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“Observation” is the term used to describe the outpatient status of a patient who is in a hospital, but not as an inpatient. Although the Medicare Manuals limit observation to 24-48 hours, many beneficiaries nationwide are experiencing extended stays in acute care hospitals under observation. A major consequence for beneficiaries of not being classified as an inpatient is that their subsequent stays in a skilled nursing facility (SNF) are not covered by Medicare. The Center has written about observation status before and has extensive background materials on this issue.[1] This Alert discusses three recent forums discussing observation status: a Listening Session sponsored by the Centers for Medicare & Medicaid Services (CMS) on August 24; federal legislation; and a redetermination decision from North Carolina.

CMS Listening Session

Virtually every speaker at an August 24 Listening Session hosted by CMS on extended observation stays agreed that all time spent by a Medicare beneficiary in observation should be counted toward meeting the three-day qualifying hospital stay for Medicare coverage of subsequent care in a SNF. Most representatives of the hospital industry, which initially sought observation status but now oppose its use, joined Medicare beneficiaries, their families and advocates, the nursing home industry, physicians, and medical directors to oppose use of observation status in its current form.

In an opening statement, Jonathan Blum, Deputy Administrator and Director, Center for Medicare, said that CMS has noticed a small but growing trend in the use of observation care. The implications for beneficiaries include higher cost-sharing and inability to qualify for Medicare-covered care in a SNF. Mr. Blum said that CMS guidance limits observation to 24-48 hours and that CMS has no payment policy incentive promoting observation. The purpose of the Listening Session is to understand why extended observation stays are increasing and whether CMS needs to change its guidance or regulations or to provide better education for beneficiaries, or both.

A repeated theme among the hospital presenters was that people who come to the hospital too sick to send home but not qualifying for inpatient care are placed in observation. A Florida physician described the distinction between observation and inpatient as, in some instances, just two to three points on a sodium level. He proposed abolishing the concept of observation altogether, admitting people to inpatient status, and addressing concerns about hospital lengths of stay through payment rates. The hospital associations identified more stringent admission criteria reflected in InterQual’s screening system, which is a proprietary system used widely by both government and providers. A Vermont caller read a list of diagnoses that she said precluded inpatient admission.[2] The American Medical Association’s speaker suggested that more discretion about hospital admissions be given to physicians and hospitals, and that inpatient admissions not be driven by software and the Recovery Audit Contractor (RAC) program.[3]

These comments all reflect the fact that various federal reviewers of inpatient hospital care – the RAC, Medicare Contractors, and Quality Improvement Organizations – use the InterQual criteria and program to determine whether a patient meets Medicare’s medical necessity standard for inpatient care.[4] InterQual is a proprietary system created and owned by the McKesson Corporation. Since hospitals’ inpatient decisions are evaluated by the InterQual criteria, it is not surprising that hospitals themselves also use the InterQual program to determine whether patients qualify for an inpatient level of care. Beneficiary families who have contacted the Center for Medicare Advocacy about extended observation stays have reported that hospitals told them that InterQual criteria prevented inpatient admission of their relative.

“Medicare beneficiaries receiving extended observation care as a hospital outpatient,” the title of CMS’s 90-minute Listening Session, was attended by more than 2100 people on the phone and in CMS’s Baltimore auditorium. Thirty-one people spoke, but many more who wished to speak were not able to get through on the telephone lines.

The entire Listening Session can be heard until September 8, 2010 by calling 1-800-642-1687. The identification number for the call is 94244031. CMS is also accepting written comments on observation, indefinitely:

Federal Legislation

On July 29, 2010, Congressman Joe Courtney (D, CT) introduced H.R. 5950, the “Improving Access to Medicare Coverage Act of 2010.”[5] The bill would amend the Medicare statute’s definition of “post-hospital extended care services,” 42 U.S.C. §1395x(i), to add the following language at the end of the section:

For purposes of this subsection, an individual who is in a period of observation status in a hospital that exceeds 24 hours shall be deemed to have been an inpatient during such period of observation status and the individual’s leaving the hospital after such period of status shall be treated as a discharge from the hospital.

The amendment would apply “to periods of observation status beginning on or after January 1, 2010… [but] only if an administrative appeal is or has been made with respect to such services not later than 90 days after the enactment of this Act.” This means the Act would apply retroactively, but only to those who appeal the services in question within 90 days of the passage of the Act.

Medicare Redetermination Decision

On May 22, 2009, a Medicare beneficiary who complained of back and neck pain and numbness after a fall was brought to the hospital emergency department. Later that day, she was admitted to the hospital. She had numerous tests, including a CT scan and MRI, and was given intravenous morphine and other fluids and treatments. The hospital billed her entire seven-day stay, from May 22-28, as outpatient observation. A redetermination decision by the Medicare contractor Palmetto GBA said that although Palmetto “would have allowed payment for the inpatient admission of [the beneficiary],” the hospital billed as outpatient observation and “Therefore, payment will not be allowed for an inpatient hospital admission due to billing issues.” Palmetto suggested that the hospital “must submit a corrected UB-04 bill type with a request for adjustment to change the outpatient admission to an inpatient admission. This would allow proper payment of the hospital stay as well as the admission to [the SNF].”[6]


The unanimity of opposition to continued use of observation status to deny post-hospital care in a SNF was a striking feature of CMS’s Listening Session. The Center for Medicare Advocacy is interested in hearing beneficiaries’ experiences with extended observation stays. Readers should consider submitting comments to CMS during the open-ended comment period. Please send copies of the comments to the Center. The Center would also like to hear of any decisions received from any level of the Medicare appeals process.

[2] Courts view rules-of-thumb as impermissible, requiring, instead, an evaluation of the unique condition of the patient. Fox v. Bowen, 646 F.Supp. 1236 (D.Conn. 1987).

[3] The RAC was a three-year demonstration program, now made permanent and nationwide, that was intended to identify incorrect payments in the Medicare fee-for-service program. Most of the overpayments were found in inpatient hospitals and reflected coding errors.

[4] See, e.g., “McKesson’s InterQual Clinical Guidelines Selected by Connolly Healthcare for Its CMS RAC Services” (Feb. 2, 2010), McKesson reports that nine of the ten RACs, 40 QIOs, CMS, and more than 3700 hospitals use the InterQual program. McKesson, “InterQual Decision Support for Providers,”

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