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In proposed rules updating Medicare reimbursement to acute care hospitals,[1] the Centers for Medicare & Medicaid Services (CMS) announces how it intends to implement the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act).[2]  Effective August 6, 2016, the NOTICE Act requires that hospitals provide written and oral notice, within 36 hours, to patients who are in observation or other outpatient status for more than 24 hours.  The notice must explain the reason that the patient is an outpatient and describe the implications of that status both for cost-sharing in the hospital and for subsequent “eligibility for coverage” in a skilled nursing facility (SNF).[3]  

Comments on the proposed rules are due June 17, 2016.  In a separate Alert, the Center for Medicare Advocacy will report on other issues in the Notice of Proposed Rulemaking that may be of interest to Medicare beneficiaries.

Observation Status

CMS describes the issue as outpatients receiving “observation services.” In reality these patients are patients in hospitals who receive medical, physician and nursing care, tests, medications, overnight lodging and food, but who are called outpatients. The Center for Medicare Advocacy calls this issue “outpatient Observation Status” because there are no hospital services that are distinctly “observation” and because these “outpatients” receive care and treatment that are identical to the care and treatment received by inpatients. 

As CMS has acknowledged in prior notices in the Federal Register, a physician can order whatever care and hospital services a patient needs, whether the patient is classified as an inpatient or an outpatient.  For example, in proposed revisions to its “two midnight rule,” CMS confirmed that the two-midnight rule “does not prevent a physician from ordering or providing any service at any hospital, regardless of the expected duration of the service” and “does not override the clinical judgment of the physician regarding the need to keep a beneficiary at the hospital, to order specific services, or to determine appropriate levels of nursing care or physical locations within the facility.”[4] 

Currently, Medicare patients who are in the hospital for three days or more are nonetheless sometimes considered “outpatients.” As a result, thousands of vulnerable older adults and people with disabilities are denied their Medicare skilled nursing facility benefit. Since care received by hospital “outpatients” in Observation Status is indistinguishable from that received by inpatients, patients should have all time spent in Observation Status count toward the three-day hospital stay requirement for coverage of post hospital nursing home care.[5]  “Observation Status,” a hospital billing code, should not affect beneficiaries’ coverage of necessary post-hospital care.  

Proposed Rules

In the proposed rules, CMS announces that it will require hospitals to use a new standardized notice, the Medicare Outpatient Observation Notice (MOON), which it has submitted to the Office of Management and Budget for approval.  With respect to the statutory requirement that the notice explain the reason for the outpatient status, CMS says, “by definition, the reason . . .  will always be the result of a physician’s decision that the individual does not currently require inpatient services and observation services are needed for the physician to make a decision regarding whether the individual needs further treatment as a hospital inpatient or if the individual is able to be discharged from the hospital.”[6]  [Emphasis added.]

CMS describes how observation status comes about: “Typically, observation services are ordered for individuals who present to the emergency department (ED) and who then require a significant period of treatment and monitoring to determine whether or not their condition warrants inpatient admission or discharge.”[7]  CMS insists that “in the majority of cases,” the decision about admission or discharge “can be made in less than 48 hours, usually in less than 24 hours.”[8]  It suggests that only “in rare circumstances” is a patient’s inpatient status changed to outpatient, under Condition Code 44.[9]

The MOON is not required for all outpatients.  CMS proposes to require hospitals to give the MOON only to patients entitled to Medicare for whom they are billing Medicare for observation hours.[10]  However, patients who do not have Medicare Part B will also receive the MOON, even though their observation status stay or other outpatient stay in the hospital will not be covered by Medicare Part B because they do not have Part B.[11]

CMS states explicitly, in both the preamble[12] and the proposed regulatory language,[13] that the NOTICE Act does not give patients any appeal rights. 

