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Research Letter | Health Care Reform

“Observation Status” for Hospitalized Patients:  Implications of a Proposed Medicare Rules Change

Ann M. Sheehy, MD, MS1; Ben K. Graf, MD2; Sreedevi Gangireddy, MD3; Roger Formisano, PhD4; Elizabeth A. Jacobs, MD, MPP5
[+] Author Affiliations
1Division of Hospital Medicine, Department of Medicine, University of Wisconsin School of Medicine and Public Health, Madison
2Department of Orthopedics and Rehabilitation, University of Wisconsin, Madison, Wisconsin
3Division of Hospital Medicine, Department of Medicine, University of Wisconsin, Madison
4University of Wisconsin Medical Foundation, Madison
5Division of General Internal Medicine, Department of Medicine, University of Wisconsin, Madison
JAMA Intern Med. 2013;173(21):2004-2006. doi:10.1001/jamainternmed.2013.9382.
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Hospitalized patients in the United States are increasingly placed on “observation status.”1 The Centers for Medicare & Medicaid Services (CMS) state that observation should rarely exceed 48 hours.2 At our hospital, however, observation stays frequently exceed 48 hours, particularly for adult general medicine patients, as our research group recently reported in this journal.3 Reimbursement has not covered the costs, resulting in operating losses.3

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Figure 1.
Per-Encounter Estimated Effect of Proposed Medicare Rules Change on Reimbursement at an Academic Medical Center for Inpatient and Observation Encounters

A, All observation stays. B, All inpatient stays. Cost numbers reflect total cost of care per encounter; reimbursement reflects payment to the hospital for the encounter. For 2 midnights and longer observation stays, estimated reimbursement per encounter is $2,639 more than current hospital reimbursement. For shorter than 2 midnight inpatient stays, estimated reimbursement per encounter is $3,050 less than current hospital reimbursement.

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Figure 2.
Estimated Effect of Proposed Medicare Rules Change on Reimbursement at an Academic Medical Center: Financial Impact of a “2-Midnight” Rule

A, Shorter stays (<2 midnights). B, Longer stays (≥2 midnights). C, All encounters. Reimbursement reflects payment to the hospital for the encounter. Dashed line indicates per-encounter average weighted inpatient and observation current reimbursement.

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