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May 21, 2014

The May 20, 2014 hearing on "Current Hospital Issues in the Medicare Program," held by the Health Subcommittee of the House Committee on Ways and Means, was the first Congressional hearing to consider the impact of observation status on hospitalized Medicare patients.[1]  At the hearing, the Center for Medicare Advocacy's Senior Policy Attorney, Toby S. Edelman, presented the beneficiary perspective, offering comments that were echoed by the hospital and physician witnesses.

The hospital and physician witnesses confirmed the Center's testimony that millions of Medicare dollars are being spent by hospitals not on care, but to defend their decisions to admit patients when those decisions are challenged by Medicare's Recovery Auditors (formerly known as Recovery Audit Contractors, or RACs). In addition, the witnesses noted that Recovery Auditors share a percentage of the savings achieved when they successfully challenge a hospital's inpatient admission decision.  

With respect to observation status and observation services, all of the witnesses agreed that patients get the medically necessary care they need regardless of whether they are called hospital inpatients or outpatients.  Even so, the negative consequence for Medicare beneficiaries becomes clear when those beneficiaries learn that necessary Medicare-covered care in a skilled nursing facility care (SNF) is unavailable to them because they have not had a 3-day prior inpatient hospital stay within 30 days of the beginning of their SNF stay

A knowledgeable observer of the hearing commented that the Committee Members seemed to understand the issues in a serious and meaningful way.  Whether Congress fixes the problem for Medicare beneficiaries by enacting H.R.1179/S.569, the Improving Access to Medicare Coverage Act of 2013,[2] remains to be seen.

On the first panel, Sean Cavanaugh, the newly-appointed Deputy Administrator and Director of the Center for Medicare at the Centers for Medicare & Medicaid Services (CMS) described how a physician decides whether to admit a patient as an inpatient and the interplay of that decision with CMS's new two-midnight rule.[3] Cavanaugh stated that CMS intended the two-midnight rule to bring clarity to physicians' admission decisions.  He suggested that the proportion of long outpatient stays had declined since the two-midnight became effective October 1, 2013.  Cavanaugh also described two related issues on which CMS is currently requesting public comment: whether and how to define short inpatient stays and whether there should be additional exceptions to the two-midnight rule.[4] 

Cavanaugh acknowledged that hospitals often classify patients as outpatients in observation rather than as inpatients in order to protect themselves from audit and denial of payment by a Recovery Auditor.  He also reported that an ongoing CMS demonstration is testing waiver of the three-day hospital inpatient requirement.  Cavanaugh testified that he was unaware of any clinical study or research supporting the use of the new two-midnight rule.

Jodi D. Nudelman, HHS Office of Inspector General (OIG), discussed two relevant OIG reports – the first, an analysis of hospitals' use of observation and short inpatient stays[5] and the second, an analysis of the Medicare appeals system,[6] which discussed hospitals' successful appeals of observation status and short inpatient stays.  Nudelman called for a careful evaluation of the two-midnight rule, enhanced oversight of the Recovery Auditor program, and fundamental changes in the Medicare appeals system.

On the second panel, Amy Deutschendorf of Johns Hopkins University Hospital described how millions of dollars in hospital resources are consumed by the hospital's efforts to address inpatient/outpatient stays and to respond to Recovery Auditors.  Duetschendorf asserted the two-midnight rule required physicians to become "soothsayers" in attempting to predict whether patients will require two midnights in the hospital, and thus should be admitted to inpatient status, or whether patients' medically necessary stays in the hospital will be shorter.  She also described a 33% increase in the hospital's observation rate since the two-midnight rule went into effect.  Deutschendorf estimated that each appeal of a Recovery Auditor's decision to an Administrative Law Judge costs the hospital about $2000.  In addition, the hospital spent about four million dollars to prepare for the Recovery Audit program when it first began.

Ellen Evans, M.D., representing the Recovery Auditors, reiterated Cavanaugh's statement that only 7% of Recovery Auditors' decisions are reversed on appeal, a figure that was widely challenged by Subcommittee Members.  She supported ALJ appeal reforms, provider education, and increased dialogue among Recovery Auditors and others.

