Print Friendly, PDF & Email

Although a large and increasing number of Senators and Representatives now support bipartisan legislation to solve the problem of Observation Status, many beneficiaries and their families continue to face this outpatient status as a barrier to Medicare coverage of care in a skilled nursing facility.  This Alert describes the continuing problem, Congressional legislation, a survey of members of the National Association of Geriatric Care Managers, several recent studies and articles, and a hearing by the Senate Finance Committee on the Recovery Audit Contractor program.

The Problem

Observation Status refers to the classification of a hospital patient as an outpatient, even though the patient is placed in a hospital bed, stays overnight (and often for multiple days and nights), and receives nursing and medical care, diagnostic tests, treatments, therapy, prescription and over-the-counter medications, and food.  The classification of Observation Status as an outpatient status means that the patient is ineligible for Medicare coverage of a subsequent stay in a skilled nursing facility (SNF) because Medicare limits SNF coverage to patients who have had an inpatient hospital stay of at least three consecutive days, not counting the day of discharge.[1]  The Center for Medicare Advocacy hears daily from families of beneficiaries who are hospitalized for more than three days, all called outpatient days, who then must pay  thousands of dollars out of pocket for their SNF stay.  Beneficiaries who cannot afford to pay privately (or who do not have another source of payment, such as Medicaid) forego SNF care.  Also hugely problematic is the fact that there is no apparent appeals system to challenge an Observation Status classification.

Federal Legislation

Identical bipartisan legislation pending in Congress – H.R. 1179 and S.569 – the "Improving Access to Medicare Coverage Act of 2013" – would count the time in Observation Status towards meeting the requirement for a three-day qualifying inpatient hospital stay.   The number of co-sponsors for both bills has increased dramatically in the last few months.  As of August 1, 2013, H.R.1179, introduced by Congressman Joseph Courtney (D, CT), has 91 House co-sponsors (an increase from 18 co-sponsors in April) and S.569, introduced by Senator Sherrod Brown (D, OH), has 16 Senate co-sponsors (an increase from one co-sponsor in April).

The legislation is supported by an ad hoc coalition of 14 national organizations (see the joint Fact Sheet[2]) and there is no organized opposition.

You can contact your Senators and Representatives about this crucial legislation at

Administrative Developments

On July 29, 2013, the Office of Inspector General (OIG) issued a report about Observation Status that included the following statement in its Conclusion, "CMS should consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost-sharing for SNF services."[3]  OIG suggested that federal legislation might be necessary.  (The Center for Medicare Advocacy will discuss the OIG report in detail in a future Alert.)

The New England Journal of Medicine

Writing in The New England Journal of Medicine, two physicians from the Department of Emergency Medicine at Brigham and Women's Hospital in Boston support the federal legislation discussed above.  Although they appear to support the use of distinct observation units, they view Observation Status in inpatient units as problematic: "When observation is used as a billing status in inpatient areas without changes in care delivery, it's largely a cost-shifting exercise – relieving the hospital of the risk of adverse action by the RAC [Recovery Audit Contractor] but increasing the patient's financial burden."[4]  (Emphasis added)  With a hypothetical three-day hospital stay, the physicians demonstrate how Observation Status shifts costs from the Medicare program to beneficiaries and hospitals.

National Association of Professional Geriatric Care Managers survey

More than 80% of geriatric care managers across the United States who were surveyed by the National Association of Professional Geriatric Care Managers (NAPGCM) between July 1 and July 16, 2013 reported that "inappropriate hospital Observation Status determinations" were a significant problem in their communities and 75% noted that the problem was growing worse.[5] 

As a result of Observation Status:

  • 81% of care managers reported that beneficiaries do not receive the rehabilitation services they need;
  • 79% of care managers reported financial hardship on beneficiaries and their families; and
  • 75% of care managers reported "emotional stress" for beneficiaries and their families.

