Medicare Regulations on Observation Status

The Centers for Medicare and Medicaid Services (CMS) define a beneficiary’s observation status in a hospital as a complete set of ongoing short-term treatment and testing administered while a decision is made whether to intensify or cancel appropriate clinical services depending on the severity of the presenting factors. If more intense treatment is deemed appropriate and medically necessary, a change to inpatient status is made. If not, the patient is discharged.

Length of Stay

• The CMS manuals provide that in most cases, patients may not stay in observation status for more than 24 to 48 hours. The Medicare Benefit Policy Manual describes that the need to classify a patient’s status as observation or inpatient depends on the severity of the signs and symptoms presented by the patient, the possibility of the condition deteriorating more, the procedures and diagnostic tests necessary, and the hospital’s policies. The decision is made by a competent physician after careful consideration and analysis of the presenting facts. If the patient’s care requires attention for more than 24 to 48 hours, an inpatient status should be ideal.

Regulations for Hospitals

• When a patient is placed in observation status by a physician, the hospital must present the patient with an Advance Beneficiary Notice (ABN) of non-coverage in order to shift liability to the patient if the services rendered have exceeded the time limit allowed by Medicare and may not be covered.

  Under the Medicare Act, if a patient has no initial knowledge that some services may not be paid for after it has been determined that there was no medical need for them, Medicare is still required to provide reimbursement for those services. The responsibility for payment by the patient is enforced only when evidence of advance written notice has been clearly provided by Medicare, notifying the patient.

  Equally, when the hospital’s utilization review committee reverses a patient’s stay from inpatient status to outpatient observation due to medical necessity, a written notice should be provided to the patient about this change and make the patient aware of the possibility that some uncovered reimbursement may be part of the responsibility.

Regulations for Skilled Nursing Facilities

• When a patient is admitted into a hospital and thereafter requires to be transferred to a Skilled Nursing Facility, Medicare has mandated that the patient must have stayed in the hospital for at least three days as inpatient prior to the transfer. If the patient was in observation status, a placement to inpatient status must have been made within the appropriate allowed time limit and the patient must have met the minimum stay criterion before reimbursement can be adequately made if subsequently transferred to a Skilled Nursing Facility.

  Past practice has determined that Medicare denies coverage mainly because the beneficiary's status was never reversed from observation to inpatient while in the hospital, although the length of stay may have been or exceeded three days before admission into the Skilled Nursing Facility. For this reason, some of the facilities may now opt to give the patient a Notice of Exclusion of Medicare Benefits (NEMB), in case Medicare denies coverage for any reason. This form gives the patient a choice to receive services and allow medical claims to be submitted to Medicare, agreeing that any outstanding or denied reimbursement will be the responsibility of the patient. The patient may also choose to receive services and be totally responsible for full payment, or may choose not to receive any service and not to have any claims submitted.