Increased Use of Hospital Observation for Repeated Stays Costs Medicare Beneficiaries

The use of hospital observation instead of hospital admission is becoming increasingly common for Medicare beneficiaries; however, it may mean higher out-of-pocket costs as hospital observation stays are not covered by Medicare Part A.

A study published in the Journal of Hospital Medicine used a 20% sample of the Medicare Outpatient Standard Analytic File (2010-2012) and sought to answer the question: Do Medicare beneficiaries who revisit observation care pay more than they would have had they been readmitted?

“As observation care grows, Medicare beneficiaries are increasingly likely to revisit observation care instead of being readmitted,” the authors wrote. “This trend has potential financial implications for Medicare beneficiaries because observation care—although typically hospital based—is classified as an outpatient service.”

They used the data to determine the total cumulative financial liability for Medicare beneficiaries who revisit observation care multiple times during a 60-day period. On average, these beneficiaries had a cumulative liability of $947.40. While this financial amount is significantly below the $1100 inpatient deductible, the researchers found that more than one-fourth (26.6%) of beneficiaries had a financial liability that exceeded the inpatient deductible.

Observation care is usually less expensive than inpatient admission, but beneficiaries lack protection from financial liabilities that can accumulate over multiple visits. Since observation is considered an outpatient service, it is covered by Medicare Part B and not subject to Medicare Part A inpatient deductible. Even if there are readmissions, the Part A deductible is only paid once in a 60-day period.

Only a few states require that patients be notified in writing about their observation status, while in the rest of the country patients are unaware until the bill arrives.

The authors noted that these findings shed light on 3 main causes for concern: Medicare beneficiaries who return to the hospital frequently are typically of lower socioeconomic status and may be more affected by increased liability compared with the general beneficiary population; patients have little control over whether they are classified as observation or inpatients; and between 2010 and 2012 the number of patients with multiple visits increased 22%.

“This means the problem of excess cumulative financial liability is likely to be increasingly common over the coming years,” they wrote.