Ask Factcheck: Does Medicare cover observation?

Q: Is it true that, under the Affordable Care Act, "Medicare will not pay anything" for patients receiving only "observation" care in hospitals?
A: No. Medicare will pay a significant portion of observation care costs after copayments and deductibles are met. Nothing has changed as a result of the ACA.

Full Question

Is this chain letter true?

Full Answer

A letter from "Roger" — a "senior gentleman" and alleged Medicare beneficiary in Mesa, Ariz. — has gone viral. In the letter, "Roger" writes about his visit to a hospital emergency room for evaluation. He says that two doctors confirmed that if "admitted" to the hospital for only "observation" services, Medicare "will not pay anything" toward his hospital bill because of the Affordable Care Act.

"I said, 'Doc, you and I both know that under the 'Affordable Care Act,' anyone on Medicare who is admitted to a hospital for observation will be responsible for the bill, Medicare won't pay a cent.' At which point he nodded in affirmation," he wrote.

But that's false. Medicare will pay a significant portion of the costs for necessary observation services in hospitals. And which services are covered has nothing to do with the federal health care law.

Under Observation

Doctors place hospital patients under observation to determine if they should be formally admitted as inpatients or if they can be discharged without further treatment. In most cases, the decision to admit a patient can be made in under 48 hours, and many times in less than 24 hours, according to the Centers for Medicare & Medicaid Services.

Hospital costs for admitted inpatients are covered under Medicare Part A after the patient pays a deductible ($1,216 for 2014). But observation care is considered an outpatient service, and Part A doesn't cover such services.

Instead, Medicare Part B helps cover the cost of outpatient services including observation care. The Medicare Benefit Policy Manual on hospital services covered under Part B says: "All hospital observation services, regardless of the duration of the observation care, that are medically reasonable and necessary are covered by Medicare."

For their part, Part B beneficiaries are expected to pay 20 percent of the Medicare-approved amount for doctors' services after paying the Part B deductible for the year ($147 in 2014), and generally to make copayments for each individual hospital service received. A Medicare pamphlet on inpatient and outpatient costs notes that the copay "for a single outpatient hospital service can't be more than the inpatient hospital deductible," but, in total, the outpatient services could end up costing more than the inpatient hospital deductible. Another Medicare fact sheet notes that the deductible and copays may be covered by a "Medigap" policy or other supplemental health insurance the individual may have.

The bottom line: Those receiving observation care as outpatients could end up paying more out of pocket than those admitted for inpatient services. But it's wrong to say that Medicare "won't pay a cent" for observation care. It pays quite a bit.

What May Not Be Covered

To be sure, Medicare doesn't cover all costs associated with observation care.

Beneficiaries may be required to pay out of pocket for any medications they receive in the hospital under observation care. CMS says patients may file a claim and receive reimbursement if the medication is covered by their Part D prescription drug plan.

Also, Medicare only covers the cost of follow-up care at a skilled nursing facility if someone was a hospital inpatient for at least three nights. So seniors treated in hospitals only under observation could be subject to high out-of-pocket costs if they need rehabilitation at a skilled nursing facility after being discharged from the hospital. In fact, such a scenario was the subject of an NBC "Nightly News" segment in January.

But while the use of observation care in hospitals has increased in recent years, which also has led to increased press coverage of higher-than-expected costs for some, the situation is not new. And it is not a result of the federal health care law, as "Roger" claims.

Andrea Callow, a policy attorney for the nonpartisan Center for Medicare Advocacy, told us in an email that the long-standing concern about how Medicare bills patients receiving observation care, which her organization has been tracking since at least 2000, has "absolutely nothing to do with the Affordable Care Act."

Callow, Andrea. Center for Medicare Advocacy. Email sent to FactCheck.org. 24 Mar 2014.

Centers for Medicare & Medicaid Services. "Are You a Hospital Inpatient or Outpatient? If You Have Medicare – Ask!" Feb 2011, accessed 9 May 2014.

Centers for Medicare & Medicaid Services. "Medicare Benefit Policy Manual, Chapter 6 – Hospital Services Covered Under Part B." 21 Mar 2014, accessed 9 May 2014.

Centers for Medicare & Medicaid Services. "Quick Facts About Payment for Outpatient Services for People with Medicare Part B." Jan 2010, accessed 9 May 2014.

Centers for Medicare & Medicaid Services. "How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings." Feb 2011, accessed 9 May 2014.

Tergesen, Anne. "Beware Medicare's 'Observation' Status." Wall Street Journal. 19 Oct 2013.

Miller, Mark. "Hospitalized but 'under observation'? Seniors, beware." Reuters. 23 Jan 2014.

Jaffe, Susan. "FAQ: Hospital Observation Care Can Be Poorly Understood And Costly For Medicare Beneficiaries." Kaiser Health News. 4 Sep 2013.

NBC Nightly News. The Two Words That Cost Medicare Patients Thousands. Video. 9 Jan 2014.

Department of Health and Human Services Office of Inspector General. "Hospitals' use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries, OEI-02-12-00040." Memo. 12 May 2014.

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