The Difference between Admitted and Observed Medicare Hospital Stays Is Not New

On July 21, The Boston Globe  (subscription required) ran an op-ed about Medicare costs in which the author ranted against politicians because, in his words

"...my mother was classified as being there “for observation” — meaning that she was considered an outpatient for billing purposes. This meant that the bill — over $20,000 — was coded under the Medicare outpatient category (Part B) with a 20 percent patient co-pay. Being classed as an outpatient also disqualified my mother from any Medicare benefits in a rehab facility or skilled nursing home (SNF-see Note) after she was discharged."

(The author is apparently also syndicated so if you do not subscribe to the Globe, you can read the article here.)

The Globe author's major point was that this idea of classifying people on Medicare in hospitals as either "observed" or "admitted" is a new idea, being perpetrated on seniors by greedy politicians... apparently because they are in bed with dastardly insurance companies.  The author also implies that this "new" rule about observed vs. admitted was created by some new group of private companies called “recovery audit contractors (RACs),” paid based on how much they save Medicare. 

The Boston Globe article is full of errors too numerous to mention in a short blog post. But like all political rants, the errors are based on kernels of truth.

There are RACs (everyone of both political persuasions agrees fraud and waste in Medicare are a problem) and they do get paid on a contingent basis (everyone that understands financing understands that contingent fees are a better approach to paying for such services than cost-plus or fixed fee). After those kernels of truth, the author begins to veer dramatically away from the facts.

The Medicare bureaucracy -- not insurers -- determine whether a charge is Part A  or Part B based on its years-old rules, which mimic 1965 Blue Cross/Blue Shield Major Medical. Hospitals determine whether patients are admitted or observed based on their years-old rules. The fact that the RACs are apparently enforcing these years-old rules (among other rules they enforce) that were previously ignored misses the real point for seniors like us. The only thing you need remember from the Globe article:

• Find out whether you are being admitted or just observed if the ER folks advise that you to go "up to" a hospital room.  
• Make sure your family knows this observed vs. admitted rule if one or more of them come with you to a hospital in an emergency... and have them check your status with hospital staff daily.

But there's a big BUT here conveniently ignored in the Boston Globe article so the author can go on his political rant. If you are not being admitted, that does not mean you should not be observed (because you are worried about the cost or simply because the rule is confusing). 

It is true that it could get very costly if the observation goes on for days and your supplemental insurance will not cover the difference.  On the other hand, if the observation is overnight -- as is typical -- observation status under Medicare Part B is actually cheaper for you in almost all cases than inpatient status under Medicare Part A. 

• Under Part A Medicare, a Medicare inpatient without a supplement owes the hospital $1165 out of pocket in 2013 just to walk in the door of the hospital. 
• Under Part B Medicare, an observed "outpatient" without a supplement and with a $2500 bill for an overnight stay, only owes the hospital $500 ($3000/$600, $4000/$800, etc.).  

You'd have to be observed in a hospital like Kate Middleton's private hospital in London before Medicare inpatient status would be cheaper for an overnight stay. Now that I think of it, maybe that's why she only stayed overnight.

NOTE: The second sentence in the quote from the Boston Globe reflects the bigger problem with Medicare's observed vs. admitted policy: transitioning over to a SNF if needed. I'll post about that issue some time in the future. And -- oh by the way -- over 95% of seniors have supplemental insurance of some type (including the Globe author's mother) so the Globe's rant is really misleading as well as potentially harmful to seniors.