.  CMS asks whether it should "redefine 'inpatient' using parameters in addition to medical necessity and a physician order that we currently use, such as length of stay or other variables."  Id. 45157.  Under current instructions, CMS anticipates that a decision to admit a patient to inpatient status should be made within 24 to 48 hours, although it does not expressly limit a patient's time in observation.  Some hospitals have suggested that CMS identify "more specific criteria for patient status in terms of how many hours the beneficiary is in the hospital, or . . . provide a limit on how long a beneficiary receives observation services as an outpatient."  Id.

Center Comment: The Center assumes that CMS would set some number of hours, likely 24 hours, as the dividing line between outpatient and inpatient care and that CMS would count all time after 24 hours as inpatient time.  Not counting a patient's first day in an acute care hospital would continue to prevent many beneficiaries from achieving a qualifying three-day hospital stay.  This concern is exacerbated by the declining average length of stay in acute care hospitals for people over age 65.  The average length of stay is now fewer than six days,[4] compared to more than 13 days in 1965, when Medicare was enacted.[5]

  • Clinical conditions or prior authorization.  CMS asks if it should establish "more specific clinical criteria for admission and payment, such as adopting specific clinical measures or requiring prior authorization for payment of an admission."  Id.

Center Comment: The identification of specific clinical measures could limit beneficiaries' eligibility for either inpatient status.  Similarly, prior authorization, which means that a beneficiary would need advance approval for inpatient status, could create an additional barrier limiting access to medically necessary hospital care.

  • Payment methodology.  CMS asks "how aligning payment rates more closely with the resources expended by a hospital when providing outpatient care versus inpatient care of short duration might reduce payment disparities and influence financial incentives and disincentives to admit."  Id.  CMS provides no further clarification of this proposal.

Center Comment: Changing payment methodology might help hospitals, but the proposal continues observation status, basically as is, and would not resolve beneficiaries' problem of being unable to achieve a three-day inpatient stay.

  • Hospital responsibility.  CMS asks commenters to "consider the responsibility of hospitals to utilize all of the tools necessary to make appropriate initial admission decisions."  Id.  Having case management and utilization review staff available in hospitals "outside of regular business hours may improve the accuracy of admission decisions."  Id.

Center Comment: This proposal also continues the use of observation, but requires hospitals to devote even more staff to utilization review functions.  It does not address beneficiaries' concerns.

In addition to these proposed solutions, CMS invites members of the public to offer any other suggestions they have "while keeping in mind the various impacts in terms of recently observed increases in the length of time for which patients receive observation services, beneficiary liability, Medicare spending, and the feasibility of implementation of any suggested changes for both the Medicare program and hospitals."  Id.

Comments from the Center for Medicare Advocacy

The Center supports changes to observation status that are embodied in the bipartisan legislation pending in Congress and in the Center's litigation challenging observation status.  The "Improving Access to Medicare Coverage Act of 2011, H.R. 1543 in the House and S. 818 in the Senate, counts all time in the hospital toward meeting the three-day qualifying hospital stay.  Bagnall v. Sebelius[6] challenges observation status as violating the Medicare statute and the Administrative Procedures Act.  On behalf of a nationwide class, the lawsuit seeks to prohibit use of observation status or, alternatively, to require CMS to give beneficiaries notice and appeal rights at the time they are placed in observation.  Accordingly, the Center opposes the various CMS proposals, for the reasons described above. 

In addition, the Center's comments will describe the enormous costs to the Medicare program of observation status.  Hospitals devote a significant amount of time and money to assuring that patients are properly classified as inpatients or outpatients.  Various Medicare contractors and federal fraud reviewers focus on patients' short inpatient stays. 

The American Case Management Association (ACMA) conducted a survey of its members, who work as case managers and discharge planners in hospitals.  Seventy-one percent of survey respondents reported that their hospitals added staff specifically to determine medical necessity on admission.  Nearly one-third of the survey's respondents reported that their hospitals spent more than $150,000 on the new staff.  More than two-thirds (68%) also use an outside secondary reviewer to help hospitals make medical necessity decisions.  These outside reviewers charge hospitals for each review they do.[7]

In addition to hospitals' costs related to observation status, various federal fraud reviewers that look at inpatient/outpatient classifications (Recovery Audit Contractors, Inspector General, Medicare Administrative Contractors) focus on hospitals' inpatient admission decisions.  CMS announced that, beginning August 27, 2012, it will begin prepayment audits in four states – Pennsylvania, Ohio, North Carolina, and Missouri – with high volumes of short inpatient hospital stays.[8]

These reviewers generally use InterQual®,[9] a proprietary system of the McKesson Corporation, to review patient classifications.  Consequently, more than 4000 hospitals have purchased InterQual® to make admissions decisions.[10]

How to submit comments

People who submit comments to CMS about their experiences with observation status should identify the state where they live and describe the circumstances of a beneficiary's hospitalization, the length of time the person remained in the hospital, and the cost and duration of the subsequent SNF stay.  If beneficiaries have other experiences with observation status, they could share those as well with CMS.

Comments must be received by CMS no later than 5:00 p.m. EST on September 4, 2012.

In submitting comments, it is important to refer to file code CMS-1589-P.

CMS authorizes four different ways to submit comments:

  • By regular mail.  Mail written comments to

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS-1589-P
P.O. Box 8013
Baltimore, MD  21244-1850

  • By express or overnight mail to

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS-1589-P
Mail Stop C4-26-05
7500 Security Boulevard
Baltimore, MD  21244-1850

  • By hand or courier.  Deliver to

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Room 445-G
Hubert H. Humphrey Building
200 Independence Avenue, SW
Washington, DC  20201

or to:

Centers for Medicare & Medicaid Services
Department of Health and Human Services
7500 Security Boulevard
Baltimore, MD  21244-1850


The proposed rules provide an opportunity for the public to share their experiences with observation status and to recommend changes, if any, that they believe would improve access to medically necessary hospital and post-hospital care for beneficiaries.



[1] 42 C.F.R. §409.30(a)(1).
[2] See "More Concerns about Observation Status: Hospitals Join the Chorus" (July 12, 2012),; "Brown University Confirms Observation Continues to Replace Hospital Admission Status," (June 7, 2012), ; "Extended Observation Stays in Acute Care Hospitals: Criticism, Legislation and Discussion,"; "When Is a Hospital Stay Not a Hospital Stay? When the Patient Is in Observation" (Dec. 11, 2008).  See also the Center for Medicare Advocacy’s site on observation status,
[3] See CMS, "Part A B Rebilling Demonstration,"
[4] U.S. Department of Health, Education, and Welfare, Utilization of Short-Stay Hospitals: Summary of Nonmedical Statistics, United States – 1966, (Data from the National Health Survey, Series 13, No. 8), DHEW Pub. No. (HSM) 72-1006 (Sep. 1971),
[5]   National Center for Health Statistics, Centers for Disease Control and Prevention, U.S. Department of Health and Human Services, Health, United States, 2011, Table 106 (ages 65-74, 5.5 days; ages 75-84, 5.8 days; 85+, 5.8 days).
[6] No. 3:11-cv-1703 (D. Conn., filed Nov. 3, 2011).
[7] One of the most well-known of the outside reviewers is Executive Health Resources (EHR)  in Philadelphia,  EHR describes itself as "the leading provider of medical necessity compliance solutions to more than 2,000 hospitals and health systems across the country."  EHR’s Physician Advisors work with hospitals to determine patients’ status on admission to hospitals.
[8]    The CMS page is just called "Demonstrations."
[9] McKesson, InterQual Decision Support,
[10] Id.




Comments are closed.