Under observation: Why hospital patients increasingly face a pricey surprise

Linda Brocato, who has multiple sclerosis and requires a scooter for mobility, says she needed nursing home care to recover from a broken leg, but Medicare didn’t cover it. 
Photo by Jason Madden

Linda Brocato, who has multiple sclerosis and requires a scooter for mobility, says she needed nursing home care to recover from a broken leg, but Medicare didn’t cover it. Photo by Jason Madden

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.


my husband was seen in the Emergency room with chest pain, the doctor wanted him to say, and I asked specifically "will this be an admission or an observation", because my daughter was hit with a medical bill after she was surprised with this new coding. I was told he was being admitted, but guess what came in the mail today? Yup, I'm getting bills because he was only there 72 hours, making it an "observation".

Well, the doctor wasn't lying. Your husband was technically admitted. He was just admitted as an observation, not an "inpatient." Yes, I know, the medical field is awful with that, but unfortunately, the people in the ER (and med floors) have very little power to do anything about that.

I am a doctor working at a large urban hospital, and I can tell you from firsthand experience that I am as frustrated about this as my patients. We need to be on the same side! The power is not with the doctor here. Medicare in an attempt to save money actually hires private firms to review discharges and have an outside physician determine if the care I gave was “medically necessary.” If they level of care given in a hospital could be reasonably given in a nursing home, then it’s not “medically necessary.” It doesn’t matter to Medicare if the patient is too sick to go home. Think of the person living alone who broke their leg and needs help getting up and around, needs extra pain medications, and needs rehab. Medicare will not pay for that level of care in a hospital anymore. If I keep you in the hospital longer as an “inpatient,” Medicare increasingly is coming back and telling me that they won’t pay for it. If you thought the bill was high when patients and families were paying 80%, think of what it would be if Medicare pays NONE of it. Thankfully, there is a bill introduced in the senate recently that my help to address this.

I am an ER doctor. This whole Obs vs Admission status is difficult for us as well. But let me say, there are MANY patients that can go home but refuse too. Many elderly patients brought in by the children because they "dont know what to do anymore" and many patients coming in with anxiety driven chest pain that isn't a heart attack. Basically if you are admitted for a symptom (abdominal pain, chest pain) without a diagnosis then your on observation status. I have told patients that they are well enough to go home but they refuse..... so walla. You status can be upgraded to admission at a later time by the inpatient doctor. BUT it cannot be downgraded per law.

Lori above got it right! If everyone including the law makers were treated to the same as all the rest of the country there would be a change and fast. Also it is understandable that no one will work for nothing but making us pay for all the repeat stabbings and criminal element that fills our emergency rooms thereby denying the paying citizens of care when they need it and they have paid for it where is the justice in passing the uncovered expenses on to the rest? If it werent so there would be a decrease in such abuses medicine is a business like any other. No one works for nothing.

I think that if the politicians who run the country (public servants???) would be required to have the same healthcare benefits as the rest of the country and pay premiums like everyone else then the system would change. This includes the President. After all, they are supposed to be doing what's best for the country and they are in this country too! Hypocrisy is too rampant!

Hello, Frank! I’m responding to your comment on our article “Why hospital patients increasingly face a pricey surprise.” Your comments were not deleted from this article. The comment you made were instead left on the related article at this link: http://magazine.angieslist.com/hospitals/articles/the-hidden-costs-of-hospital-observation-care.aspx We appreciate and invite diverse viewpoints on the stories we cover. Thanks for commenting!

so...shouldn't it be, you spend the night, youre admitted...case closed....I would certainly advocate for this...get rid of any ambiguity

My comment is not specific to patient status, but rather the numerous fees now incurred at Dr and ER visits. I was diagnosed with MS in April 09 which has made medical treatments my new career. It used to be my co-pay covered my visit from my end. Now I receive multiple bills for individual services. My ER co-pay is $50.00 for example. Then I get another $180.00 bill for "attending physician services." How is a Dr not included in my ER co-pay? Who goes to the ER to not see a Dr?