When it implemented the two-midnight rule, CMS cut Medicare reimbursement to hospitals by 0.2%, reflecting its determination that there would be more inpatient stays as a result of the new rule.  The hospitals sued and challenged the cut in reimbursement.  In the same set of proposed rules, “in light of recent review and the unique circumstances surrounding this adjustment,” CMS retroactively restores full reimbursement to hospitals.[14]


First, the Center for Medicare Advocacy is concerned that the proposed rule does not require the hospital to explain in the MOON the specific reason the patient is being considered an outpatient.  This decision is contrary to all other Medicare notices.  In both traditional Medicare and Medicare Advantage, CMS requires health care providers and plans to explain in detail the specific reasons why they believe Medicare coverage is not available.[15]  For example, in traditional Medicare, independent laboratories, home health agencies, hospices, physicians, practitioners, and suppliers must use the Advance Beneficiary Notice;[16] skilled nursing facilities must use the SNF ABN;[17]and hospitals must use the Hospital-Issued Notice of Noncoverage.[18]  Medicare Advantage plans must issue a Notice of Denial of Medical Coverage (or Payment).[19] 

The proposed MOON is unique in its mandated use of a blanket statement, not tailored to the patient, which fails to require an explanation of the basis for the lack of inpatient coverage.[20]

Moreover, CMS’s proposal not to require information about the specific reason a patient is in observation status is contrary to the legislative history of the NOTICE Act, which sought to give patients “meaningful disclosure” of their status in the hospital.[21]  Requiring standardized language about the “reason” for being placed on Observation Status, which CMS has declared by fiat, thwarts the purpose of delivering information.  

Second, all Medicare notices of coverage determinations other than the MOON give beneficiaries an opportunity to appeal to Medicare for a determination of coverage.[22]  Only the MOON defines the coverage issue as non-appealable.  Just as beneficiaries can challenge a premature discharge or contest a host of other coverage determinations in the Medicare program, they should be able to appeal their placement on Observation Status.

Third, the MOON will not be required for patients whose hospitals choose not to code their “outpatient” Medicare bills as Observation Status.  This decision affects many hundreds of thousands of people.  The HHS Inspector General reported in 2013 that in 2012, 1.5 million patients had hospital stays that were classified as observation (because the hospital billed Medicare for observation hours) and another 1.4 million patients had long outpatient stays that were not coded as observation (because the hospital did not bill Medicare for observation hours).[23]  In other words, about half the long-stay outpatients were not considered observation status, but solely because the hospital chose not to bill Medicare for observation hours.  However, the consequences for patients remained the same.  Whether the hospital billed Medicare for observation hours or not, the patient’s post-hospital care in the SNF was not covered because the patient was classified as an outpatient by the hospital. 

CMS’s decision not to require the MOON for all outpatients is contrary to the legislative history of the NOTICE Act, which requires hospitals to provide information to patients about whether they are inpatients or outpatients.[24]  CMS’s decision also exacerbates the arbitrariness of observation status.  Not only does it remain arbitrary whether patients are called outpatients or inpatients, it is now also arbitrary whether hospitals are required to give the MOON to outpatients. 

CMS repeats in the preamble its belief that use of Condition Code 44 (which allows hospitals to change a patient’s status from inpatient to outpatient) is rare[25] and that the decision to admit to inpatient is usually made within 48 hours, usually less than 24 hours.[26]  The Center’s experience is to the contrary.  We hear regularly from people all over the country whose status was changed from inpatient to outpatient or who remained in the hospital for multiple days (five and six days and more), all classified as outpatient, even after the “Two-Midnight Rule” was announced.[27]

Finally, CMS expresses no concern about the impact of Observation Status on Medicare beneficiaries and their need to pay out-of-pocket for care in a SNF that would have been paid by Medicare Part A if their hospital had classified them as inpatients.[28] 


Although CMS has the authority to count all time in the hospital for purposes of determining a beneficiary’s entitlement to Part A coverage of a post-hospital stay in a SNF,[29] it has refused to revise its Manuals to authorize this coverage.  In these new proposed rules, it has also declined the opportunity to provide real and meaningful relief to Medicare beneficiaries who are called outpatients by their hospitals.  Congress needs to act by passing the bill that would do so, The Improving Access to Medicare Coverage Act of 2015 (H.R.1421/S.568).

