Problems With Hospital Observation Status

Hospitals have figured out a controversial way to make money, which could put patients at risk both financially and medically. They are using what used to be a good way to help patients who didn't really need to be admitted to the hospital, called "observation status." It's costing patients money out of their pockets and from their taxes, and could possibly affect their medical outcomes, too.

Man sitting on hospital bed
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What Is Hospital Observation Status?

When patients go to the emergency room, a determination is made about whether they should be admitted to the hospital or not. Some patients are simply sent home with some sort of prescriptive treatment and follow-up care. Others are admitted right away because they clearly need surgery or some other form of medical evaluation or treatment. Others may either be borderline, or they may need treatment for a short period of time—it's those patients who may be put on observational status.

How the Hospital Makes Money From Observation Status

If a patient is assigned observational status, he is considered to be an "outpatient"—meaning he is not admitted to the hospital. It can be lucrative for the hospital to assign that patient outpatient status without formally admitting him. Here's how:

  • Some insurances, including Medicare, don't consider observation status as an admission and therefore don't cover the cost as they would if the patient was hospitalized. That means the patient can be charged cash for their visit. The cash payment for an outpatient visit is far higher than reimbursement from insurance for an admitted patient's stay because, of course, insurance companies negotiate far lower rates for the patients they pay for.
  • Medicare does not totally reimburse hospitals for patients who are readmitted within 30 days of leaving the hospital previously. That means that if a Medicare patient was hospitalized, then sent home, and reappears in the emergency room within 30 days, the hospital will be penalized for the readmission. By putting a patient on observational status, they could avoid this potential penalty.

Problems for Patients

In cases when this observation status is questionable for patients, there are a few reasons it can become problematic.

  • The out-of-pocket costs are higher. This is particularly true for Medicare patients—if they aren't admitted to the hospital, even if they stay there, the hospital can charge them for many things Medicare doesn't cover if Part B coverage is used. The latest ruling (2014) says that Medicare patients must be formally admitted, and stay in the hospital overnight for two midnights.
  • Medical care can be compromised. Hospital stays are so short these days because insurance reimbursements are so low once a patient gets past a certain point in his/her care. That means there are some patients who are being sent home too early. If they begin to get sick again or find themselves in unmanageable pain, they will try to return to the hospital. But if the hospital is reluctant to admit them, those patients may not get the care they need. The "observation status" designation can compromise the care they get because they have not been fully admitted to the hospital and are therefore not fully part of the hospital process of caring for patients.
  • Medicare patients who must be admitted to a nursing home are required to be fully hospitalized prior to nursing home admission if they expect Medicare to pay for their nursing home stay. If a patient had been put on observation status instead of fully admitted, then there will be no nursing home reimbursement - that can amount to hundreds of thousands or more. If Medicare is to cover any nursing home costs, the patient must be formally admitted to the hospital for at least three midnights (not the same rule as the two-midnight rule mentioned above).

This article addresses only Medicare patients, however, if your healthcare is covered by a private payer, or another government payer (Tricare, Medicaid), you would be wise to check with them to find out if your observation status is covered. 

It should also be noted that hospitals can determine and change the status of a patient without letting anyone know it's been done. They may tell a patient he is being admitted to the hospital, but the paperwork instead will reflect observation status. Even if a patient has been admitted, the hospital can change that status at any time.

What You Can Do

Short of avoiding the emergency room altogether, there isn't much you can do to protect yourself or a loved one from being placed on observation status.

However, you may be able to get yourself or your loved one admitted to the hospital instead.

  • Be fully aware that you do not want to be held at the hospital on observation status. Even though it might sound even marginally appealing because it sounds temporary (and you think you might return home quicker), know that there are really no upsides to observation status.
  • Contact your primary care doctor before heading to the emergency room. He or she will advise on whether you have alternatives to the ER. Further, if you do have to go to the ER and stay at the hospital, you should be able to enlist your healthcare provider to help you be sure you are fully admitted.
  • Ask to see the paperwork which shows you have been admitted. If you see the word "observation" then ask to speak to the person who will fully admit you—and be assertive if you need to. You may need to find a hospital administrator and don't be afraid to argue about it.
  • If you are afraid to speak up, or if you need support in any way to change status, contact a patient advocate to help you.

It bears repeating—even if you or your loved one is not a Medicare patient, double-check with your payer to be sure a hospital stay is covered, observation status or not.

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  1. Centers for Medicaid & Medicare Services. Frequently Asked Questions: 2 Midnight Inpatient Admission Guidance &Patient Status Reviews for Admissions on or after October 1, 2013.