A report released today from the Society of Hospital Medicine in conjunction with its testimony before the Senate Special Committee on Aging urges a significant overhaul of the Centers for Medicare and Medicaid Services (CMS) policy on observation status and two-midnight rule definition for inpatient status.

Current policy is simply unsustainable, the hospitalists say, and is leading to a host of ill effects on hospitalist and hospital workflow, individual doctor-patient relationships and even the finances of Medicare beneficiaries who end up requiring skilled nursing facility care after a short (less than two midnights) stay.

At a minimum, the report urges the following immediate changes:

• Educate providers on observation status rules.
• Educate patients on the intent and purpose of observation status, as well as informing patients about the impact of observation status on coverage determinations and what costs the patient will be financially responsible for.
• Change skilled nursing facility care coverage rules to ensure patients are able to access the care they need as ordered by their hospitalists.
• Count time under observation status toward the three-day inpatient stay requirement for skilled nursing facility coverage.
• Reform the Medicare Recovery Audit Contractor (RAC) program to ensure that hospitalists and their hospitals are not pressured to make admission decisions based upon the expectation of RAC audits and payment denials.

According to the Society of Hospital Medicine, based in Philadelphia, current CMS observation status rules impact nearly two million patients each year and affect more than $2.5 billion in Medicare payments. Their members are “on the front lines” of the observation status problem because hospitalists are often the admitting physicians making decisions based on the clinical status of a patient. In addition, hospitalists are typically the ones who must explain to Medicare beneficiaries the confusing and, from a patient perspective, often frustrating aspects of the rule, such as how even thought the patient spent a night in the hospital, he or she was not a hospital inpatient, and that Medicare is therefore not obligated pay for needed skilled nursing facility care after the hospital stay.

“Observation care remains a major problem in the Medicare program, and the two-midnight rule is not the right solution,” wrote University of Wisconsin Health hospitalist Ann Sheehy, M.D., M.S., in her pre-submitted testimony to the committee. She plans to cover the report’s findings in her testimony before the Senate Special Committee on Aging.

For a permanent solution to the problem, the hospitalists want Medicare to eliminate observation status all together and replace it with a new system with the following features:

1. A low-acuity modifier to be applied to Medicare diagnosis-related group payments that accounts for patients who require fewer or less-intensive hospital resources.
2. A list of short-stay/low-acuity inpatient diagnosis-related groups that would account for patients who require inpatient care but only for a brief period of time.
3. A simplified Medicare payment system with a budget-neutral formula that accounts for the changes.

“Overhauling observation care helps everyone,” stated Dr. Sheehy in a press release. “It improves the care for two million patients every year, it gives caregivers the clinical independence they need to deliver the best care possible and it reduces inefficiencies for both hospitals and Medicare.”