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Hospitals play with Medicare patients' status

A growing number of senior citizens are ensnared in a Medicare crackdown on hospitals over costly inpatient admissions.

Hospitals nationwide are responding by classifying more overnight visitors as outpatients held for observation.

Caught in the middle are senior citizens, who aren't warned about the consequences of observation and can't appeal, patient advocates say. As outpatients, they typically shoulder a higher share of costs than they would as inpatients. Worse yet, the rehab that elderly patients often need after a hospital stay isn't covered for observation patients, leaving them—or their children—to struggle with big bills.In the Chicago area, the use of observation nearly tripled to about 90,000 days annually between 2007 and 2011, according to a Crain's analysis of Medicare claims.

Northwest Community Hospital had the most observation days during the period, followed by St. Alexius Medical Center, also in the northwest suburbs, and west suburban Loyola University Medical Center, Crain's found.

Presence Our Lady of the Resurrection Medical Center on the Northwest Side had the biggest jump in observation days from 2007 to 2011, followed by Northwestern Memorial Hospital and south suburban Little Company of Mary, the analysis shows.

Medicare officials defend observation as a badly needed cost-cutting move. Short inpatient stays sometimes can cost three times more than observation for the same ailment, according to a federal report. Advances in medical technology have lessened the need for inpatient stays, officials also say.

Hospital executives blame Medicare's strict admission rules but say those don't affect their decisions about care. For hospitals, lower reimbursements for observation are better than losing a larger inpatient fee after a government audit.

Yet some hospitals also manipulate observation to lessen Medicare penalties they receive for delivering poor care, since only inpatients are included in the formula, healthcare experts say.

Nationwide, the number of observation visits climbed 65% from 2006 to 2011, according to an independent congressional agency on Medicare (PDF). Yet there is little uniformity in the decisions to use observation, according to a recent report (PDF) by the U.S. Department of Health and Human Services inspector general.

Crain's analyzed claims for observation by 62 local hospitals from 2007 to 2011. Most of the data was provided by the U.S. Centers for Medicare and Medicaid Services, which administers Medicare, under the Freedom of Information Act. A CMS spokeswoman declines to comment.

Evanston-based NorthShore University HealthSystem and Loyola provided their own data, which was missing or not detailed in federal records. Because observation is billed in hourly units, Crain's divided the total time by 24 to determine the number of days.

Crain's also looked at penalties Medicare imposed on hospitals for readmitting patients within 30 days of discharge. Those penalties create incentives to use observation for elderly patients with complicated medical conditions.

“If you're never admitted, you could never be rehospitalized,” says Vincent Mor, a Brown University professor who has studied the national rise of observation.

Among Crain's findings:

  • Arlington Heights-based Northwest Community had the most observation days, with 15,326 from 2007 to 2011. That's 56 observation days for every 1,000 patient days in 2011.


  • The 10 hospitals with the most observation days accounted for 42 percent of the overall total. Eight of them decreased their readmission penalties from fiscal years 2013 to 2014.


  • Our Lady of the Resurrection's observation days shot up from just 40 in 2007 to more than 2,100 five years later.


  • Morton Oster spent three nights undergoing a battery of tests at Northwestern Memorial after he broke his ankle and bruised his cheek in a fall at home.

    But after the 83-year-old retired insurance broker sought rehab at a Skokie facility to strengthen his weakened muscles, he was forced to pay $7,360 out of his own pocket, says his daughter, Ann Heller.

    Unbeknownst to Mr. Oster, that meant Medicare didn't cover his 2011 rehabilitation stay because he wasn't admitted to the hospital.

    “We got caught in the loophole,” Ms. Heller says. Her father died from prostate cancer a year later.

    Even though they're on the rise, observation days represent a fraction of total patient days, records show. Representatives of Chicago-based Northwestern and Presence Health, which operates Resurrection, decline to comment.

    In an effort to quell controversy, CMS implemented a new rule on Oct. 1 intended to soften the requirements for inpatient admissions. Some experts doubt the rule will have any effect.

    Observation began climbing significantly around 2007, a few years after Medicare hired third-party recovery audit contractors, known as RACs, some experts say.

    Norwegian American Hospital is fighting auditors who are trying to claw back $450,000 in reimbursements, including some for short inpatient admissions the RACs claim should have been billed as observation, says Jose Sanchez, CEO of the Humboldt Park safety-net hospital.

    Mark Newton, CEO of Swedish Covenant Hospital on the Northwest Side, one of the highest users of observation, says he doesn't feel pressured by Medicare to reduce costs.

    “What I'm focused on is to give people the right care at the right time,” he says.

    At Northwest Community, decisions are based on placing patients in the most effective environment, says Judith Beekman, director of clinical resource management.

    “If patients meet inpatient criteria, they will be admitted,” adds Jonathan Rozenfeld, chief operating officer at St. Alexius and its sibling hospital, Alexian Brothers Medical Center. “It's to our benefit financially. . . . We're not defaulting to observation.”

    Many hospitals have hired case managers and consultants to review observation cases or opened observation units to distinguish those patients from inpatients.

    Hospital executives recognize the need to cut costs, says Liz Behrens, a vice president at NorthShore, which has two hospitals among the top 10 for observation use. “But I think the pendulum might have swung a little too far.”

    "Hospitals play with Medicare patients' status" originally appeared in Crain's Chicago Business.
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