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For recipients of Medicare benefits, the cost of a hospital stay and any subsequent stay in a nursing facility may depend in large part on whether or not the patient was “admitted” to the hospital as an inpatient, or is on observation status as an outpatient. The distinction is crucial, and vexing for patients and doctors alike.

After a patient has spent the night in a hospital bed, been given a gown and wrist bracelet, been seen by doctors and nurses, and been fed and washed by aides, he might reasonably be perplexed by the idea that there is any question about whether he has been “admitted” to the hospital. Yet many patients do find, after the fact, that their entire hospital stay has been on “observation” status and they were never formally admitted. This can greatly increase the out-of-pocket expense for the patient, and can affect Medicare coverage for any nursing home stay after the hospital stay.

The current Medicare policy is known as the “two-midnight rule”: if a doctor expects that a patient’s stay will include two midnights, then the patient is admitted under inpatient status. This means that the stay is covered by Medicare Part A, which covers hospital stays. If the stay doesn’t include two midnights, then Medicare regards the person as an outpatient covered by Medicare Part B, which covers doctors. The distinction can make a huge difference in cost for patients, because under Part B, each procedure, visit and prescription is billed separately, and co-pays can easily mount to hundreds or even thousands of dollars.

Naturally, Medicare patients would prefer to be admitted as inpatients, and hospitals generally feel the same way, since Part A reimburses at a higher rate than Part B. However, hospitals that formally admit patients who do not end up needing two midnights’ care can face audits, payment denials and fraud accusations from Medicare.

Both doctors and patients complain that the two-midnight rule is arbitrary. A patient who arrives at the hospital at 11:55 p.m. on a Wednesday night and is discharged Friday morning may be admitted as an inpatient and covered by Medicare Part A. If he arrived 10 minutes later, he would be an outpatient under observation status and face higher co-pays under Medicare Part B. Another problem with the rule is that doctors are supposed to make the call about whether a patient is expected to stay for two midnights, and this can often be unpredictable.

A further difficulty is caused by the fact that Medicare will pay for up to 100 days of skilled nursing care only if the nursing home stay is preceded by a three-day hospital stay. If a patient is classified as under observation as an outpatient, the nursing home stay is not covered.

One bright spot for residents of New York State is the legislation recently passed and signed into law that requires that hospitals inform Medicare beneficiaries if they are on observation status and allows them to appeal that status. It is crucial for Medicare beneficiaries entering the hospital to be aware of their admission status and be prepared to appeal observation status if necessary. Congressional legislation is also pending – but stalled – to allow any hospital stay, whether inpatient or outpatient, to be applied to the three-day requirement for Medicare to cover care in a skilled nursing facility.

This article first appeared on Poughkeepsie Journal (Dec. 14, 2013)

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