Beware Medicare “Observation” Status

You might need a subscription to read this from The Wall Street Journal, but I’ll give you the highlights. As you might know, when you’re at a hospital you might be officially admitted or you might be kept there but under “observation status.” Ideally observation status is so doctors can run tests and take other measures to decide if you really need to be admitted as a patient. But as with so much in the medical system, economics and finances are behind how the status is used a lot of the time. If a hospital admits someone and Medicare auditors later decide the person wasn’t seek enough to be admitted, the hospital won’t receive full reimbursement for the patient. So, doctors and hospitals might keep someone on observation status until he either clearly need to be admitted or is well enough to go home.

The problem with this approach is that Medicare Part A covers most hospitalization expenses after a deductible. But if the person never is officially admitted, outpatient care is covered under Part B. The patient then is responsible for the 20% deductible on all expenses, regardless of how high the final bill is. You’ll also pay more for any rehabilitation you need after the hospital stay if you were under observation instead of being admitted. It’s tough for a sick person and loved ones to keep track of such nuances and their effects, but if you don’t the difference can be thousands of dollars or even more.

From 2004 to 2011, the number of observation services administered per Medicare beneficiary rose by almost 34%, according to the Medicare Payment Advisory Commission, while admissions per beneficiary declined 7.8%. (That’s an imperfect comparison, but it’s the way the Department of Health and Human Services’ Office of Inspector General reports the numbers.) The number of Medicare beneficiaries grew 13% in the period, according to the nonprofit Henry J. Kaiser Family Foundation.

Observation status can expose Medicare patients to unexpected expenses. As outpatients, their visits aren’t covered under Medicare Part A, which pays for hospital charges above a $1,184 deductible. Instead, outpatient services are billed under Medicare Part B, which requires patients to pay 20% of the cost and imposes no cap on their total expenditures.

Observation patients also pay out-of-pocket for the medication they receive in the hospital. While those with Medicare Part D prescription-drug plans can file claims for reimbursement, they stand to receive little or no refund if their Part D plan doesn’t cover the medications they took or include the hospital in its network, says Joe Baker, president of the nonprofit Medicare Rights Center.