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Medicare & Medicaid News

Report Finds Rapid Growth in Medicare Observation Services that Can Cost Seniors

Raises concerns about clinical benefit and out-of-pocket costs for seniors, quality of care

Nov. 14, 2013 – AARP Public Policy Institute released a new report today examining the use of hospital "observation status" for Medicare patients. Hospital emergency rooms sometimes hold patients for observation before admitting them or sending them home. This observation status has grown rapidly and for Medicare patients the distinction is important because it can affect out-of-pocket costs. Use of observation status as a substitute for admission also raises concerns about quality of care.

The report, “Rapid Growth in Medicare Hospital Observation Services: What’s Going On?,” analyzed the frequency and duration of the use of observation status for Medicare beneficiaries between 2001 and 2009. It found a dramatic increase in Medicare claims for observation status – more than 100 percent growth over nine years – and an even greater percentage increase in the length of time spent in observation, with visits longer than 48 hours increasing the most.


Related Archive Stories


Hospital ‘observation’ care bad, costly decision for many seniors on Medicare

Considered by Medicare an outpatient service which means seniors can face higher out-of-pocket expenses and fewer Medicare benefits.

By Susan Jaffe, Kaiser Health News

Sept. 4, 2013


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“The dramatic increase in the use of observation status for Medicare patients deserves a closer look,” said Debra Whitman, AARP Executive Vice President for Policy, Strategy and International Affairs. “The clinical benefit of long-term observation remains questionable. And for Medicare patients who remain in the hospital under observation, they may not realize the high out-of-pocket costs they'll have to pay.”

Currently, Medicare requires a patient have a three-day inpatient hospital stay before receiving covered care in a skilled nursing facility, such as rehab for a knee replacement or the like. However, a patient may spend three nights in the hospital under observation and not meet that requirement, potentially resulting in unexpectedly high out-of-pocket costs and lack of coverage for needed care.

"In some cases, Medicare cost sharing for outpatient services, including OS, may be greater than the inpatient deductible that beneficiaries would incur when admitted ($1,184 in 2013)," according to the report.

"Unlike inpatient coverage, there is no cap on beneficiary cost sharing for OS visits. In addition, some beneficiaries may forego or be denied coverage for necessary care in a skilled nursing facility (SNF) because time spent in OS does not count toward Medicare’s 3-day prior inpatient stay requirement for Part A SNF coverage. As a result, some beneficiaries may incur out-of-pocket expenses for SNF care that can amount to thousands of dollars."

The report explores the reasons for growth in the use of observation services as well as potential policy solutions, including counting time spent in observation toward the three-day stay requirement.

Bipartisan legislation has been introduced in both the House and Senate (sponsored by Representatives Joe Courtney (D-Conn.) and Tom Latham (R-Iowa) and Senators Sherrod Brown (D-Ohio) and Susan Collins (R-Maine)) to count the time spent in observation toward the three-day stay requirement. The legislation, the Improving Access to Medicare Coverage Act of 2013 (H.R. 1179/S. 569), has been endorsed by AARP.

The full report, “Rapid Growth in Medicare Hospital Observation Services: What’s Going On?” is available here:

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