Medicare patients 'under observation' face higher costs

• U.S. health centers are facing increased Medicare scrutiny for costly and unnecessary hospital admissions
• Under observation designation can significantly affect Medicare coverage
• Lee Memorial Health System has grown its observation rates steadily in recent years

Doctors at Gulf Coast Medical Center were about to discharge 95-year-old June Stanley to a rehabilitation center last spring when Stanley's daughter remembered something she had read about how hospitals classify patients.

Was her mother admitted during her stay?, Carole Brokke wondered. Or had medical staff considered her only "under observation," despite her three days in a hospital bed?

The answer would mean the difference between a standard Medicare bill or one with potentially tens of thousands of dollars in out-of-pocket costs. It turns out that Stanley, who had recently taken a hard fall at a Lehigh Acres nursing home, had not been officially admitted. Insurance would not pay for skilled nursing care.

"How do you expect us to pay for this out-of-pocket because you've classified her as observation?" said Brokke, who lives in Fort Myers. "What do they expect us to do?"

Gulf Coast staff eventually decided to keep Stanley a few more days as an inpatient, the kind of status change that hospital officials say is rare.

But the case highlights a trend at U.S. health centers, which have faced Medicare scrutiny for costly and unnecessary hospital admissions. Here and elsewhere, they have increasingly used a quirk in record-keeping to avoid federal penalties — keeping the sick under observation rather than full-fledged patients.

The designations, of which patients are often unaware during their stays, don't change hospital treatment. But they can significantly affect Medicare coverage of routine medications, medical treatment and skilled nursing home care. Simply put: When you're under observation, you're often less insured.

Lee Memorial Health System, Southwest Florida's dominant health care provider and one of the nation's largest public hospital systems, has grown its observation rates steadily in recent years. Discharge records show that about one of every eight Medicare patients last year was considered under observation for the entire hospital stay.

Collier County's hospital systems, the nonprofit NCH Healthcare System and the two for-profit Physicians Regional hospitals in Naples, are not subject to the same open records rules as the public Lee Memorial. But both organizations have previously reported their own sharp increases in observation patients over the last decade.

Driving all of this is the uneasy tension between the government's desire to reduce U.S. health care costs and fraud, hospitals' requirements to follow ever-evolving federal regulations, and Medicare patients' expectations they are fully covered for such care.

Lee Memorial administrators say they are simply trying to follow the rules.

"We feel like we're caught in the middle," said Chris Nesheim, Lee Memorial Health System case management director. "Because the patient's getting the same care, no matter what status they're in."

Hospitals have historically used physician judgment and a set of medical guidelines to determine patient classification. Changes to the federal rules now taking effect require all patients who are hospitalized for at least "two midnights" to get inpatient status, a change aimed at reducing confusion and out-of-pocket costs.

But health care administrators complain that takes doctor expertise and long-established admissions practices out of the equation. Studies show it could also hurt profits by reducing payments to hospitals for patients who would have otherwise been admitted immediately. The American Hospital Association is now suing to block the changes.

'Observation' common at Lee hospitals

The News-Press obtained seven years of Lee Memorial "observation" patient records, the length of their stays and the types of extra charges these patients incurred.

Some highlights:

• About 12 percent of Medicare patients discharged from Lee Memorial Health System hospitals last year were considered under observation. Rates had been dropping in previous years but started rising again in 2011, possibly because of increased Medicare payment audits and better electronic medical record-keeping. The observation rate for all patients last year was about 15 percent.

• Health system patients kept in the hospital but under observation last year stayed an average of 1.1 days, compared to the four-day average stay for inpatients. Medicare patients spent an average 1.6 days in the hospital as observation patients.

• But about 16 percent of observation patients stay longer than two days. Those patients were in hospital beds an average of nearly three days. Health system officials say that such longer observation stays are now dramatically shrinking.

It's unclear if these rates will continue to increase with the new 2014 federal guidelines.

The health system said it has brochures available for patients about the classification system. Patients can ask about their status. But changes to classifications don't happen often, because the rules are set by federal rules, hospital staff say. Once patients are discharged, it's too late to do anything about it.

"The patients don't understand that it's not us making the decision," Nesheim said. "It's based on the patient's condition."

And elsewhere

NCH Healthcare System, which operates the largest hospitals in Collier County, says its observation rates have similarly grown in response to government regulations. Its current rate is about 21 percent, more than twice the 9.2 percent it had in 2008. Dexter Patton, NCH's director of case management, also blamed the increase on Medicare rules.

"Payers are requiring more and more procedures and care be provided in an outpatient setting. This is not atypical for the Naples area," he said. "This has been a trend across the nation for years."

