Why You Pay More if You're Hospitalized for Observation

How Observation Guidelines Work

Doctors examining patient in hospital room
Getty Images/Caiaimage/Robert Daly

Health insurance companies, Medicare, and hospitals are always looking for ways to save money. Assigning you to observation status using observation guidelines saves them money, but might end up costing you more.

When you’re put in the hospital, knowing whether you’ve been admitted as an inpatient or put on observation status is important to you financially. Here’s why it’s important, and what to do.

What is Observation Status?

When you’re put in the hospital, you’re assigned either inpatient status or observation status. You’re assigned inpatient status if you have severe problems that require highly technical, skilled care.

You’re assigned observation status if you’re not sick enough to require inpatient admission, but are too sick to get your care at your doctor’s office. Or, you might be assigned to observation status when the doctors aren’t sure exactly how sick you are. They can observe you in the hospital and make you an inpatient if you become sicker, or let you go home if you get better.

How Do I know if I’ve Been Assigned Observation Status or Inpatient Status?

Since observation patients are a type of outpatient, some hospitals have a special observation area or wing of the hospital for their observation patients. But, many hospitals put their observation patients in the same rooms as their inpatients.

This makes it difficult for you to tell if you’re an inpatient or an observation patient. You can’t assume that, just because you’re in a regular hospital room, or in a hospital bed rather than on a gurney, you’re an inpatient.

Nor can you assume since you’ve been in the hospital for a few days you’re an inpatient.

Although observation is intended for short periods of time, it doesn’t always work that way.

The only way to know is to ask.

How Is My Observation or Inpatient Status Assigned?

Hospitals and doctors don’t just assign you to one status or another because they feel like it, because one status seems better, or because you ask to be assigned to a particular status. Instead, there are national guidelines published in the Medicare Benefit Policy Manual for determining who is assigned to inpatient status, and who is assigned to observation status.

These guidelines are vague yet complex and can change every year, so most hospitals and insurance companies use a service that publishes criteria to help them apply the guidelines to each patient. Two of the most popular services are McKesson’s InterQual Criteria and Milliman Care Guidelines.

These inpatient and observation guidelines typically address two different types of criteria. The first criterion is the severity of your illness: are you sick enough to need inpatient admission?

The second criterion is the intensity of the services you’re requiring: is the treatment you need intense enough or difficult enough that a hospital is the only place you can safely receive that treatment? Each criterion point has a whole slew of very specific evaluation points which might include things like blood test results, X-ray findings, physical exam findings, and the types of treatments you’ve been prescribed.

When you’re put into the hospital, the hospital’s case manager or utilization review nurse will evaluate your case, comparing your doctor’s findings, your diagnosis, results from your tests and studies, and your prescribed treatment with the guidelines. He or she will then use those guidelines to help your doctor assign you to either observation status, or inpatient status.

Why Should Observation Status or Inpatient Status Matter to Me?

If you’re an inpatient, but Medicare or your health insurance company determines that you should have been assigned observation status, it can refuse to pay for the entire inpatient hospital stay. You probably won’t discover this until the hospital has submitted the claim and had it denied by the insurance company weeks or even months after your hospitalization.

In fact, the Centers for Medicare and Medicaid Services contracts companies to search Medicare patients’ hospitalization records in an effort to find inpatient admissions that could have been handled in observation status. This happens months or even years after-the-fact. Then, Medicare takes back all the money it paid the hospital for that admission.

Hospitals try to follow the guidelines closely since that’s the easiest and most universally accepted the way to justify why they assigned you that particular status. For example, if your health insurance company or Medicare denies your claim because it determined that you should have been in observation status rather than inpatient status, the hospital will fight that denial by showing that you met InterQual or Milliman guidelines for the status you were assigned. If the hospital doesn’t follow the guidelines closely, it risks claim denials.

But, if you’re assigned to observation status rather than inpatient status, although it’s less likely your insurer will deny your entire claim, you might still take a financial hit. Usually, your share of cost for outpatient services is larger than your share of cost for inpatient admissions.

Since observation patients are a type of outpatient, their bills are covered under Medicare Part B, or the outpatient services part of their health insurance policy, rather than under the Medicare Part A or hospitalization part of their health insurance policy. Outpatient coverage can have higher coinsurance rates than inpatient coverage (this is particularly true if you're on Medicare, since Part B has coinsurance with no out-of-pocket cap unless you have a Medigap plan or Medicare Advantage). So, you may end up paying a larger portion of the bill for observation services than you would have paid for inpatient services.

If you're on Medicare, observation status will also end up costing you more if you need to go to a nursing home for rehabilitation after your hospital stay. Medicare usually pays for services like physical therapy in a nursing home for a short period of time. But, you only qualify for this benefit if you're been an inpatient for three days. If you’re in observation status for three days, you won’t qualify.

This means you’ll have to pay the entire bill for the nursing home and its rehab services yourself. You can expect this bill to be several thousand dollars.

Two-Midnight Rule

In 2013, the Centers for Medicare and Medicaid Services (CMS) issued guidance called the "two-midnight rule" which helps to further identify which patients should be admitted as inpatients and covered under Medicare Part A (hospitalization) rather than Part B (outpatient). The rule states that if the admitting doctor expects that the patient will need to be in the hospital for a time period that spans at least two midnights, the care would be billable under Medicare Part A.

In 2015, CMS updated the two-midnight rule to provide more flexibility for case-by-case determinations. The new guidelines still generally call for a hospital stay that spans at least two midnights before Medicare Part A applies, but they also leave some wiggle room for physician discretion. If the doctor believes that the patient's treatment warrants inpatient admission even when the hospital stay is expected to have a duration of fewer than two midnights, the doctor can still opt to admit the patient as an inpatient.

Should I Fight for Inpatient Status, or Settle for Observation Status?

Although it's frustrating, it’s not so much a matter of settling for observation status or fighting for inpatient status as it is a matter of making sure you’re in the correct status and understanding what that means to your budget.

Demanding to have yourself reassigned to inpatient status when you actually fit the criteria for observation status might seem like it could save you the money if your coinsurance costs are higher for outpatient care (observation status), and it's definitely advantageous to be assigned to inpatient care if you're on Medicare and you're going to need care afterwards in a skilled nursing facility. But, remember, your health insurance company might refuse to pay the hospital bill if it determines you were incorrectly assigned to inpatient status. Neither you nor the hospital will likely succeed in fighting that claim denial since you didn’t fit the guidelines for inpatient status.

That said, it’s wise to ask what specific guidelines were used to decide that you should be in observation status rather than inpatient status. You might also ask what types of treatments, test results, or symptoms would have qualified you for inpatient status with this same diagnosis. Additionally, consider asking to speak with someone from the billing office who can estimate your out-of-pocket costs whether you’re in observation status or an inpatient.

If you’re too sick to do this yourself, you can give permission to have a trusted family member, friend, or patient advocate ask these questions for you, and follow up on the answers.

Sources:

Centers for Medicare and Medicaid Services, Fact Sheet: Two-Midnight Rule, 10-30-2015. 

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