Ann Sheehy, M.D., a hospitalist from the University of Wisconsin Hospital, described two studies of observation status at her hospital.  Her first article found that observation status is very different in practice from what CMS discusses in the Medicare Manuals.[7]  Her second article, retrospectively applying the two-midnight rule to hospital stays from January 1, 2012 and February 28, 2013 found that use of observation status would increase, not decrease.[8]  She views the two-midnight rule as creating new challenges for hospitals.

Testifying for the Center for Medicare Advocacy, Toby Edelman described a call six years ago, when a Medicare patient hospitalized for 13 days was denied Medicare coverage of her subsequent stay in a SNF because she was classified as an outpatient for her entire hospital stay.  In the past six years, the Center has received hundreds of calls from beneficiaries and families, all telling similar patient and family experiences.  A recent call involved a 90-year old man whose leg hematoma exploded.  He was denied SNF coverage because his entire four-day hospital stay, which included emergency surgery, was called outpatient.  Edelman described the pervasive and increasing use of observation status and its impact on beneficiaries, and called for prompt enactment of H.R.1179/S.569, which would solve the primary problems created by outpatient status and observation status for Medicare patients. 

Committee Members seemed especially troubled by conflicting reports regarding hospitals' success rates when appealing denials of inpatient care by Recovery Auditors.  Echoing CMS's data, Evans reported hospitals success rates in appeals of Recovery Auditor decisions at 7%; Duetschendorf and Sheehy reported that their hospitals succeeded in nearly every appeal they filed.  Committee Members were also concerned by the diversion of millions of Medicare dollars from patient care to audits and appeals, especially when, as all witnesses agreed, patients get whatever medically necessary care they need, whether they are called inpatients or outpatients.

The Subcommittee's record will remain open for two weeks.  Written submissions are due by June 3, 2014, and must be submitted by email in Word format to Submissions must include your Name, Organization (if applicable), Address, Phone Number, Contact E-mail Address, and the Title of Hearing ("Current Hospital Issues in the Medicare Program"). Further information on submissions is available at:

CMS will accept comments on the proposed rules discussed by CMS' Sean Cavanaugh through June 30, 2014.  Comments may be submitted electronically at  The proposed rules describe additional methods of submitting comments at 79 Fed. Reg. 27978.


The 144 Representatives who have co-sponsored H.R.1179 and the Members of Congress who participated in the May 20 hearing were familiar with, and concerned about, observation status and its impact on hospitalized Medicare patients who require post-acute care in a SNF.  Members of Congress must continue to hear from Medicare patients and their families about their experiences with outpatient status and observation status.  Moreover, Congress must act speedily to rectify the conundrum of observation status and services and its impact on the ability of Medicare beneficiaries to receive necessary SNF care.

[1] (Opening Statement of Subcommittee Chairman Kevin Brady, R-TX).
[2] See our Alert at:  The Bill has since been reintroduced.
[3] 78 Fed. Reg. 50495, 50906-50954 (Aug. 19, 2013).  See CMA, "Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries" (Weekly Alert, Aug. 29, 2013),
[4] The proposed rules were published at 79 Fed.Reg. 27977, 28169-28170 (short inpatient stays), 27170 (suggested exceptions to the two-midnight benchmark)  (May 15, 2014), .  Comments on CMS-1607-P are due June 30.  Comments may be submitted electronically at  The proposed rules describe additional methods of submitting comments at 79 Fed. Reg. 27978.
[5] OIG, Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02-12-00040 (July 29, 2013),   See CMA, "Observation Status: OIG Provides an Analysis and CMS Issues Final Regulations" (Weekly Alert, Aug. 8, 2013),
[6] OIG, Medicare Recovery Audit Contractors and CMS's Actions To Address Improper Payments, Referrals of Potential Fraud, and Performance, OEI-04-11-00680 (Aug. 2013),   
[7] Ann M. Sheehy, M.D., MS, et al, "Hospitalized but Not Admitted: Characteristics of Patients With 'Observation Status' at an Academic Medical Center," JAMA Intern Med. 2013;173(21): 1991-1998, CMA, "Observation Status: 'Morphed Into Madness'" (Weekly Alert, Aug. 1, 2013),
[8] Ann M. Sheehy, M.D., MS, et al, "Observation and Inpatient Status: Clinical Impact of the 2-Midnight Rule," J Hosp Med. 2014; 9(4): 203-209.  See CMA, "New Study: CMS's New 2-Midnight Rule Increases Hospital's Use of Observation Status" (Weekly Alert, Feb. 20, 2014),


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