Skip to content

Welcome to Society of Hospital Medicine

Your Browser Is No Longer Supported. Please upgrade your browser from Internet Explorer 10 to Internet Explorer 11 or higher

Hospitalists Agree: For Better Patient Care, Observation Status Needs Overhaul

July 30, 2014

About SHM

Representing the fastest-growing specialty in modern healthcare, the Society of Hospital Medicine (SHM) is the leading medical society for hospitalists and their patients.

Learn More

New Report from SHM Recommends Changes to Improve Observation Status, Provides New Research on Impact in the Hospital

Piecemeal changes to rules surrounding observation status will not improve care for hospitalized patients, according to a new report from the Society of Hospital Medicine, published today in conjunction with a Senate Special Committee on Aging Hearing on the Centers for Medicare and Medicaid Services (CMS) rules about observation status.

Rather, “The Observation Status Problem: Impact and Recommendations for Change,” advises that CMS should implement significant policy changes to better serve patients, including adjusting skilled nursing facility (SNF) care coverage rules and even eliminating observation status entirely. These changes would dramatically improve the care that nearly two million patients receive each year and affect more than $2.5 billion in Medicare payments.

SHM member and University of Wisconsin Health hospitalist Ann Sheehy, MD, MS, will detail the report’s findings in testimony before the Senate Special Committee on Aging today.

“Observation care remains a major problem in the Medicare program, and the two-midnight rule is not the right solution,” wrote Dr. Sheehy in her written testimony to the committee. She added that reform must ensure that “Medicare beneficiaries are treated fairly and have both hospital and nursing home coverage, regardless of whether their hospital stay is classified as observation or inpatient.”

Available at online, SHM's “The Observation Status Problem” also reveals new data illustrating the unnecessary administrative burdens observation status and the “two-midnight” rule (which dictates the admission decision) place on hospitalists. In a broad survey of  hospitalists, more than half (55 percent) felt that the two-midnight rule made hospitalist workflow worse compared to prior observation policies.

In addition, hospitalists report that they are asked to change the status of their patients for 16 percent of the cases they see in an average day, reducing efficiency and time spent providing care to patients.

“Now is the time for Congress and CMS to take bold steps to improve care for hospitalized patients,” said the chair of SHM’s Public Policy Committee, Ronald Greeno, MD, FCCP, MHM. “These recommendations and the data that support them indicate that observation status is outdated, harmful and inefficient. By taking the larger view of observation status and overhauling it, Congress and CMS can improve patient care to millions of hospitalized Americans.”

Observation Status: A Growing Problem, Managed by Hospitalists

Observation status was originally intended to help hospitals differentiate incoming patients who needed immediate acute care (inpatients admitted to the hospital) versus patients whose conditions required more time and monitoring prior to diagnosis. Today, observation status has become a set of policies that are not rooted in quality clinical care. Difficulties with implementing the policy and navigating its consequences yield inconsistencies within the Medicare program and leaves patients caught in the middle, at a time when they are the most vulnerable.

The number of hospitalized patients placed on observation status has continued to grow, making reform even more important. In a 2014 report to Congress on Medicare payment policy, the Medicare Payment Advisory Commission found that 1.8 million patients were classified under outpatient status in 2012, an increase of 88 percent over 2006. The same report showed that CMS paid $2.5 billion for observation visits to the hospital in 2012.

As the new SHM report outlines, hospitalists are on the front lines of the observation status problem. Hospitalists are often the admitting physician making decisions based on the clinical status of a patient and are also the physicians tasked with explaining the implications of their admission status.

Solutions for Observation Status from the Front Lines

The report outlines both short-term improvements and options for long-term solutions to observation status. While short-term fixes would mitigate some of the problematic aspects of observation status, SHM’s findings make it clear that comprehensive reforms are needed to reduce confusion and ensure patients get the care they need.

Short-Term Improvements

  1. Educate providers to raise proficiency and confidence in applying observation status rules.
  2. Educate patients on observation status and its financial and coverage implications.
  3. Change SNF care coverage rules to ensure patients are able to access the care they need as ordered by their hospitalists; at a minimum, time under observation status should count toward the three-day inpatient stay requirement.
  4. Reform the Medicare Recovery Audit Contractor (RAC) program to reduce unintended and inappropriate pressures on admission decisions.

Options for Long-Term Solutions: Eliminate Observation Status and Replace with a New System

  1. Create a low-acuity modifier to be applied to Medicare diagnosis-related group (DRG) payments that accounts for patients who require fewer or less-intensive hospital resources.
  2. Create a list of short-stay/low-acuity inpatient DRGs that would account for patients who require inpatient care for short periods of time.
  3. Eliminate observation status entirely and simplify the Medicare payment system with a budget-neutral formula that accounts for the changes. A broad change such as this would allow patients to get the care they need while eliminating the confusion and inefficiencies created by acuity determinations.

“Overhauling observation care helps everyone,” said Dr. Sheehy prior to the hearing. “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.”