The now-defunct Health Management Associates had an observation rate of 21 percent in 2010 at its Collier hospitals, according to news reports elsewhere at the time. HMA's new owner, the Nashville-based Community Health Systems, did not comment for this story.

The rest of the country seems to be the same.

Kaiser Health News, the news division of the nonprofit Kaiser Family Foundation, recently found that observation rates jumped 69 percent at U.S. hospitals between 2006 and 2011, to about 1.6 million patients.

A 2013 report from AARP similarly found that Medicare claims for observation stays grew 100 percent between 2001 and 2009, and that observation stays longer than two days grew by 250 percent.

Confusing for patients?

Brokke had the benefit of knowing about the classification system when she asked hospital staff about her 95-year-old mother's status. But she said she can understand why many patients haven't understood it, especially those spending days in the hospital.

"Why would you think there are two statuses for admittance?" she said. "But there are."

This issue is one that primarily affects Medicare patients. Medicare may not pay for some medications patients receive during their hospital stays, and skilled nursing is only covered if a patient has three inpatient days.

Private insurance is different, and coverage of observation care varies from plan to plan.

Medicare patients needing post-hospital rehabilitation or nursing home care should determine their status before discharge. The insurance program will fully cover the first 20 days of an approved skilled nursing facility or rehabilitation center. But patients must have at least three inpatient days in a hospital before that can happen.

Michael Skaggs, administrator at Heartland Health Care Center-Fort Myers, said nursing homes try to work closely with hospitals to make sure patients know their status before discharge and whether they are covered for care.

Still, he said patients do slip through the cracks. Discharged observation patients have occasionally shown up for care assuming, incorrectly, that their Medicare covers their nursing home stays. "All of a sudden, it's a $10,000 bill," Skaggs said. "That does happen."

Audits galore

Hospitals have seen sharp increases in Medicare investigations of patient stays over the last five years.

In 2010, Lee Memorial faced 496 such audits, known as Medicare Recovery Audit Contractor reviews. It jumped to 5,248 by 2012, a 958 percent increase. Potential over-payments during to date: nearly $61 million, or roughly twice the profit margin the organization sees in a given year.

Such reviews essentially freeze those dollars, making them unavailable until the cases are resolved. And, in some cases, patients may be informed they still owe money to the hospital years after their discharges.

The idea is to make sure hospitals aren't gaming the system — keeping patients extra days or admitting them unnecessarily — to get higher insurance payments. HMA faced allegations, famously in a "60 Minutes" investigation, of unnecessary admissions. The company denied the charges at the time, pointing in part to its observation numbers.

Contractors perform the reviews and get commissions on denied claims. The American Hospital Association calls them "bounty hunters." Lee Memorial Health System spokeswoman Mary Briggs said their efforts are largely overreaching.

Representatives for the Medicare system did not respond to requests for comment.

But its reports on U.S. audits point to some significant cost savings. That includes $1.3 billion in "improper payments" to health centers in 2010 and 2011. Its report this month on fiscal year 2012 reported another $2.4 billion in wrong payments (including $129 million in Florida).

Auditors get between 9 percent and 12.5 percent fees based on such claims. But the Centers for Medicare and Medicaid Services notes that they do not get to keep that money if the claims are overturned on appeal.

Of the $60 million in Lee Memorial billing under RAC review since 2010, at least $33 million was deemed proper. Auditors gave another $27 million an unfavorable ruling, most of which Lee Memorial is appealing. Another $550,000 is still pending a final ruling.

Lee Memorial says it has won 91 percent of such appeals to date, compared to the national hospital average of 72 percent.

The Medicare system announced in February that it would temporarily halt its audit program, a move some industry insiders interpreted as reaction to growing case backlogs. Some in Congress are also urging the Department of Health and Human Services to retool the program.

"In theory, and this is my personal opinion, you should just get rid of observation altogether," said Nesheim, the Lee Memorial billing expert. "We care for the patient, whether they're inpatient or observation. It shouldn't matter."

By the numbers

The News-Press obtained seven years of Lee Memorial "observation" patient records, the length of their stays and the types of extra charges theses patients incurred.

About 12 percent of Medicare patients in 2013 were considered under observation for the entire hospital stay, according to Lee Memorial Health System.

About 15 percent of all Lee Memorial Health System hospital patients were considered under "observation" last year.

1.2 days is the average stay for observation patients kept in the hospital, compared to the four-day average stay for inpatients.

1.57 days is the average stay for Medicare observation patients.

About 16 percent of observation patients stay longer than two days.

Those patients were in hospital beds an average of nearly three days.