I guess it is too politically incorrect to criticize Medicare. My post and replies have been removed. Frank

I can't understand why calories have to be listed on fast food but there is no requirements for listing the cost of procedures in the waiting room. It makes sense to know what you are paying before you have it done. A cat scan in one facility cost $1,080.00 while in another it costs $400.00. Why such a huge difference. We as consumers should demand a posting of the costs before we agree to anything, if possible.

It should not surprise anyone that healthcare is a "for profit" enterprise. Bottom line - insurance drives the healthcare industry, not healthcare providers.

Observation is a medical cop out. Physician should be able to decide if a patient is well enough to be sent home out of the emergency room. If the patient is not well enough to go home he should be admitted to hospital. In general the care one receives in "observation" is not as good as in the fully staffed hospital bed. If hospital does not have requirement to that effect in medical staff bylaws there should be an effort to make state laws to that effect.

I take exception to Norman's post. Hospitals are not abusing and deceiving patients. There are strict Medicare guidelines as to whether a patient can be classified as In-Patient or Observation. Hospitals have no control over this. The Hospital Utilization Review RN's try desperately to change the status to In-Patient (especially if patient needs to go to a rehab), but they can't change lab values or test results to make a patient qualify. Medicare needs to change it's rigid standards. I know, I am a hospital Discharge Planner.

This happened to a family member in March. I strongly suggest asking the physician whether or not it is "medically necessary" to admit a patient. If they say "no," you can be sure that the patient is being billed by the hour. An empty bed does not generate any income and they don't care who fills one or how the bill is going to be paid.

All politicians and pundits agree that ever rising healthcare costs will bankrupt our country. Is it not obvious that the business model of our healthcare system is criminally flawed. We are in a global economy. How can we compete with European countries where the highest cost for a day in hospital is $800, where here, as your example shows some genius in the hospital billing office comes up with $36,000 for 3 days in "observation"? Don't look to insurance companies for help, they can make a lot more money off $12,000 rooms than off $800 rooms. In all other businesses prices need to be competitive and justifiable. Government is responsible for keeping our country solvent. Obviously, we cannot afford uncontrolled price gauging to continue. If our leaders and our healthcare community don't understand that, but think the problem is Medicare or Obamacare, then we will go broke.

To John Shoenberg"s comment " Don't look to insurance companies for help, they can make a lot more money off $12,000 rooms than off $800 rooms" Wrong. Insurance companies get to PAY the bill, NOT profit from it. Insurance Companies must maintain Government regulated Reserves to insure payment of claims. They can"t print money to pay. The Healthcare mess can not be solved by unqualified, un-involved , un-caring POLITICIANS. Government needs to back off and let the Medical Industry Experts sort it out. Also every US citizen including Government should be required to use the same system. ALL LAWS SHOULD APPLY EQUALLY TO THOSE WHO MADE THEM.

The definition of observation vs. admission needs adjustment. If a hospital can burn through $36,000 in three days and call that observation, the definition is flawed.

Thanks for this very informative, potential savings. Shocking that health care has become a business whey preys on the most vulnerable at the most vulnerable time.... Angie should organize all those deceived and abused by hospitals to start a class action suit.

Hi, Marie! Thanks for your comment! We have corrected the photo caption online to reflect that Linda Brocato has multiple sclerosis and not muscular dystrophy.

This is a major issue and very unfair to patients. Physicians have not control over this. I applaud Linda Brocato for pursuing this and you for publishing it.

I am a friend of Linda's. She does not have muscular dystrophy, but Multiple Sclerosis after being poisoned by her mercury dental fillings. In the process of treating her MS with prednisone and other steroid treatments, she has developed severe osteoporosis, which is leading to all these bone breaks. All this misery has happened to Linda because the FDA won't require the American Dental Association to stop promoting, and dentists to stop using mercury in dental products.

The problem is with the Medicare laws. If the doctor admits the patient to inpatient, the patient has to meet certain criteria, no matter what the doctor and hospital want to do. Otherwise, the hospital has to pay the money back and possibly be assessed a fine. Medicare law needs to be changed in this regards.

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