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Study: Use of Observation Stays Drives Up Costs for One in Four Medicare Patients

The bill skyrockets when patients return within 60 days after prior observation stay

Currently, there is a growing trend for Medicare patients to receive observation care in hospitals to determine whether they should be formally admitted. A new study from the Perelman School of Medicine at the University of Pennsylvania has shown that for more than a quarter of beneficiaries with multiple observation stays, the cumulative out-of-pocket costs of these visits exceeded the deductible they would have owed for an inpatient hospital admission.

The new findings were published in the Journal of Hospital Medicine.

Observation care is considered by Medicare to be an outpatient service even though patients typically stay in beds in the emergency room or other areas of the hospital while they are tested, treated, and assessed. Using Medicare data to identify hospital observation stays among beneficiaries from 2010 to 2012, the researchers found that, on average, patients owed approximately $470 –– a significantly lower cost than the standard deductible of $1,100 for an inpatient visit. However, when beneficiaries had to return to observation care within 60 days of a prior observation stay, their average cumulative costs more than doubled ($947), and for 27% of these patients, the costs exceeded the inpatient deductible.

“While most patients receiving observational care do spend significantly less in out-of-pocket copayments, those with at least two observational stays within 60 days are potentially facing higher copayments than if they were admitted,” said lead author Shreya Kangovi, MD. “Additionally, the design of the Medicare benefit allows several ways in which observation stays may become more costly to patients. For example, Medicare patients are required to pay a percentage of the cost of each service provided during an observation stay, as opposed to a single fixed cost for an inpatient stay.”

Kangovi noted that Medicare beneficiaries who return to the hospital frequently are typically of lower socioeconomic status and thus may be disproportionately affected by an increased financial liability.

The Penn team also found that the number of patients with multiple observation visits within a 60-day period increased by 22% between 2010 and 2012.

“This could signal that excess cumulative financial liability will be all the more common in the future,” said senior author David Grande, MD. “Some have suggested capping the total out-of-pocket expense for observation care at the inpatient-deductible amount. This warrants further study since observational care is already more costly than inpatient stay for a significant portion of the patient population.”

Sources: Penn Medicine; August 26, 2015; and Journal of Hospital Medicine; August 20, 2015.

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