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Patients in “outpatient” observation status often receive care in acute care hospitals that is indistinguishable from the care patients receive when they are formally admitted to hospitals as inpatients.[1]  Nevertheless, the financial consequences of outpatient status are considerable, particularly for patients who need post-acute care in a skilled nursing facility (SNF).  Medicare Part A does not cover SNF care for patients who were not hospitalized as inpatients for at least three consecutive days, not counting the day of discharge.[2]  Hospital patients who were in observation or other outpatient status must pay for their SNF care entirely out-of-pocket.

The Society for Hospital Medicine (SHM) represents hospitalists who provide 59% of all hospital observation care.[3]  SHM’s 2014 survey of its members found that the two-midnight rule had not clarified admissions policy and that observation status had negative impacts on both patients and physicians.[4] 

SHM resurveyed its members in 2017 and found that dissatisfaction with observation status had not changed.  Increased experience with the two-midnight rule has not improved hospitalists’ dissatisfaction with the policy.  Hospitalists report that nearly one in seven patients in observation status has his or her status changed while hospitalized, with multiple reviews consuming hospital time and resources that could be better spent on patient care.[5]  Hospitalists report that the NOTICE Act[6] and the Medicare Outpatient Observation Notice (MOON)[7] have increased patients’ awareness of their observation status, and its significance, but have added to patients’ stress.  Patients ask physicians to change their status to inpatient, but hospitalists believe they cannot change patients’ status due to Medicare regulations.

SHM calls for short-term options to improve current practices, including approval of the Improving Access to Medicare Care Coverage Act,[8] (which counts all time in the hospital for purposes of satisfying the three-day inpatient stay requirement), repealing the three-day stay requirement in the Medicare statute, and increased clarity from Medicare about observation status.  Comprehensive observation reform recommended by SHM calls for eliminating observation care and developing a new system to pay for care.  SHM offers three options that would combine the elimination of observation status with: (1) using a low-acuity diagnosis related group modifier for hospital reimbursement; (2) developing a model to bundle observation and post-acute time; or (3) creating payments to blend inpatient/outpatient rates.[9]

T. Edelman, March 1, 2018


[1] See the Center for Medicare Advocacy’s extensive materials on observation status at
[2] 42 U.S.C. §1395x(i).
[3] Public Policy Committee, Society of Hospital Medicine, The Hospital Observation Care Problem 4 (Sep. 2017).
[4] Id.  42 C.F.R. §412.3(d)(1) (two-midnight rule).  See the Center for Medicare Advocacy’s materials on the two-midnight rule, at
[5] Public Policy Committee, Society of Hospital Medicine, The Hospital Observation Care Problem 5-6 (Sep. 2017).
[6] 42 U.S.C. §1395cc(a)(1)(Y);  see
[7] MOON is available at (click on download for MOON, CMS-10611); see
[8] H.R. 1421, S. 568.
[9] Public Policy Committee, Society of Hospital Medicine, The Hospital Observation Care Problem 9-10 (Sep. 2017).


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