Medicare needs to end observation status for patients

I read with interest the recent article “Hospitals hope for relief from Medicare's two-midnight purgatory". Every time I see a story about the issue of observation services I feel compelled to reply. Quite frankly, it is the existence of observation services that is actually the problem. Any solution has to include the elimination of observation.

First and foremost, the presence of observation services has a negative effect on quality of care. Because of its availability, hospitals have to spend inordinate amounts of time, money and other resources trying to decide whether a patient who needs hospitalization should be observation or inpatient. A hospital like mine, which is a 250-bed community facility, might spend $1 million a year in personnel costs—highly trained medical personnel including nurses and physicians—determining whether a patient should be in observation or admitted as an inpatient.

If anyone feels that this price tag is an exaggeration, realize that it is a condition of participation with Medicare to have a utilization process to review for proper hospital status. These costs also include defending denials from recovery audit contractor reviews. For a community hospital, spending time and money on observation issues takes away resources that could have been used on quality and patient-safety issues.

Observation services also are distracting to physicians. When a physician puts a patient in the hospital, the focus should be on treating the acute medical issue. However, physicians also have to make a decision about whether that patient should be in observation or admitted to the hospital as an inpatient. The physician has to look into the crystal ball and decide whether that patient is going to stay two midnights. And the physician knows that whatever decision is made as to the hospital status of the patient will be scrutinized by the hospital utilization committee, and then later by government-contracted auditors. Physicians should not have to deal with this. If the decision is made that a patient needs to be in the hospital, then that patient should be admitted as an inpatient, end of story. Physicians could then devote their focus to important matters such as the medical condition of the patient and appropriate treatment.

Observation is also confusing and distressing to patients. I gave a presentation in my community recently in an attempt to educate our citizens on observation versus inpatient status. Amazingly, it was a record crowd and a completely packed house.

Our patients do not understand how they could be in the hospital occupying a bed and not be admitted (observation is an outpatient service; thus they are not actually admitted). They do not understand why they have to pay for self-administered medications and outpatient copayments. They believe that since they have paid into Medicare for decades, they should not be denied benefits they deserve. They are afraid they will get stuck with the bills when their inpatient hospitalization is denied. Observation thus creates conflict between patients and their local hospitals over these billing issues, and distracts patients from more important issues such as learning about their treatment plans.

Finally, observation cases are the genesis of the vast majority of denials in recovery audits of inpatient hospitalizations. As someone who writes these appeals and testifies in administrative law judge hearings defending the inpatient admissions of our patients, I can attest that the audit contractor never denies an inpatient hospitalization using the argument that the patient should not be treated in the hospital. The denial is always based on the argument that the patient could have been treated in observation status.

Recovery audit contractors use the nebulous definitions in the Medicare benefit policy manual to make their case. And although I believe the judges do their best, there is certainly no agreement among the 65 administrative law judges as to when a patient should be observation versus inpatient. Studies have shown the overturn rate for these denials ranges from 15% to 85%. Observation versus inpatient is also one of the reasons there are reportedly 500,000 recovery audit denial cases backlogged at the administrative law judge level.

The two-midnight rule is an attempt to define observation services. I do appreciate the CMS recognizing the need for clarification and then acting. But clearly this rule has its own significant problems. Let's fix the problem by eliminating observation, which can be done in a budget-neutral way. When a physician determines hospitalization is necessary, that person should be admitted as an inpatient.