Hospital Readmissions Reduction Program Misses Nearly 20% of Hospital Stays in “Observation Status”

Since 2012, the federal Hospital Readmissions Reduction Program (HRRP) has reduced payments to acute care hospitals that readmit patients with certain medical conditions to inpatient status within 30 days of their discharge from the hospital.  A new study, “The Hospital Readmissions Reduction Program and Observation Hospitalizations,”[1] finds that HRRP fails to count nearly 20% of rehospitalizations of patients because the patient’s initial hospital stay (the “index” stay) or hospital readmission within 30 days, or both, was classified as outpatient observation.  Earlier analyses did not consider both the index stay and the readmission stay in calculating the impact of observation status on hospital readmissions.

The researchers describe observation stays as “often clinically indistinguishable from inpatient hospitalizations billed under Medicare Part A.”   As the Center for Medicare Advocacy has repeatedly reported,[2] the classification of hospitalized patients as outpatients in observation, despite the lack of distinction in the care needed or received by patients, has significant financial consequences.  Patients who need post-hospital care in a skilled nursing facility are denied Part A coverage unless they have had a three-day inpatient hospital stay; time spent in outpatient observation status does not count.

Researchers based their study on a review of 100% of hospital claims for Medicare beneficiaries between January 1, 2014 and November 30, 2014 as well as 30-day inpatient and observation rehospitalizations.  They suggest that their estimate may undercount the impact of observation status when they did not look at Emergency Department stays and the rates of observation stays have increased since the 2014 data they reviewed.  They suggest that “CMS and Congress might consider this an opportunity to address the oxymoron of ‘outpatient hospitalizations’ by engaging in comprehensive observation reform.” 

A 2019 column in The New England Journal of Medicine suggested that HRRP use a “return to hospital” metric, instead of a return to inpatient status,[3] noting that HRRP’s use of inpatient-only rehospitalizations “artificially inflated estimates of [the program’s] success.”  The column also noted an unintended consequence of HRRP – significantly increased rates of mortality within 30 days of hospitalization for patients with heart failure.

Federal legislation could help address the problem of observation status for Medicare beneficiaries.  Identical companion bills reintroduced in the House[4] and Senate[5] this month – the Improving Access to Medicare Coverage Act of 2021 – would count all time in a hospital towards qualifying for the three-day inpatient Medicare requirement.  Another approach would remove the three-day requirement altogether,[6] recognizing that hospital care in 2021 is different from hospital care in 1965, when the Medicare program was enacted and the three-day inpatient requirement was put into law.

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[1] Ann M. Sheehy, et al, “The Hospital Readmissions Reduction Program and Observation Hospitalizations,” Journal of Hospital Medicine, published online Jun. 16, 2021, 2021; 16:XXX.
[2] See the Center’s extensive materials on observation at https://medicareadvocacy.org/medicare-info/observation-status/
[3] Rishi K. Wadhera, et al, “The Hospital Readmissions Reduction Program – Time for a Reboot,” N Engl J Med 2019; 380(24); 2289-2291 (Jun. 13, 2019), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6589834/
[4] H.R. 3650, discussed in Center for Medicare Advocacy, “Observation Status Bill Reintroduced” (CMA Alert, Jun. 10, 2021), https://medicareadvocacy.org/observation-status-bill-reintroduced/
[5] S.2048, discussed in Center for Medicare Advocacy, “Senators Introduce Bipartisan Observation Status Bill to Help Vulnerable Medicare Beneficiaries” (CMA Alert, Jun. 17, 2021), https://medicareadvocacy.org/observation-status-bill/
[6] Center for Medicare Advocacy, “It’s Time to Repeal the 30Day Inpatient Hospital Requirement for Medicare Skilled Nursing Facility Coverage” (CMA Alert, Feb. 11, 2021), https://medicareadvocacy.org/end-medicares-3-day-hospital-requirement/