Extent and Impact of the Use of Observation Services in the Medicare Program

Grant Description: The researchers examined the extent of the use of Medicare observation services, as well as their implications. Observation services, as distinct from inpatient stays, are covered under Medicare Part B, rather than Medicare Part A. This has implications for beneficiary copayments and beneficiary eligibility for SNF coverage. The researchers examined how observation services are used in the Medicare program, how the patient and provider characteristics compare between observation services and inpatient stays, as well as how observation services affect beneficiary out-of-pocket liability. Data from 2006 was compared to 2001 data in order to understand the extent to which observation services changed over time.  The objective of this project was to better understand the extent to which observation services, rather than inpatient visits, are used, as well as the implications for beneficiaries.

Policy Summary: Observation services (OS) are ongoing short-term services that provide an opportunity for physicians to evaluate the condition of an outpatient and assess the need for an inpatient admission. While they can take place in hospital inpatient settings, OS are considered outpatient services and covered under Medicare Part B. This has several implications for Medicare beneficiaries. With an inpatient stay, the beneficiary is only responsible for the inpatient deductible ($1,100 in 2008); prescription drugs received during the stay are generally covered under Part A. For OS, however, beneficiaries face Part B copayments for all covered services and must generally pay hospital prices for maintenance and prescription medications. A potentially greater financial burden may face beneficiaries who are admitted to a skilled nursing facility (SNF) after outpatient OS since the observation time does not count toward the three-day prior hospitalization requirement for Medicare-covered SNF care. This study examined the use of OS between 2001 and 2006, evaluated the financial burdens on Medicare beneficiaries who used OS in 2006, and assessed the impact of potential changes in the three-day prior inpatient stay requirement for Medicare-covered SNF care. Using the 2001 and 2006 Medicare standard analytic files from inpatient, outpatient, SNF, and home health settings for a 5% sample of beneficiaries who had ever enrolled in those two years, the researchers found that there was an increasing trend in the use of OS in both the total number of OS and the number of OS per 1,000 beneficiaries. There also appears to be substitution of one-day inpatient stays with OS.  The length of stay (LOS) increased significantly between 2001 and 2006--the share of OS with LOS greater than 24 hours but less than 48 hours and those with LOS of at least 48 hours increased by 35 percent and 52 percent, respectively. Seven percent of beneficiaries using OS were discharged to SNF while the vast majority (81 percent) were sent home without the need for home health care. The data indicate that the out-of-pocket (OOP) burden falls on a small percentage of beneficiaries who used OS, though the impact for these individuals can be large. In 2006, 9.3 percent of OS that did not lead to an inpatient admission generated OOP costs that were higher than $952, the inpatient stay deductible in 2006. In other words, less than 10 percent of OS would result in a cost to the beneficiary higher than what would have been spent had the beneficiary been admitted as an inpatient. However, for these beneficiaries, the financial burden from outpatient OS could be substantial--the median of OOP costs was $1,179 but for some beneficiaries neared $20,000 in 2006. Because of the potentially high burden when OS do not lead to an inpatient admission but are followed by a SNF admission, there has been discussion of counting OS toward the three-day requirement. Based on their assumptions of the likelihood of users of outpatient OS receiving SNF care, the authors estimated that it will cost Medicare about $50 million if Medicare were to count OS toward the three-day prior inpatient stay requirement for SNF coverage, a policy change introduced in H.R. 5950.