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Hospital Observation Stays Impacting Medicare SNF Admissions

An issue that I am fielding a fair number of inquiries about lately involves Medicare patients spending more than three days in a hospital, subsequently ‘discharged’ to a SNF and the SNF learning later that the patient was never technically admitted to the hospital.  Mostly, the inquiries I am getting are along the line of “what’s happening”, is this practice legal, what’s going on with hospitals, etc.  Unfortunately, based on the number of inquiries I am getting and from all across the country, this practice or recent phenomenon must be fairly widespread.

In a nutshell here is what is technically happening.  I’ll explain why in the next paragraph.  Hospitals are admitting certain Medicare patients, typically not all or even close to a large number for an “observation” stay.  An observation stay is not classified as an admission to a hospital bed or an inpatient unit as the patient is generally in a separate area of the hospital, typically adjacent or proximal to the Emergency Department or Outpatient area.  Even though the customary and CMS encouraged length of stay for observation purposes is 48 hours or less, hospitals are apparently pushing the envelope on the length of stays. There is no current provision under Medicare that limits observation stay length.  I have recently heard of observation stays extending up to seven or eight days.  Since the patient never was admitted to the hospital via a Medicare definition, the three-day qualifying inpatient stay for Medicare SNF benefit purposes has not been met.  The SNFs that I have talked with recently are justifiably confused, upset, and often, stuck in a quandary about how to explain to the patient and to the family, why Medicare will not cover their SNF stay (or a portion thereof).

When this observation stay practice appears to occur the most is when the patient is already an SNF patient.  It appears to occur less frequently when the patient is originally from an Assisted Living or some other care domicile.  I have started to hear of cases where the patient was recently hospitalized, discharged to home health and now will likely require a return to home health or to an SNF environment.  I have not yet heard of many cases or instances where the patient originally resided in the “community” (his/her home) and subsequently, incurred a prolonged observation stay prior to being discharged to an SNF.

The cause for the recent increase in the prevalence of observation stays in hospitals for Medicare patients is CMS and the HHS OIG, aided in part by last year’s discussions/deliberations on health care reform.  Essentially, the issue under Medicare is two-fold.  The first issue is the focus of CMS and HHS on reducing what are called “preventable or unplanned readmissions”.   According to CMS, unplanned (and thus, primarily preventable) readmissions costs Medicare over $17 billion annually.  CMS in 2004, did away with allowing for a second DRG payment to be made to a hospital for readmissions occurring within a twenty-four hour period.  Today, the focus is predominantly on readmissions occurring within the 30 day window, post-hospital discharge.  To combat this problem, CMS has begun to publish readmission data for certain hospitals for patients admitted for heart-attacks, heart failure and pneumonia.  In 2009, hospitals were required to begin reporting 30 day readmission data for these diagnoses.  Now beginning in 2010, CMS may reduce, modify or deny payment for a readmission occurring within 30 days of discharge for these diagnoses.  For a typical 250 bed hospital, according to industry data, the potential readmission revenue loss is $1.5 million for just these three diagnoses.

The second part of this two-fold issue concerns the HHS OIG and the wide ranging ability of this organization, along with CMS, to impute an issue of Medicare fraud to a hospital that bills for multiple readmissions, regardless of original diagnosis and the readmit diagnosis.  In an allegation of fraud circumstance, the basis would be that the hospital billed Medicare for care that it should have provided adequately and completely enough to avoid the need for a readmission.  Essentially, the issue frames-out that it is illegal and fraudulent to bill Medicare for unnecessary and unwarranted care.  Hospitals, knowing full well that the OIG and CMS are looking very closely at thirty-day readmissions and hospital to hospital patterns, are wary of readmitting Medicare patients regardless of the diagnoses (although the three identified by CMS are most perilous) for fear that they (the hospital) will be targeted by CMS and the OIG for Medicare billing review and potential recovery activity; or worse, fraud allegations and reviews.