Study of University of Wisconsin's Use of Observation Status

A retrospective descriptive study looked at all Observation Status and inpatient stays at the University of Wisconsin Hospital and Clinics, an academic medical center that does not have a dedicated observation unit, from July 1, 2010 to December 31, 2011.[6]  The study found that:

  • 4,578 of the total 43,853 hospital stays (10.4%) were observation stays
  • 756  observation stays (16.5%) exceeded 48 hours; 1,791 observation stays (39.1%) were 24-48 hours; 2,031 observation stays (44.4%) were less than 24 hours
  • 25.4% of patients in observation had longer lengths of stay and were more likely to be discharged to a SNF, to have more acute/unscheduled admissions, to have more "avoidable days" (days not accounted for by medical need), and to have more "repeat encounters."

The study found that "many observation stays did not meet the CMS definition of observation." Many patients stayed longer than 48 hours and 1,141 distinctly billed observation codes were used for their stays.  It concluded, "observation care in clinical practice is very different than what CMS initially envisioned and creates insurance loopholes that adversely affect patients, health care providers, and hospitals." (Emphasis added)

In an Invited Commentary on the Wisconsin study, Robert M. Wachter, MD, of the Department of Medicine at the University of California, San Francisco, was more blunt.  He described "Observation Status" as having "morphed into madness"[7] and wrote, "[I]n fact, if one was charged with coming up with a policy whose purpose was to confuse and enrage physicians and nearly everyone else, one could hardly have done better than Observation Status." 

Senate Finance Committee Hearing

The Senate Finance Committee held a hearing on June 25, 2013, "Program Integrity: Oversight of Recovery Audit Contractors,"[8] which focused on the impact on hospitals of the Recovery Audit Contractor (RAC) program.  Although the RAC is intended to assure that Medicare payments to health care providers are appropriate, hospital witnesses from Montana and Utah testified about the burdensome nature of RAC review, the amount of money hospitals spend responding to RAC reviews (Intermountain Health's Vice President of Business Ethics & Compliance estimated that most of the 22 full-time employees it hired are devoted to RAC issues[9]), and hospitals' successful appeals of RAC denials of inpatient status.  Many of the RAC reviews involve inpatient status and RACs' claim that patients should have been classified as outpatients in observation.  The Center for Medicare Advocacy submitted a statement for the record describing the impact of Observation Status on beneficiaries.[10]


Observation Status continues to grow as a significant problem facing Medicare beneficiaries and their families.  Studies and articles identify the need to change the system and to assure that beneficiaries get Medicare coverage for their SNF care following their hospital stays.  Members of Congress increasingly support pending legislation.   Pending litigation brought by the Center for Medicare Advocacy, Bagnall v. Sebelius, challenges the use of Observation Status as violating the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution.[11] The time has come to end the "madness."





[1] 42 C.F.R. §409.30(a)(1).
[3] Office of Inspector General, "Memorandum Report: Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries," OEI-02-12-00040, page 15 (July 29, 2013),
[4] Christopher W. Baugh, M.D., M.B.A., and Jeremiah D. Schuur, M.D., M.H.S., "Observation Care – High Value Care or a Cost-Shifting Loophole?" N Engl J Med 369:4 (July 25, 2013),
[5] "Seniors Increasingly Victims of Medicare's 'Observation Status' Trap Says Survey of Aging Experts; Congress Considers Changes" (July 24, 2013),
[6] Ann M. Sheehy, MD, MS, et al., "Hospitalized but Not Admitted: Characteristics of Patients With 'Observation Status' at an Academic Medical Center," JAMA Intern Med. 2013; ():-. doi:10.1001/jamainternmed.2013.7306.  (abstract published online July 8, 2013),
[7] Robert M. Wachter, MD, "Observation Status for Hospitalized Patients," JAMA Intern Med (published online July 8, 2013),
[11] No. 3:11-cv-01703 (D. Ct., filed Nov. 3, 2011),


Comments are closed.