April 28, 2016 – T. Edelman

[1] The proposed rules, CMS-1655-P, went on public view April 18, 2016 and were published in the Federal Register on April 27, 2016, 81 Fed. Reg. 24945, .
[2] Pub. L. 114-42.  The NOTICE Act was signed by President Obama on August 6, 2015.  See Center for Medicare Advocacy, “Observation Status: The NOTICE Act Will Soon Be Law,” (CMA Alert, Aug. 6, 2015),
[3] 81 Fed. Reg. 24945, 25131 (April 27, 2016).  The “subsequent eligibility” is actually non-eligibility.  Medicare Part A pays for a resident’s stay in a SNF only if the resident spent at least three days as an inpatient in the hospital.  As CMS acknowledges in the preamble, “For purposes of Medicare SNF coverage, the time spent receiving observation services as an outpatient does not count towards the requirement of a 3-day hospital inpatient stay because these services are outpatient.”  81 Fed. Reg. 24945, 25134.
[4] 80 Fed. Reg. 39199, 39349, 39350 (July 8, 2015), Center for Medicare Advocacy, “Proposed Revisions to ‘Two-Midnight’ Rule Provide Little, If Any, Relief for Medicare Beneficiaries Stuck in the Hospital in Observation Status” (Alert, July 9, 2015),
[5] 42 U.S.C. §1395x(i).
[6]  81 Fed. Reg. 24945, 25133 (April 27, 2016).
[7]  Id.
[8] Id.
[9] Id.  25132.
[10] Id. 25131-25132.
[11] Id.  25132.
[12] Id. 25134.
[13] Id. 1269, adding a new subsection (u) to 42 C.F.R. §405.926(u), “Actions that are not initial determinations.”
[14] CMS, “Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Proposed Rule Issues for Fiscal Year (FY) 2017” (Fact Sheet, April 18, 2016),
[16] Form CMS-R-131,
[17] Form CMS-10055,
[18] CMS-HINN,
[19] CMS-10003-NDMCP,
[20] CMS may take the position that there is no denial when a patient is classified as observation status because the hospitalization will be covered as an outpatient stay under Part B. The reality is that being put on observation functions as a denial. Patients on observation are denied coverage of self-administered drugs while at the hospital, as well as coverage of post-hospital skilled nursing facility care. Patients with Medicare Part A only are denied Medicare coverage altogether for their hospital stay. CMS should not rely on a forced and counterintuitive definition of “denial” to disallow appeal rights.
[21] Congressman Lloyd Doggett on the House Floor during passage of the NOTICE Act, March 16, 2015, described the need for “meaningful disclosure” to give patients the knowledge they need,
[22] See CMS forms cited at footnotes 15-19, supra.
[23] Office of Inspector General, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries,” OEI-02-12-00040 (July 29, 2013).  See Center for Medicare Advocacy, “Observation Status: OIG Provides an Analysis and CMS Issues Final Regulations” (Alert, Aug. 8, 2013),
[24] H. Rept. 114-39 (114th Cong. 1st Sess.),
[25]  81 Fed. Reg. 24945, 21532.
[26] Id.  25133.
[27] See Michelle Stein,  “Cavanaugh: Some Hospitals Continue Long Observation Stays Despite CMS Policy Shift,” Inside Health Policy (April 8, 2016).
[28] For many years, CMS has expressed concern with the impact of observation status on Medicare beneficiaries.  On August 24, 2010, CMS held a Listening Session on observation status to consider hospitals’ increased and extended use of observation status.  That year, CMS sent letters to the national hospital associations asking why they used observation status for extended periods.  In 2012, in proposed and final rules for the outpatient prospective payment system, CMS again expressed concern about the increasing amount of time that patients spend in the hospital under observation.  77 Fed. Reg. 45155 (July 30, 2012) (proposed rules); 77 Fed. Reg. 68426 (Nov. 15, 2012).  In proposed rules published in March 2013 addressing the Part A-B hospital rebilling issue, CMS repeated its concerns about lengthy observation stays.  78 Fed. Reg., 16632, 16634 (Mar. 18, 2013). 
[29] The Center for Medicare Advocacy submitted a memorandum to Sean Cavanaugh, CMS, at his request in July 2014.  CMS has not responded to the memorandum.


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