It plays out in every hospital in every state. A frail, elderly patient falls and fractures a pelvis or hits his or her head. Perhaps no surgery is warranted, but the patient is not safe to be discharged from the emergency department. Perhaps this frail, elderly person was previously totally independent, even caretaking an even older, more frail spouse. Now this patient cannot walk without major pain or is dizzy and unsteady from a small, subdural hematoma.

They meet "observation" status (an outpatient status paid for by Medicare Part B, rather than by Medicare Part A); they do not meet "inpatient" status. And therein lies all the difference: for the hospital, for the case managers, and, most profoundly, for the patients. For the hospital, reimbursement is affected, and should the wrong status be chosen, a denial is usually their payment for trying to do right by the patients they care for (and No! I do not believe hospitals are trying to "game" the system by putting patients in observation status to reduce their inpatient readmission rates!). Hospitals are more likely to err on the side of caution, at the expense of their own reimbursement, than play games.

For the case manager, the amount of time spent in regulatory work and/or justifying their collaborative decision making with the physicians is intense. Giving the hard message to the patients or families takes an emotional toll. Furthermore, case managers are put in a no-win situation because the patient cannot safely be discharged to his or her previous place of residence, yet do not qualify for skilled care (no 3-day qualifying stay when a patient is in observation status).

But the patients are hit hardest. Because Medicare will not pay for medically necessary care in a skilled nursing facility (SNF) if a patient was not placed in inpatient status for 3 days, the patient must pay for the SNF themselves, or be discharged to a much less safe environment. And, the amount they must pay is steep and more than most elderly people can afford. How much can this cost for a Medicare beneficiary?

* Cost of hospitalization may be in the $1,000s of dollars.

* If an SNF is required for physical therapy (for example), the patient is not eligible and must pay privately for room and board, it may cost the beneficiary upwards of $8,000.00 per month.

Note that these rules apply to traditional, fee-for-service Medicare beneficiaries. They may or may not apply to Medicare Advantage Plans, as these plans are not obligated to follow the regulations and may administer benefits as they choose (Hale, 2008). All of this causes confusion to patients and families. And, when in observations status, the discharge appeal process is not allowed.

One has to ask: was this thought through when the regulations were signed into law? Or, was this a untoward side effect? Either way, case managers cannot always abide by the Medicare Conditions of Participation and provide a safe discharge plan and also put some patients in the "correct" status, without risking reimbursement denials. Rock-and-hard-place scenario.

Let us go back to 1983. Thirty years ago, Medicare was reimbursing hospitals according to their costs. However, it was felt that providers were not motivated to keep their costs low, as that only served to reduce their own reimbursement. There was little regulatory oversight during the pre-1980 years and efficiency and effectiveness were not monitored. Then, the diagnosis-related groups were born, and this pay structure to prospectively set rates for certain diagnoses changed everything; for example, hospitals were keen to reduce length of stays and the rising cost of health care began to slow down and nurse case managers were embedded in hospitals to look more closely at clinical issues.

At first, observation status had no written regulations and, therefore, provided relief from the constraints of the diagnosis-related groups payment methodology and the regulatory oversight. Then, in 1994, the Prospective Payment Assessment Commission identified observation stays as problematic because many of the observational stays should have been coded as "inpatient admissions." So after this investigation, the Health Care Financing Administration-now the Centers for Medicare & Medicaid Services-published the rules for appropriate use of observation status in the September 1996 Medicare Hospital Manual, Publication 10 (Hale, 2008). And, the current problems began.

Fast forward to November 3, 2011: a lawsuit was filed on November 3, 2011, by the Center for Medicare Advocacy and co-counsel National Senior Citizens Law Center, seeking to end the use of hospital "Observation Status" (Bagnall v. Sebelius (No. 3:11-cv-01703, D. Conn)). The suit was filed on behalf of seven individual plaintiffs from Connecticut, Massachusetts, and Texas who represent a nationwide class of people harmed by the illegal "observation status" policy and practice. Bagnall v. Sebelius states that the use of observation status violates the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution. It states that Medicare is using observation status to deny reimbursement to beneficiaries for hospital services and nursing home stays (Edelman, 2012). If a Medicare beneficiary cannot safely go home and requires physical, occupational, or speech therapy (for example), Medicare does not have to pay for an SNF-the beneficiary pays for it. Is this not a form of cost-shifting?

So where do we stand on 2013? In Canada, they say that American hospitals have one big building for the hospital care and an equally big building to manage regulations. Although the regulations are managed within the "big" hospital building, the statement is not without merit. The question must be asked: is this even efficient use of resources? And, is this cost-shifting? Medicare is not paying for many medically necessary SNF stays-the beneficiaries are paying (or worse, they cannot pay and the discharge plan is less safe).

There is also bipartisan legislations pending in Congress: H.R. 1543 in the House and S 818 in the Senate, which is known as the "Improving Access to Medicare Coverage Act of 2011." This bill would amend title XVIII of the Social Security Act to count a period of receipt of outpatient observation services in a hospital toward satisfying the 3-day inpatient hospital requirement for coverage of SNF services under Medicare (Govtrack.us, 2012). That would be, at least, a fair start to fixing this regulatory loophole.

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