Boiling the above down to every day life, what SNFs are seeing and experiencing is hospitals using observation stays as a means of circumventing the readmission penalties and peril that are being imposed by CMS and the OIG of HHS.  For the time being and perhaps for a bit longer until enough heat is placed on CMS and other industry care-coordination measures are fully integrated, hospitals will monitor their readmissions closely, the causes, and where they deem applicable, use observation stays to avoid getting caught in the readmission “penalty box”.  Don’t look for the heat from CMS on this issue to remediate any time soon as the potential savings to Medicare from curbing readmissions that occur within 30 days of discharge is substantial.

My advice to SNFs that are encountering this issue more than very infrequently is as follows.

  • The SNF can assist the patient if it desires, to appeal the classification of the stay to the Medicare intermediary.  The use of this approach however, needs to be well though out by an SNF as appeals are not usually decided timely and during the interim until a decision is rendered, the issue of payment to the SNF is still in question.
  • The SNF should develop very pro-active working arrangements and referral arrangements with its hospital partners.  This means having SNF admission staff go directly to the hospital to work with hospital discharge staff and to know in advance, whether the stay is observation or an admission.  This will assure that the SNF doesn’t get caught unaware of Medicare coverage issues come the time when the patient is admitted to the SNF.
  • The bigger and best strategy is for the SNF to develop a very solid partnership with its primary referral hospitals and work with the hospital and the medical staff at the hospital and the SNF to develop integrated care protocols and discharge plans to help both the SNF and the hospital, combat the readmission problem.  To be frank, hospitals are a major part of this problem and their traditional unwillingness to recognize any ongoing responsibility for care outcomes post-discharge is the major impetus behind CMS’ aggression on readmission frequency.  This said however, SNFs can and need to do a better job of upping their care competency as well and to reduce the reasons that their patients are being sent back to hospitals within the thirty day window.  If both parties committed to truly developing a concerted game plan with each taking responsibility for their own factors/issues that contribute to this problem, observation stays would become far less prevalent and certainly, far shorter in length.

February 26, 2010 - Posted by | Skilled Nursing | , , , , , , ,


  1. You’ve left out 1 very significant factor – hospitals do not admit or discharge patients. Physicians do. Hospitals cannot change an inpatient level of care admission to an observation level of care status without a physician’s written order. Put the blame where it should be – physician’s ignorance of the rules and regs governing hospital level of care.

    Comment by SDaniels | October 11, 2010

  2. Unfortunately there is nothing in the PPACA (reform bill) that changes any programmatic elements within the Medicare SNF benefit, including the three-day prior hospital stay requirement. In my opinion, this is where reform fell woefully short as it truly does nothing to change how health care is delivered, including the incentives that presently make U.S. health care so expensive and inefficient (such as the prior hospital stay requirement among others). “Reform” is a misnomer as the primary changes in the bill are expansions of entitlements within an already bureaucratic system. Care delivery, payments that target and reward best pratices, tort reform, reduction of nonsense regulation and bureaucracy, and focus on prevention and primary care along with reduction in the incidencts of chronic disease and funding for better methods of managing chronic disease don’t really exist (and in most cases are absent) within the PPACA.

    Thanks for reading and thanks for the comment!

    Comment by Reg Hislop III | June 27, 2010

  3. Very good information here. Is there anything in the health care plan (OBAMACARE) that speaks to revising or dropping the 3 days qualifying stay to access an SNF Medicare stay?

    Comment by sgarde | June 27, 2010

  4. Agree – though I think the most difficult element to address is the patient and the family/significant others. With older adults, especially in the generation presently receiving care now, it is difficult to get them to “question”; to “be self-advocates”. Essentially, we are telling them to “question” hospitals and physicians as “they may not have your best interest at heart” – this is hard for them (the patients) to hear. I have older parents who have had some health problems and it is difficult to get them to “push” for answers and to probe when things don’t seem quite right. This is even in spite of my father being a very bright man – a lawyer and a former hospital board chairman. His generation just doesn’t believe or perceive that institutions such as hospitals and persons such as physicians, may have other motivations that aren’t always congruent with his best interests.

    Thanks for the comment!

    Comment by hislop3 | March 5, 2010

  5. All of this information, including the update, is really helpful. The update especially reminds us that the patient him/herself plays an active role in these situations. I think it would also be important for the patients involved to know that these maneuverings by hospitals directly affect the benefits they are entitled to.

    Comment by John Morrison | March 4, 2010

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