Wisconsin Study Suggests Hospitals Lose Money On Observation Care

A new study conducted by clinicians at the 566-bed University of Wisconsin Hospital and Clinics in Madison suggest that hospitals are losing money by placing some patients into observation care – a practice often spurred by fear of Medicare payment clawbacks.

The number of hospital patients held in observation care has increased in recent years as the scrutiny from recovery audit contractors, or RACs, has increased. RACs often focus on hospital stays of 48 hours or less, claiming such patients should have been treated on an outpatient basis, where the cost of providing care is far less.

However, the increase in observation care has often led to irate patients if they are transferred to a skilled nursing facility upon discharge. Medicare does not cover such stays unless the transferee was a hospital inpatient, and hospitals are not legally obliged to inform patients of this fact.

The American Hospital Association has been lobbying Congress to change some of the rules governing RACs, claiming their methods have become too financially onerous for both hospitals and patients to abide by.

The researchers examined nearly 44,000 hospital stays at the University of Wisconsin Hospital and Clinics that occurred between July 2010 and December 2011. Slightly more than 10% were under observation care. The mean length of stay was 33 hours. Patients with non-specific complaints of chest or abdominal pain and fainting were the most likely to receive observation status.

UW Hospital had an average negative margin of $331 for each observation patient, or -8.7 percent. That compares to a positive margin of $2,163, or 10.9 percent, for each inpatient admission.

However, the losses were stratified among different categories. Patients held in observation care for general medical issues lost far more money – an average of $1,378. But those held under subspecialty categories generated a modest profit. Pediatric observation cases were close to a break-even proposition for the hospital.

Observation patients were also less likely to be discharged to a SNF – 7 percent of those observed were sent to a SNF, compared to 13.7 percent for those who received inpatient care.

“Although reducing erroneous Medicare billings is important, our findings suggest that many aspects of observation status and reimbursement should be reevaluated,” wrote the study's authors. They also noted that “adult general medicine observation patients were also most likely to have government insurance, and so they were potentially vulnerable to self-pay skilled facility costs and a greater out-of-pocket hospital bill than were inpatients for a given set of services. The result is financial hardship for many general medicine patients and substantial fiscal losses for hospitals and healthcare providers.”

The study was published online on the website of the Journal of the American Medical Association.