Observation Encounters and Subsequent Nursing Facility Stays

Only 1.2% of community-dwelling Medicare beneficiaries who received hospital-based observation services in 2010 were discharged to an SNF not covered by Medicare.
Published Online: May 11, 2015
Anita A. Vashi, MD, MPH, MHS; Susannah G. Cafardi, MSW, LCSW, MPH; Christopher A. Powers, PharmD; Joseph S. Ross, MD, MHS; and William H. Shrank, MD, MSHS
ABSTRACT

Background: Medicare coverage of skilled nursing facility (SNF) care requires that beneficiaries have a 3-night inpatient stay in the prior 30 days to be eligible. Time spent by beneficiaries receiving hospital-based observation services does not count toward this requirement.

Objectives: To examine the frequency of Medicare beneficiary discharge from hospital-based observation services to SNFs and its impact on Medicare coverage.

Study Design: Retrospective cohort study.

Results: In 2010, 195,068 community-dwelling beneficiaries received hospital-based observation services. Beneficiaries were overwhelmingly (96.5%) discharged back to the community without home health services. Only 1.2% (2319) were discharged to non-covered SNFs, while 0.6% (1196) were discharged to covered SNFs. Patients discharged to SNFs experienced longer lengths of stay (LOS) than those discharged back to the community (34.9 hours vs 25.5 hours; P <.01). Approximately one-fourth of beneficiaries discharged to SNFs had an observation LOS of 48 hours or more.

Conclusions: While only a small minority of community-dwelling Medicare beneficiaries who received hospital-based observation services in 2010 were discharged to an SNF not covered by Medicare, the implications for these patients and the associated costs deserve attention. These findings have important implications for Medicare’s observation service and 2-midnight policies.

Am J Manag Care. 2015;21(4):e276-e281
Medicare coverage of skilled nursing facility (SNF) care requires that beneficiaries have a 3-night inpatient stay in the prior 30 days to be eligible—time spent in hospital–based observation does not count toward this requirement. In 2010, only 1.2% of community-dwelling Medicare beneficiaries who received hospital-based observation services were discharged to an SNF not covered by Medicare. Beneficiaries were overwhelmingly (96.5%) discharged back to the community.
  • This study addresses concerns that have been raised about potential unintended consequences of increased use of observation services, including whether Medicare beneficiaries may be left responsible for costly, post discharge nursing care following an observation encounter—the subject of a lawsuit against the HHS.
  • These findings have important implications for Medicare’s observation service and 2-midnight policies for a covered inpatient stay.
Hospital-based observation services allow short-term evaluation, treatment, and assessment of patients as an alternative to inpatient admission. Recently, there has been a steady increase in the number of observation units and in the utilization and duration of observation services.1,2 In limited studies, observation encounters have been found to be associated with decreased Medicare and hospital costs, decreased overall hospital length of stay (LOS), and increased patient satisfaction.3,4

More recently, however, concerns have been raised about the potential unintended consequences of increased use of observation services, including whether Medicare beneficiaries may be left responsible for costly post discharge nursing care following an observation encounter—the subject of a recent lawsuit against the federal HHS.5 Under current Medicare regulations, observation services are billed as outpatient treatment, not inpatient care. One of the main requirements for Medicare coverage of post acute care in a skilled nursing facility (SNF) is a 3-day hospital admission. Time spent by patients in observation is not counted toward the required 3-day inpatient stay,6 and consequently, beneficiaries may bear prohibitively high out-of-pocket costs.

The frequency of discharge from observation services to SNFs and the characteristics of beneficiaries who receive SNF care after observation services are currently unknown. We used a nationally representative sample of community-dwelling Medicare fee-for-service (FFS) beneficiaries to evaluate patterns and predictors of care after observation services, and to estimate the potential financial impact on beneficiaries; such data are necessary to assess the impact of the 3-day rule on beneficiaries and the potential costs related to the use of observation services.

METHODS

Databases

We performed a retrospective cohort study of FFS Medicare beneficiaries receiving observation services in 2010 using a 20% nationally representative sample from the CMS Chronic Conditions Data Warehouse. Beneficiaries were included if they had at least 1 observation service encounter.

Observation encounters were linked to an administrative Medicare file that specifies beneficiaries’ daily location of care: hospital, SNF, community with home health services, community without services, and deceased. This timeline file is created from Medicare inpatient claims, SNF claims, home health claims, the Long-Term Care Minimum Data Set (MDS), and the Outcome and Assessment Information Set.

Patient Selection

The study cohort was constructed by identifying beneficiaries who met Medicare’s criteria for payment for observation services.7 In the 20% sample from 2010, 241,929 beneficiaries received observation services. We limited our analysis to beneficiaries who were community dwelling prior to their observation service (n = 209,613) and for beneficiaries with multiple encounters, we utilized the first service. We further limited our analysis to beneficiaries who were enrolled in Medicare Parts A and B for the full study period or covered until their date of death (n = 195,143) and discharged alive from their index encounter (n = 195,068). After exclusions, 195,068 beneficiaries remained in our cohort.

