“Observation Status” May Disproportionately Burden Medicare Beneficiaries in the Most Vulnerable Neighborhoods

A new study shows that the consequences of “observation status” may disproportionately burden Medicare beneficiaries in neighborhoods with high levels of socioeconomic deprivation.

When hospitalized patients are labeled in observation status they are considered “outpatients,” even though there may be no difference between their medical care and the care of inpatients, and even though the hospital stay may last for several days. Observation status often prevents beneficiaries from accumulating three days as a hospital inpatient, which is required for Medicare to cover post-hospital care in a skilled nursing facility (SNF). Patients are thus denied access to medically necessary rehabilitation after their hospital stays.

The new findings, published in Mayo Clinic Proceedings, show that people living in the most deprived neighborhoods were more likely to be re-admitted for a subsequent observation stay within 30 days of a first observation stay. In other words, the most vulnerable patients – and those least likely to be able to pay out-of-pocket costs on their own – are most likely to have repeat observation stays, increasing their risk for non-coverage of SNF care. The study also found the most vulnerable patients were more likely to have long observation stays, and less likely to be discharged to SNFs.

These findings are not surprising as it is prohibitively expensive to receive care in a nursing facility without Medicare coverage. The consequence of observation stays is that patients often do not receive the post-hospital care they require. As the authors put it, the study “raises the possibility that those least able to afford unexpected medical costs from serial observation hospitalizations or subsequent uncovered SNF stays are the ones most likely to bear these expenses under Medicare’s current observation policy, which in turn may discourage these patients from seeking needed health care.”

There was already evidence of racial or ethnic disparities in the use of observation stays within hospitals. This new study is another indication that Medicare’s observation status policies – and the pressure the agency places on hospitals to comply with its billing rules – have a disproportionate impact on those who can least afford it, and may contribute to health disparities and inequities.

The study bolsters the Center for Medicare Advocacy’s support for a policy change, so that time spent in observation status would count toward Medicare’s three-day inpatient hospitalization requirement for SNF care. It also reinforces the need for beneficiaries to be able to appeal an Observation Status classification to show they met Medicare’s criteria for inpatient coverage. The Center for Medicare Advocacy’s class action lawsuit pursuing beneficiaries’ right to appeal Observation Status classification is currently on appeal by the government after a favorable trial decision issued earlier this year.