What Observation Status Means For Your Insurance Coverage

QUESTION: My mother was in the Emergency Room (ER) and they couldn’t find out exactly what was wrong. The doctor recommended her staying at the hospital for observation. She has been there three days and now they are recommending her going to a rehab facility. We just found out that it won’t be covered by insurance. What is happening? Why isn’t that rehab stay covered by her insurance?

ANSWER: Observation Status is one of my most frustrating phrases. It has created a very difficult situation for many people, not only here in our part of the country, but everywhere! I will try to explain what is happening, but this may require two articles.

It sounds like you have just had your first experience with Observation Stay or Observation Status.” This first article will deal with what Observation Stay is and what that means for insurance purposes. The second article will cover related issues.

When we think back to a previous experience you may have had, the outcome was probably different, or maybe this is your first time taking a parent to the ER for a serious medical condition.

In the not too distance past, if you went to the ER and they did testing and evaluation, they generally decided within 24 hours to determine if you needed to be admitted or not. If you got to that 24 hour mark and you were still in the ER you were admitted to the hospital. This type of situation is what we now call Observation Status or Observation Stay.

The Centers for Medicare and Medicaid Services (CMS) changed those rules. The Observation Stays were extended to 72 hours. That means that there can be up to 72 hours before a decision has to be made on admission to the hospital. The rule is actually three midnights. So we say 72 hours, but it is counted by the midnights you are in hospital. That means three consecutive midnights in the hospital bed, with a diagnosis that qualifies you for admission.

This policy change was done for a number of reasons, just one of which is the amount of testing that can be done to determine exactly what is wrong. There are times when that can’t be completed or reviewed within 24 hours, so by extending that time limit, it allowed more of a complete picture of a person’s medical situation.

This simple change has had a significant impact on hospitals, doctors and patients. The biggest change is for payment and the patient’s cost.

Hospital Stays (inpatient) are one of the benefits covered under Medicare Part A. Medicare Part A has a $1,340 deductible for each hospital stay and the remainder is paid by Medicare part A until day 61 of inpatient benefits (consecutive hospital days). That means that all testing, medications, etc. are paid by Medicare Part A benefits. Physician visits while in the hospital continue to go to Medicare Part B.

If you have a Medicare Advantage Plan a hospital stay is covered differently than Original Medicare, usually with a single co-pay or per day charge ($850 per stay or $360 per day for days one through five).

With either type of insurance your out-of-pocket is pretty low and predictable.

With an Observation Stay this hospital stay is covered as an Outpatient Benefit which is Medicare Part B. Medicare Part B has a $183 deductible. Once that deductible is met each year Medicare pays 80 percent of approved charges and you pay 20 percent of approved charges. This Part B (outpatient) coverage makes for a very different cost to you. Each doctor you see, each test done, each day you are there becomes 20 percent of the approved charges. The deductible is lower (Part A vs. Part B), but the overall cost is much more.

The other difference is medications. In a hospital stay covered under Part A, your medications are included in that coverage with no additional costs. In an Observation Stay your medications are not included in Part A or Part B, so they would be billed to your Part D prescription drug plan. The difficulty here is that Hospitals are not Participating Pharmacies with your Part D plan. Therefore they often cannot direct bill the prescription drug plan you have and the amount paid by the insurance company will be less. This medication you are given during your hospital stay will be billed to you and then you may need to file a claim from your Prescription Drug Insurance Company.

For those individuals with Original Medicare the difference in payment can be significant. Instead of one deductible amount you are left to pay ($1,340), there can be a significant amount of co-pays for each test, doctor, medication, etc (20 percent). If you have a Medicare Supplement Plan, this insurance will probably cover most of the charges either way, but there can be some differences depending on which Medigap Plan you have. The Medication difference will impact you significantly because of the Pharmacy coverage.

For those individuals with Medicare Advantage Plans you may see less of a difference in how an Observation Stay is paid. Some of the Medicare Advantage Plans have opted to cover the different stays the same way with regard to co-pays. Remember the Medicare Advantage Plans have to give you all the coverage that original Medicare would give you, but they can choose to give you more coverage.

This Observation Status or Stay applies no matter where you are in the hospital. We have run into this issue for people who are in the ER for more than 24 hrs, but less than 72. I have talked with people who were in ICU for two days, but were considered Observation Status. Where you physically sleep in the hospital does not determine admission or observation. It is doctor’s orders and Medicare Admission Criteria.

This answer covered just the hospital stay itself and how it is paid for with regard to Original Medicare Parts A, B & D, as well as Medicare Advantage Plans.

The article next week will cover the Skilled Nursing Stay and other related issues and concerns with Observations Status. There are many more aspects of this issue that is important for you to understand.

To contact Janell Sluga, GCMC with questions or concerns, please call 716-720-9797 or e-mail her at janells@lutheran-jamestown.org.

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