Defining the Outcome

We assessed the rate of SNF utilization directly following hospital-based observation services. Post observation discharge destinations included return to the community without home health services, return to the community with home health services, or discharge to an SNF. Discharge to an SNF outcomes were further separated to delineate stays that were covered by Medicare and stays that were not covered by Medicare.

Descriptive Variables

Demographic and clinical variables from administrative files, including age, gender, race, dual status, and presence of end-stage renal disease, were used to describe the sample. Beneficiaries’ chronic conditions were identified using Chronic Conditions Data Warehouse condition flags,8 and the following 14 conditions were used: dementia (Alzheimer’s disease, related disorders, or senile dementia), atrial fibrillation, cancer (breast, colorectal, lung, prostate), chronic kidney disease, chronic obstructive pulmonary disease, depression, diabetes, glaucoma, congestive heart failure, ischemic heart disease, osteoporosis, arthritis (rheumatoid or osteoarthritis), hip fracture, and cerebrovascular disease (stroke or transient ischemic attack).

Cost Variables

Medicare Part A deductible and coinsurance amounts and the beneficiary deductible liability amounts were obtained from the 20% Medicare SNF Standard Analytic File. The presence or absence of supplemental Medicaid coverage was obtained from the Medicare Master Beneficiary Summary File.

Analytic Plan

We described the characteristics of the sample and evaluated unadjusted differences in beneficiary characteristics, characteristics of the stay, and discharge settings using t tests and χ2 tests. For beneficiaries discharged to Medicare-covered SNFs following index observation stay—and eligible for Medicare coverage due to the fact that they previously met Medicare eligibility requirements for coverage—beneficiary liability was calculated by combining the MedicarePart A deductible and coinsurance amounts with the beneficiary blood deductible liability amount.

Because available data only capture Medicare costs, the estimated financial impacts of current policy on non–Medicare-covered SNF costs following observation stays were calculated by classifying beneficiaries discharged to non–Medicare-covered SNF stays following index observation stay, into 3 subgroups: 1) those with full Medicaid coverage, 2) those with partial Medicaid coverage, and 3) those with no Medicaid coverage. We were unable to accurately estimate the financial impact of Medicaid coverage due to the lack of availability of 2010 Medicaid financial data. For the purposes of this analysis, those with full Medicaid coverage were assumed to have no financial liability, and for those without Medicaid coverage, we assumed beneficiaries might have been liable for up to 100% of the costs for care. As such, cost estimates for this group were derived using average SNF LOS for this beneficiary group and reported average cost per day for a semi-private SNF room in 2010.9 For the small group of beneficiaries with partial Medicaid coverage, we did not have sufficient information to make any financial estimates.

All analyses were performed using SAS version 9.1 (SAS Institute, Cary, North Carolina). This study was considered exempt from review by the Yale University Human Investigations Committee.

RESULTS

Description of the Overall Sample

In 2010, 195,068 community-dwelling beneficiaries received observation services and met study criteria, representing 3.2% of community-dwelling Medicare FFS beneficiaries. The mean age was 72.5 years (SD = 13.3) with beneficiaries distributed across all age groups (Table 1). The majority of beneficiaries were white (84.9%), male (58.9%), and of non-dual status (77.1%). Overall, the average time spent in observation status averaged 25.7 hours, but varied substantially (SD = 17.2) (Table 2). Those discharged to SNFs experienced longer LOS in observation than those discharged back to the community (34.9 hours vs 25.5 hours; P <.01). Approximately one-fourth of beneficiaries discharged to SNFs had observation LOS of 48 hours or more.

Disposition Following Observation Encounters

Following the index observation encounter, beneficiaries were overwhelmingly (96.5%) discharged back to the community without home health services (Table 1); less than 2% (1.7%) of beneficiaries were discharged back to the community with home health services. The remaining beneficiaries in our sample—only 1.8%—were discharged to an SNF. Less than 1% (0.6%) of the sample were discharged to an SNF with the stay covered by Medicare, while 1.2% were discharged to an SNF with their stay not covered by Medicare.

Beneficiaries discharged to a non-covered SNF tended to be older compared with beneficiaries discharged to a covered facility (82.5 years vs 80.1 years; P <.01). Beneficiaries discharged to a covered SNF also tended to have more comorbid conditions (P <.01), with 60.8% having at least 5 comorbid conditions compared with those discharged to a non-covered SNF—of whom 40.8% had at least 5 comorbid conditions.

Financial Impact on Beneficiaries

Of the 1196 beneficiaries in our sample who were discharged to a Medicare-covered SNF, LOS and Medicare payment records for services provided in 2010 were obtained for 1188 beneficiaries. These beneficiaries had an average LOS in observation of 35.3 hours (SD = 29.6 hours), and their average LOS in the SNF was 19.0 days (SD = 15.4 days) in 2010 for the stay immediately following their observation service encounter. On average, beneficiaries were liable for $1414.84 (SD = $827.11) beyond their Medicare SNF coverage.

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