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As Hospital Readmissions Fall, Observation Status Rises

While Medicare rules play a part, VA and commercial insurance patients are also affected

Many hospitals are substituting observation care for readmissions in order to avoid Medicare penalties, the Health Affairs Blog reports. This trend is also being found at veterans’ hospitals, even though those facilities do not stand to lose money if they don’t reduce readmission rates.

Since October 2012, Medicare has penalized hospitals when too many patients in traditional Medicare are rehospitalized within a month of discharge. This policy appears to be having unintended consequences for patients in Medicare and the commercial market.

Hospitals with readmission rates above the national average now receive lower payments across the board from Medicare; the higher the rate of “excess” readmissions, the greater the penalty. The fines are intended to push hospitals to provide better care for their patients both in and out of the hospital so those patients don’t return. However, when patients do return to the hospital, the policy may unintentionally encourage hospitals to keep them “under observation” to circumvent the penalties.

Although observation patients often receive care in a hospital’s inpatient unit, patients “under observation” have outpatient status under Medicare rules; they are not formally admitted to the hospital. This subtle difference may have significant financial consequences for some patients. For example, treatment under observation could mean denial of coverage for follow-up care in a skilled nursing facility, resulting in huge medical bills. Why? Because, under complex Medicare rules, beneficiaries must have spent at least three inpatient hospital nights before the program will cover care in a skilled nursing facility; observation status doesn’t count toward those three nights.

Hospital readmissions have been declining for years; this has intensified since Medicare began fining hospitals. The Centers for Medicare and Medicaid Services (CMS) has touted the decrease in readmission rates as evidence that hospitals are providing better care while better coordinating their efforts with other clinicians and as proof that patients and their caregivers are leaving the hospital with clearer instructions on how to take their medications or where to get appropriate follow-up care. But the rate of Medicare observation almost doubled in the six years preceding implementation of Medicare’s readmission penalties and continued growing between 2012 and 2013.

The findings suggest that in the new world of readmission penalties, some clinicians may be placing returning Medicare patients under observation rather than admitting them. An independent analysis of Medicare data published by CMS showed that the top 10% of hospitals with the largest drop (16% on average) in readmission rates between 2011 and 2012 also increased their use of observation status for Medicare patients returning within 30 days by an average of 25% over the same period.

Recent data indicate that Medicare’s readmission penalties may be affecting some commercially insured patients. Patients not covered under Medicare do not impact a hospital’s readmission fine, But Medicare, the country’s largest payer for health care services, often influences how hospitals care for all patients.

Data from the OptumLabs Data Warehouse, which includes claims from a large private health insurance carrier, showed that hospitals that reduced readmissions within 30 days also increased their share of returning observation patients in private plans. The top third of hospitals with the largest six-year (2009–2014) reduction in 30-day readmissions (26% on average) increased their share of returning observation patients in private plans by an average of 45%. Much of that increase started in 2012, the same year that Medicare hospital readmission penalties began. These findings apply to the health insurance carrier’s enrolled population and are not necessarily representative of the U.S. population.

Similar trends in the use of observation stays were seen in Veterans Affairs (VA) hospitals, where provider incentives and payment policy differ significantly from those of Medicare and private plans. An article published by Brad Wright and colleagues in the October 2015 issue of Health Affairs shows that rates of observation stays in the VA more than doubled between 2005 and 2013.

There may be other reasons for observation stays’ increasing popularity. For instance, as Wright and colleagues point out, veterans owe the hospital a significantly lower copay when they remain under observation ($50) than when they are admitted as inpatients ($1,184). The situation is similar for Medicare beneficiaries: nine out of 10 owed less for hospital services — not counting follow-up care — when they were “observed” rather than admitted. And some studies show that by placing certain patients under observation, physicians can save hospitals money while giving patients better and safer care. Finally, Medicare’s Recovery Audit program and similar initiatives by private payers, which carefully check the appropriateness of short inpatient stays, may be driving hospitals to observe patients more often.

 These trends raise a number of questions. Do observation patients get the same quality of care as inpatients? Do drops in readmission rates mean that hospitals are providing better care? Or, as David Himmelstein and Steffie Woolhandler suggested in a recent Health Affairs Blog, is it merely that some hospitals are avoiding penalties by relabeling patients they previously would have readmitted as observation patients?

Source: Health Affairs, October 30, 2015.

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