The Origin and Disposition of Medicare Observation Stays

Background: Growing use of hospital observation care continues unabated despite growing concerns from Medicare beneficiaries, patient advocacy groups, providers, and policy makers. Unlike inpatient stays, outpatient observation stays are subject to 20% coinsurance and do not count toward the 3-day stay required for Medicare coverage of skilled nursing facility (SNF) care. Despite the policy relevance, we know little about where patients originate or their discharge disposition following observation stays, making it difficult to understand the scope of unintended consequences for beneficiaries, particularly those needing postacute care in a SNF. Objective: To determine Medicare beneficiaries' location immediately preceding and following an observation stay. Research Design: We linked 100% Medicare Inpatient and Outpatient claims data with the Minimum Data Set for nursing home resident assessments. We then flagged observation stays and conducted a descriptive claims-based analysis of where beneficiaries were immediately before and after their observation stay. Results: Most patients came from (92%) and were discharged to (90%) the community. Of >1 million total observation stays in 2009, just 7537 (0.75%) were at risk for high out-of-pocket expenses related to postobservation SNF care. Beneficiaries with longer observation stays were more likely to be discharged to SNF. Conclusions: With few at risk for being denied Medicare SNF coverage due to observation care, high out-of-pocket costs resulting from Medicare outpatient coinsurance requirements for observation stays seem to be of greater concern than limitations on Medicare coverage of postacute care. However, future research should explore how observation stay policy might decrease appropriate SNF use.