Balancing Clinical Care, Cost, and Patient Centeredness

Hospital outpatient observation reflects the challenges of health reform

In an effort to balance care and cost, Medicare's billing rules for outpatient observation created a riddle. What do hospitals do with a patient too sick to leave but too well to be admitted to inpatient status? For many hospitals and patients, solving this riddle has been a source of confusion and consternation. Solving the riddle may provide clues to implementing health reform.

The need for health reform is indisputable—medical costs in the U.S. have risen disproportionately to other costs and are out of alignment with other countries. Medicare, as a payor funded by tax payer dollars, seeks ways to control costs while ensuring quality patient care. In 1996, it implemented outpatient observation as a billing status for patients that did not need full hospital care. This allowed Medicare to reimburse hospitals at a lower rate for providing less intensive service. Good in theory perhaps, but challenging in implementation.

The use of observation stay has increased as hospitals gain a better understanding of how to evaluate and code for level of care. Along with the increased use of observation stay, the health care community has seen its challenges come to light.

Determining a patient's status is challenging

Whether patients can be admitted to inpatient status or should be placed in observation is determined by the severity of their illness or the level of intensity in the services they need.

"The guidance for inpatient medical necessity is continually changing," said Joe Schindler, Minnesota Hospital Association. "It can be frustrating for physicians to navigate complex documentation requirements for patients who clearly need to be monitored, but don't meet Medicare's inpatient admission criteria."

Hospitals act conservatively, erring on the side of patient safety. Patients receive the care they need, regardless of the billing determination about status. "The good news is that patient care is placed ahead of all the bureaucracy," Schindler added.
Communicating complex information to patients is challenging

Patients are confused when what looked and felt like an inpatient hospital stay didn't count as an inpatient hospital stay for their Medicare coverage. The financial impact is significant when Medicare does not fully cover medications, the time in the hospital, or nursing home costs following the hospital stay.

Hospitals are only required to inform patients of outpatient status if their status changed from inpatient to outpatient or if previously covered observation services are being reduced or terminated. But, when hospitals haven't clearly communicated a person's outpatient status, patients and their families have been shocked to learn their medical expenses are not being covered by Medicare as expected.

Collaborating to understand and overcome challenges

"We were hearing about problems with outpatient stay from Medicare beneficiaries," said Betsy Jeppesen of Stratis Health. "We were hearing about it from nursing homes and from hospitals."
Recognizing the extent of the problem, Minnesota stakeholders came together to discuss and work on the challenges around observation.

"Navigating Medicare is difficult," said Cheryl Hennen, Minnesota Office of Ombudsman for Long-Term Care. "We wanted to bring understanding and a focus to the problem."

The Ombudsman's Office is working with stakeholders and partners to develop a standard information sheet to help patients understand observation status and its implications.

This summer, the Centers for Medicare & Medicaid Services held forums to hear from the public, providers, and advocacy groups. It is evaluating the recently reported impact to Medicare patient benefits and to providers, and considering whether changes to observation rules are needed.

Learning from observation status

Health reform will require us to better communicate with patients, sharing the right information, at the right time, in a manner patients can understand.

Health reform requires that we look for efficiencies in systems to keep down costs. Managing patient care outside of hospital walls is becoming more important.

Health reform is requiring better documentation of diagnoses and treatments, not only for billing accuracy but to enhance care delivery and support population health. Electronic health records are becoming more essential to support care quality, assist with data reporting and analysis, and aid in accurate and appropriate billing.

From the experience of outpatient observation, we know health reform won't be easy. We can expect more challenges from unintended consequences as we try to find the right value equation for balancing clinical decision making, payment and reimbursement, and patient centeredness.

We also believe that stakeholders in Minnesota's health care system are well poised to work together on these challenges.