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Joining the discussion about hospitals' extended use of observation status, the Department of Health and Human Services' Office of Inspector General (OIG) has issued a memorandum report that describes the nationwide use of observation and outpatient stays in calendar year 2012.  OIG reports that more than 600,000 Medicare beneficiaries had hospital stays lasting at least three midnights but not including at least three inpatient midnights.  It recommends that the Centers for Medicare & Medicaid Services (CMS) "consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost-sharing for SNF [skilled nursing facility] services."[1]  The OIG report, Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, preceded by several days the promulgation of final rules for inpatient hospital reimbursement under the Medicare program,[2] which included final rules related to observation status. 

The Problem

Many Medicare beneficiaries receiving care in an acute care hospital are classified as observation patients (an outpatient category), even though the care they receive may be indistinguishable from the care received by patients who are classified as inpatients.  The consequence for beneficiaries is significant if they need post-hospital care in a SNF.  Medicare will not pay for a SNF stay under Part A unless the beneficiary has been classified as an inpatient for at least three consecutive days, not counting the day of discharge.[3]  The Center for Medicare Advocacy hears daily from beneficiaries who are denied Medicare coverage for their SNF stay because of observation status.  One recent call involved an 86-year old woman who was hospitalized with a broken shoulder.  Initially admitted as an inpatient, the woman was reclassified by the hospital as an outpatient.  She stayed three midnights and then went to a SNF for rehabilitation, where she paid, out-of-pocket, $7,600 for the first month and was told she would be billed $10,000 for the second month.  A second recent call involved an 87-year old woman who fractured her shoulder.  Called an outpatient by the hospital for her entire four-day stay, she paid $10,650 for her subsequent one-month stay in the SNF.  A third beneficiary, an 89 year-old woman, was hospitalized for three days with pneumonia and sent home.  She returned to the hospital the next day, having fallen and broken her hip.  She remained in the hospital for six days as an "outpatient in bed" and then went to a SNF, paying out-of-pocket for her care. 

The Center for Medicare Advocacy has materials on its website to help beneficiaries and their families with observation status,[4] and you can contact your senators and representatives about legislation to end the problem at

Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries

OIG reports two concerns about observation stays.  First, CMS, Congress, and others are concerned about "beneficiaries spending long periods of time in observation stays without being admitted as inpatients,"[5] resulting in beneficiaries being ineligible for Medicare coverage of their post-acute stay in a SNF.  Second, CMS is also concerned about "improper payments for short inpatient stays when the beneficiaries should have been treated as outpatients."[6] 


OIG describes CMS current policy on observation stays, set out in the Medicare Benefit Policy Manual.  The Manual describes the factors a physician should use to determine whether to admit a patient to inpatient status.  According to OIG, the Manual directs physicians to consider, as one factor, whether a patient is likely to remain in the hospital for 24 hours.[7]

OIG also describes the two sets of proposed rules published by CMS in the Spring of 2013 that would affect how hospitals bill for observation stays and short inpatient stays.  One set of proposed rules would create time-based presumptions of inpatient status, using two midnights as the benchmark for inpatient admission.[8]  The earlier set of proposed rules would allow hospitals to rebill Part B if a Medicare contractor, or the hospital itself, decided that an inpatient admission was not medically necessary.[9]  As noted above, on August 2, CMS posted final rules that address both proposals.

OIG's Analysis of Medicare Data for Calendar Year 2012

OIG classifies hospital stays into three categories: observation stays, long outpatient stays, and short inpatient stays.  Nationwide, in 2012, 72% of these three types of stays were observation or long outpatient stays and 28% were short inpatient stays.  Hospitals vary significantly in their use of these different classifications.[10]

Observation Stays

OIG reports that Medicare beneficiaries had 1,511,875 hospital stays in 2012 that were classified as observation (see Table 2, below).[11]  In addition, OIG reports that more than three-quarters of all observation stays (78%) began in the emergency department and that 9% of observation stays began after an operating room procedure (most frequently, for the insertion of coronary stents).[12]  601,880 beneficiaries in observation (of the 1,511,875 observation stays) were then admitted to the hospital as inpatients.[13] 

OIG Report Table 2: Number and Percentage of Observation Stays by Length of Stay[14]

Length of Stay

Number of Observation Stays

Percentage of All Observation Stays

0 nights (1 calendar day)



1 night



2 nights



At least 3 nights







Long Outpatient Stays

In addition to the 1.5 million people whose hospital stays were classified as outpatient observation stays, OIG identifies an additional 1.4 million "long outpatient stays" (i.e., hospitalized at least one night, but not coded as observation).  OIG recognizes that some of these days may have also been observation stays, although they were not coded as observation by the hospital.[15] 

