Practice Economics

Society of Hospital Medicine Ranks Observation Status a Priority Advocacy Issue


The use of observation status within hospitals has risen over the last several years, creating the potential for negative financial impacts on patients and mounting headaches for hospitalists. Historically, the intent of observation status was to provide care in designated hospital units for short-stay patients with well-defined diagnoses, according to Medicare; however, as a result of complex federal policy and the realities of hospital care, patients under observation often receive care in general hospital beds, with stays that can extend past the 48-hour benchmark set by the Centers for Medicare & Medicaid Services (CMS).

Almost all hospitalists are familiar with the implications of observation status for their patients, and SHM has taken a leadership role in advocating for positive changes that benefit both the patient and hospitalist workflow.

Today, patients under observation often receive identical care to that received by inpatients but are billed as outpatients under Medicare Part B. This results in high deductibles, additional cost sharing, and out-of-pocket costs for medications. Complicating the issue more, hospitals in most states are not required to notify patients that they are coded as outpatients, leaving them with the impression that they have been admitted, until they receive their hospital bill.

In an attempt to curb the overuse of hospital observation status and clarify guidelines pertaining to inpatient admission decisions, CMS changed the rules for admitting patients in August 2013. Under what is now known as the “Two-Midnight Rule,” if a patient is expected to stay longer than two midnights and their stay is documented as medically necessary, they are an inpatient; fewer than two midnights constitutes outpatient services.

Even though the two-midnight rule is intended to simplify admission decisions, hospitalists have expressed a general apprehension regarding the impact of observation status. If a patient classified as an inpatient is discharged before two midnights, Medicare recovery auditors may deem the inpatient classification unnecessary, potentially resulting in loss of payment for medical services rendered.

For patients, the new rule does not remedy the fact that days spent under observation do not count toward the three-day inpatient stay requirement needed for skill nursing facility (SNF) post-acute care under Medicare. Consequently, thousands of patients classified under outpatient status have no choice but to pay for SNF care themselves, or forego the treatment altogether, creating possible complications in their care and delays in recovery.

Hospitalist concern over this issue has prompted SHM to rank observation status as a priority advocacy issue. Hospitalists are ideally situated to be part of a meaningful solution, and SHM’s Public Policy Committee has set out to do just that.

The first step will be to fully understand the experiences and perspectives regarding observation policy among hospitalists. SHM’s Public Policy Committee and government relations team have developed a survey for a group of randomized members. While individual anecdotal accounts are available, this is the first time the issue will be addressed on an aggregate level. Responses from survey participants will be used to frame the hospitalist perspective, help to bolster advocacy and educational efforts within SHM, and, ultimately, bring about possible policy revisions.

Hospitalists not receiving the survey can help by joining SHM’s Grassroots Network and lending their voice to the effort. To get involved, visit

NaDea Jeter is a member of SHM’s government relations team.

Next Article:

   Comments ()