Hospital Observation Status and CMS

posted May 1, 2013, 8:15 AM by Frank Baskin   [ updated May 15, 2015, 5:53 AM ]

CMS Invites Public Comment on Observation Status

As part of a notice of proposed rulemaking published in the Federal RegisAs part ter on March 18, 2013 CMS is ....FOR MORE CLICK TITLE... for public comments on potential policy changes related to observation status. This Alert describes observation status, CMS's discussion in the Federal Register, a discussion of the comments that NAPGCM will submit, and information about how to submit comments to CMS.

Observation Status

Observation status refers to the classification of a patient in an acute care hospital as an outpatient, even though, just like an inpatient, the person is placed in a bed in the hospital, stays overnight, and receives medically necessary nursing, medical care, diagnostic tests, treatments, therapy, prescription and over-the-counter medications, and food. Until now, classification as an outpatient may make a patient ineligible for Medicare coverage of subsequent skilled nursing facility (SNF) care because the Medicare statute requires three days of inpatient status (not counting the day of discharge) as a precondition to Medicare coverage of care in a SNF.

Proposed Rules

In July 2012, CMS asked for public comment on various approaches to revising CMS policy on observation status, but failed to adopt changes in the final rule. The proposed rule described CMS's Part A to Part B Rebilling Demonstration, which allowed hospitals to rebill Part B after a Part A inpatient stay was denied.

In the March 18th, 2013 rule, CMS notes “ongoing concern about recent increases in the length of time that Medicare beneficiaries spend as hospital outpatients receiving observation services.” CMS proposed the above change – allowing hospitals to rebill Part B when Part A is denied. CMS limited hospitals’ rebilling option, requiring that the Part B claim be filed within 12 months of the date of hospital service. The proposed rules allow hospitals that originally filed a Part A inpatient claim, using a “self-audit” procedure and also within the one-year period, to withdraw the Part A claim and rebill Medicare for medically necessary inpatient claims under Part B. Unfortunately, this approach does not help beneficiaries in outpatient observation status.

As an interim measure, and until it publishes final rules, CMS issued a Ruling, CMS-1455-R, effective March 18, that authorizes hospitals to bill Part B after a Part A claim is denied, even when the hospital services were provided more than one year earlier. In this regard, CMS is "adopting," but not endorsing, the decisions of ALJs and the Medicare Appeals Council. CMS reports that thousands of pending appeals are subject to this Ruling. Noting that hospitals cannot change a patient’s status after the patient is discharged from the hospital, CMS reports that under the Ruling, “The beneficiary is considered an outpatient for services billed on the Part B outpatient claim, and is considered an inpatient for services billed on the Part B inpatient claim.” CMS has terminated the Part A to Part B Rebilling Demonstration.


The proposed rules continue uncertainty for Medicare hospital patients about their status. A patient may be classified as a hospital inpatient and go to a SNF for rehabilitation, all payable under Part A. Then, up to one year from the date of service in the hospital, a Medicare contractor may reject the Part A claim or the hospital, using self-audit, may decide to withdraw its Part A claim for reimbursement and submit a Part B inpatient claim instead. At that point, the patient receives a refund of the Part A inpatient deductible and must pay the Part B co-payments and medication charges.
CMS acknowledges in its rule, “some beneficiaries who are entitled to coverage under both Part A and Part B may have a greater financial liability for hospital services compared to current policy, as they would be liable for additional Part B services billed when the inpatient admission is determined not reasonable and necessary.” CMS does not discuss what happens to the Part A-covered SNF claim when the hospital withdraws the qualifying three-day inpatient stay.

Action Step:

Please support changes in your letter to CMS about observation status that are embodied in the bipartisan legislation pending in Congress, the "Improving Access to Medicare Coverage Act of 2013. Please DO NOT support the approach outlined by CMS which creates more uncertainty and financial exposure for beneficiaries.


How to submit comments

Submit comments asking CMS to repeal the current observation status policy and indicating concern with the new, proposed approach. People who submit comments to CMS about their experiences with observation status should identify the state where they live and any relevant anecdotal details about clients such as the circumstances of a beneficiary's hospitalization, the length of time the person remained in the hospital, and the cost and duration of the subsequent SNF stay. If you have other experiences with observation status, please share those as well with CMS.

Comments must be received by CMS no later than 5:00 p.m. EST on May 17, 2013.

In submitting comments, it is important to refer to file code CMS-1455-P.

CMS authorizes the following ways to submit comments:

  • By regular mail. Mail written comments to

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS-1455-P
P.O. Box 8013
Baltimore, MD 21244-1850