When Linda Brocato landed in Glenbrook Hospital in Glenview, Ill., last August, it was like deja vu from 2009. In both instances, the 61-year-old had badly broken her leg, which doctors had to immobilize with a straight-leg brace. She was at the hospital for three days both times and then went to a nursing home for intensive rehab.

So Brocato, an Angie's List member, says she was shocked when hospital staff told her two days into her most recent stay that follow-up nursing home care wouldn't be covered by Medicare. She became furious at the hospital when she received a $13,000 nursing home care bill. The reason: Unlike 2009, this time the hospital didn't admit Brocato as an inpatient, a requirement by Medicare to receive nursing home coverage. Instead, doctors had placed Brocato under observation — something health care providers may do to allow more time and tests to determine what care is needed.

A decision to discharge or admit is supposed to be made in less than 24 hours. But a growing number of patients like Brocato, find themselves in this medical status limbo — not fully admitted but in a hospital bed — for days. This can cause confusion and have far-reaching financial implications, particularly for older patients or those with disability who qualify for Medicare. Upon learning her nursing home care wouldn't be covered, Brocato says: "I thought, 'My God, how am I going to [pay for] this?'"

Observation status incurs more costs to patients

Observation is generally cheaper than inpatient care for insurers and hospitals, but the opposite can hold true for some patients. Brocato has supplemental coverage that picked up the portion of her hospital bill Medicare didn't pay. But observation patients without other coverage pay 20 percent of hospital outpatient services, which isn't required for inpatient care. In addition, post-hospital nursing home care stays aren't covered by Medicare unless an individual has been an inpatient for at least three days. And hospitals routinely fail to tell patients they're under observation.

Taken together, observation can end up costing patients thousands, and the number of claims is increasing, even as inpatient cases have leveled. According to the most recent data, providers submitted nearly 1.27 million Medicare claims for observation services in 2009, up from 932,488 in 2006. In that time, claims related to observation lasting more than 48 hours tripled, despite increasing patient complaints to Medicare and hospitals.

Medicare doesn't prohibit observation care up to 72 hours, but longer stays can trigger an investigation by the Centers for Medicare and Medicaid Services into why the patient wasn't admitted. "We are aware of the problem," says Ellen Griffith-Cohen, a spokeswoman for CMS, speaking about the increase in prolonged observation care. "We're still looking at what's causing this."

Is Medicare compounding pricing problems?

Rather than being the solution, however, many see Medicare as the problem. "They're the 800-pound gorilla in the room," says Brian Contos, executive director of research for The Advisory Board Company, a firm that consults with hospitals on observation care.

In 2008, Medicare expanded a hospital audit program under direction from Congress to reduce fraud. Many say that's led hospitals to increase their use of observation to prevent CMS from challenging their admission decisions. Auditors are particularly focused on inpatient cases where patients are admitted for three days and go to a nursing home, says Mary Ellen Mitchell, corporate director of care management and medical social work at NorthShore University HealthSystem, which includes Glenbrook Hospital where Brocato had been placed under observation. "This is not unique to NorthShore," she says. "This is an issue all hospitals nationwide are grappling with."

If a hospital admits a patient who Medicare feels should've been placed under observation, Medicare can refuse to pay the hospital for care. Private insurers also emphasize outpatient care to reduce costs, but most don't require a three-day inpatient stay to cover nursing home care. With the federal health care law looking to hospitals to reduce high readmission rates, some say hospitals will be more likely to keep patients in observation rather than send them home too early or admit them. "I think we'll continue to see a pretty substantial increase in observation," Contos says.

That could mean more surprises for patients like Brocato. She hired Susie Dressler, a patient advocate in West Chicago, Ill., to appeal the hospital's decision to place her in observation. Dressler's now appealing the case with Medicare. "There's no difference between the two incidents," Dressler says of Brocato's need for skilled nursing care after she broke her legs in successive years. "It depends on how the hospital billed."

Clearing up confusion over status requirements

Hospital officials see it differently. "It is a frustrating situation, and we're as frustrated as our patients," says Mitchell. Still, she defends the hospital's decision, saying inpatient care wasn't medically necessary for Brocato, according to Medicare rules. Citing HIPAA, NorthShore spokeswoman Colette Urban later declined to explain why they treated Brocato's two hospital visits differently.

Griffith-Cohen of CMS didn't speak specifically to Brocato's case, but says there are situations where a patient doesn't feel he or she can return home, but doesn't meet requirements for an inpatient stay. She thinks the new health care law, focusing on holding medical providers accountable for patient outcomes, may help. "You may find that in the future there are better bridges from one setting to another," she says.

But for now, Contos of The Advisory Board Company says Medicare rules, which determine when it's medically necessary to admit a patient, are confusing for doctors and hospitals, too.

"It's not terribly straightforward with some of these patients, what you do with them," agrees Dr. Mark Moseley, medical director of the emergency department and clinical-decision — or observation — unit at The Ohio State University Medical Center in Columbus, which is highly rated.

Patients need to know their status

The American College of Emergency Physicians estimates 25 percent of hospitals have observation units or beds — and the number is growing. Stand-alone observation units don't eliminate the potential of higher out-of-pocket costs for patients. But, Moseley says, they do reduce confusion over admission status, and it's a good way to ensure some patients aren't sent home too early or kept in the hospital unnecessarily.

"Certainly, patients should know whether they are an inpatient or outpatient, and we encourage them to ask that question," says Roslyne Schulman, director of policy development for the American Hospital Association. (Read "How to know your medical status") But nationally, there is no formal protocol for communicating this. "The No. 1 error I've found with hospitals using observation is they're not clear with the patient [how] they're being admitted," Contos says. He adds that the word "admitted" — often associated with inpatient care — can be accurately used for observation, causing further confusion.

Often it's not until a patient gets the bill that they start to piece it all together. "It certainly can add up," says Mary Kesel, president of Benefit Advocates in Winston-Salem, N.C., who's assisting one client who faced $36,000 in charges for three days of observation care. The patient, who was experiencing chest pain and had fallen, had Medicare coverage for inpatient but not outpatient. Kesel has negotiated the bill to $10,000, but it still looms large: "We appealed it, we tried to get it switched to an inpatient, but it's almost impossible."

Observation problems have even caught the attention of lawmakers. U.S. Rep. Joe Courtney, D-Conn., is collecting co-sponsors for a bill he introduced in July that would count time patients spend in the hospital under observation toward the three-day hospital stay Medicare requires to cover skilled nursing care.

That could spell relief for people like Brocato, who says she spent much of her recovery time calling attorneys, patient advocates, even a local newspaper, to plead her case. "This is insanity," she says.