Hospitals vary considerably in the extent to which they classify their patients as observation or long-stay outpatients – the range is 5% in some hospitals, 90% in other hospitals.[16]

Short Inpatient Stays

In addition to observation and long outpatient stays, 1,146,925 patients in acute care hospitals had short inpatient stays in 2012.  OIG variably defines short inpatient stays as one night or less[17] and as less than two nights.[18]  90% of these patients spent one night in the hospital.  Two-thirds of short inpatient stays began in the emergency department.  Short inpatient stays "were often for the same reasons as observation stays."[19]

The Medicare program and Medicare beneficiaries pay more for short inpatient stays than for observation stays:

  • The Medicare program paid an average of $5,142 for each short inpatient stay, compared to $1,741 for each observation stay.[20]
  • Medicare beneficiaries paid an average of $725 per inpatient stay,[21] compared to $410 for each observation stay (and $528 if drug costs were included in each observation stay).[22]

Medicare beneficiaries had 617,702 hospital stays lasting more than three nights that did not qualify them for SNF care[23]

The OIG report notes that 617,702 observation and long outpatient stays lasted more than three nights.  In some of the stays, patients were first classified as outpatients and were subsequently admitted as inpatients.

OIG Report Table 6: Types of Hospital Stays Lasting at Least 3 Nights
but With Less than 3 Inpatient Nights

Type of Hospital Stay

Number of Hospital Stays

Percentage of Hospital Stays

Outpatient only:




    Long outpatient



Inpatient that began as outpatient:

   Short inpatient



   2-night inpatient







OIG reports that 25,245 beneficiaries (out of 617,702 hospital stays) went to a SNF and that Medicare improperly paid for the SNF care for 23,148 of them, totaling $255 million (averaging $11,016 per person); beneficiaries paid copayments totaling $63 million and averaging $2,735.  OIG reports that the remaining 2,097 beneficiaries (out of 617,702 hospital stays) paid privately for their SNF care, totaling $22 million and averaging $10,503 per person.[25]

OIG's Conclusion

OIG concludes that "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."[26]  It suggests that counting outpatient nights towards the qualifying three-day inpatient stay may require action by Congress to change the law.  Despite this recommendation, OIG plans to identify the SNFs that received Medicare payments for patients who did not have a qualifying inpatient stay "so that CMS can look into recoupment."[27]

Final Regulations

The regulations issued August 2 by CMS finalize the A-B rebilling regulations and the time-based presumption regulations.  Neither set of regulations solves the problem of observation status for beneficiaries.  Rebilling will create greater confusion for beneficiaries if their inpatient status is changed months after they received care in the hospital.  The time-based regulations are internally inconsistent and confusing about whether and how, if at all, time spent in observation is counted toward the SNF-qualifying three-day hospital stay.

The Center for Medicare Advocacy will continue to analyze the final regulations and report on them in greater detail in a later Alert.

[1] OIG, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02-12-00040, page 15 (July 29, 2013), [hereafter Hospitals’ Use of Observation Stays].
[2]  The final regulations went on view on August 2 and will be published in the Federal Register on August 19.
[3] 42 C.F.R. §409.30(a)(1).
[4] A Self-help packet for observation status is available at; additional materials on observation status are available at
[5] Hospitals’ Use of Observation Stays, supra note 1, at 1.
[6] Id.
[7] Pub. No. 100-02, ch.1, §10.  Actually, the Manual directs physicians to consider whether patients need to remain “overnight.”
[8] 78 Fed. Reg., at 27,486, at 17,645-27,649 (May 10, 2013).  See CMA, “CMS Addresses Observation Status Again . . . And Again, No Help for Beneficiaries” (Weekly Alert, May 16, 2013),
[9] 78 Fed. Reg. 16,632(March 18, 2013).  See CMA, “CMS’ Proposed Rules on Observation Status Would Not Help Beneficiaries” (Weekly Alert, March 28, 2013),
[10] Hospital’s Use of Observation Stays, supra note 1, 13-14.
[11] Id. 9.
[12] Id. 
[13] Id.
[14] Id. 10, Table 2.
[15] Id. 10.
[16] Id. 11.
[17] Id. 6.
[18] Id. 11.
[19] Id. 11.
[20] Id. 12.
[21] Id. 12.  OIG is apparently not counting the inpatient deductible, which was $1,156 in 2012.  Id. 13, note 35.
[22] Id. 12, note 32.
[23] Id. 14.
[24] Id. 14, Table 6.
[25] Id. 15.
[26] Id. 15.
[27] Id.



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