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Medicare Patients at Financial Risk as More Hospitals Game System

Think You’ll Be Safe on Medicare?

Many Americans on Medicare or nearing their age of eligibility (65) are operating on old assumptions that threaten to hit them in the pocketbook. A recent study of hospital admitting practices by Brown University researchers published in Health Affairs (1) documented a massive 34% increase from 2007 to 2009 in the ratio of hospital “observation stays” to admissions.

Such a large change in such a short period usually suggests there’s something going on behind-the-scenes to power such a dramatic change. The “something” in this case was Medicare incentives to avoid admitting emergency room patients on Medicare to hospitals. Many are held  instead for “observation” to avoid their being counted as “readmissions”.

What’s this all about? As usual in America’s healthcare system, it’s about money.

Hospitals are penalized financially by Medicare for above-average readmission rates – and will be even more so as health reform (the Affordable Care Act) is fully implemented. The idea behind this is to prevent hospitals from admitting patients who don’t really need to be admitted and needlessly driving up Medicare spending.

Keeping patients in this holding pattern of “observation” helps hospitals hold down their readmission stats and thereby benefit financially. This means they have a financial conflict-of-interest that causes them to classify patients, or reclassify them after-the-fact, differently than they would without this conflict-of-interest.

But what does all this financial sleight-of-hand mean for the Medicare patients stuck in this “observation” limbo?

Now You Have It, Now You Don’t

It means they – and possibly you or a loved one – will be stuck with bigger medical bills, since Medicare patients in observation status are classified as outpatients. This leaves them personally responsible for many hospital services that Medicare Part A doesn’t cover for outpatients. This is true even though the patient experience may be exactly the same as that of an inpatient admission.

What makes this practice particularly galling is hospitals don’t have to tell patients this at time of admission. Even worse, they can retroactively change patients’ status from a hospital admission to observation status – or from inpatient to outpatient – even after they’ve been in the hospital for a week or more. This effectively deprives patients of Medicare coverage for hospital services to which they would otherwise be entitled.

In other words, hospitals can unilaterally rescind – or steal, to put it more bluntly – Medicare coverage from patients for no other reason than to protect their own bottom lines.

The financial consequences of this hidden and unethical practice may be especially burdensome if nursing home care is required. That’s because Medicare only pays for nursing home care after a patient has been admitted to a hospital. Hospital stays for “observation” don’t qualify as admissions, meaning Medicare won’t pay for any subsequent nursing home care that’s needed.

So unless they qualify for Medicaid coverage or have private nursing home insurance, being held for observation instead of being admitted means these patients’ families will have to bear their own nursing home costs.  At a median annual rate of over $81,000 in 2012 (2) – and well over $100,000 annually in many states – these self-serving decisions by many hospitals will essentially bankrupt many American families.

This deceptive practice – in which patients may be held for observation for several days to a week or longer – varies widely across America. This is  illustrated in the following map (worst offenders in red and blue, best in yellow and green):

US map of hospital observation stays by state

Credit: Brown University

A Double Whammy: Less Care, More Cost

The worst financial impact is in those states combining high rates of hospital observations (in red or blue in the above map) and high nursing home costs. The financial burden for these patients and their families should nursing home care be required will be the greatest. These include Massachusetts, New Hampshire and Rhode Island. There are also pockets like these within other states, especially in high-cost urban areas.

This financial impact on patients and their families is likely to mean higher hospital bills for Medicare patients receiving hospital services as “outpatients” while in this observation status. It also means fewer patients will receive nursing home services that need them.

As the study in Health Affairs concluded:

“Observation services may create barriers for access to post-acute skilled nursing facility care, especially for those having been held for observation for an extended period of time.”

Just Another Deceptive Medical Practice

It’s also another example of pervasive cost-shifting that’s become routine.  Government payers and private insurers both try to find ways to squeeze costs out of their budgets. This seldom means that costs are actually squeezed out of the system, however.

Instead, the modus operandi in American healthcare is that when one payer adopts a policy designed to contain medical spending, our medical providers come up with new ways to transfer that expense to others.

In this example, it’s patients themselves (unless they have supplementary insurance coverage for the “outpatient” services not covered by Medicare). In other instances, this translates into higher private insurance premiums that subsidize government underpayments.

And you – the American consumer – are the ultimate payer-of-last-resort. This usually means you’ll be left holding the bag for larger medical bills after-the-fact.

In this instance, however, it may well mean families will be forced to deny needed nursing home care to family members because they can’t afford $7-10,000 a month in nursing home payments.  This is how this hidden and self-serving hospital practice threatens to devastate many unsuspecting American families.

What this represents is yet another deceptive medical practice in which patients are merely pawns in the cat-and-mouse game between hospitals, doctors and third-party payers. And it’s further evidence – as discussed further in Our Healthcare Sucks – that our healthcare system is the most corrupt industry in America (see Tony Soprano, M.D.?).

Tell us what you think about all this by commenting below.

1 Sharp Rise In Medicare Enrollees Being Held In Hospitals For Observation Raises Concerns About Causes And Consequences. Health Affairs. June 2012 vol. 31 no. 6 1251-1259.

2 Genworth 2012 Cost of Care Survey. www.genworth.com

This article is provided for informational and educational purposes only.
It does not constitute medical advice and should not be relied upon as such.

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1 Awesome Comments So Far

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  1. John Lynch
    August 15, 2012 at 8:44 am #

    We certainly agree on that, Scott. And gaming the system for financial advantage will continue no matter what changes are made – it’s simple human nature.

    There is question, however as to whether readmission rates are a sound measure of hospital performance. A hospital can be penalized, for example, for keeping a patient alive who;s subsequently readmitted, while another hospital in which the patient dies during the first readmission is not so penalized.

    There are a lot of unintended consequences and loopholes to be exploited – too many for patients and their families to understand. Given the financial burden these practices can place on us, we all need to be a lot more cautious before agreeing to being hospitalized unless it’s a true emergency.

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