A revealing article in Bloomberg recently described the latest way in which elderly patients are getting screwed by the system.

Medicare reviews all admissions and if the patients don’t meet indications for admission, the hospital doesn’t get paid by Medicare. Medicare has also recently implemented a mercenary system called Recovery Audit Contractors (or RAC for short) in which third parties audit hospital charts to see whether Medicare “overpaid” for a patient’s visit. If the auditor finds an “overpayment”, the auditor gets to keep a percentage of that overpayment.

Just as an aside, most states have laws against percentage “fee splitting” such as this since paying someone on a percentage basis creates a conflict of interest that encourages the contractors to do things to enhance their income.

Hospitals have the ability to classify Medicare patients as an “observation” admission during the patients’ stay. “Observation” admissions are apparently paid at a lower rate, but don’t come under as much Medicare scrutiny. Additionally, under Medicare rules, “observation” patients may have to pay a 20% co-payment that wouldn’t be required if they were admitted. Medicare “observation” patients also have to pay full price for any subsequent care that is rendered after they have been discharged.

For example, if a Medicare patient needs a nursing home care or physical therapy after a hospital stay, Medicare will pay if the patient has been admitted for three days or longer and will not pay if the patient is classified as an “observation” stay. The Bloomberg article gives an example of one 76 year old patient who was saddled with more than $36,000 in bills based on his “observation” stay for eight days.

Another 90 year old woman was billed more than $11,000 after fracturing her hip and then undergoing five weeks of physical therapy so that she could walk again. Sorry, grandma, you weren’t admitted. You were only “observation.” Pay up.

If a patient is a borderline case, hospitals appear to be leaning toward keeping patients in “observation” status. The number of patients receiving the “observation” designation doubled between 2006 and 2008.

Also note how Medicare is planning to penalize hospitals that re-admit too many patients, which will only increase the number of patients classified as “observation” status.

On one hand, hospitals get paid more for admitting Medicare patients. On the other, hospitals could be accused of false claims and penalized for admitting Medicare patients who don’t meet Medicare’s strict admission criteria. Medicare’s RAC mercenaries will be combing through charts because they have a financial incentive to find patients who have been “inappropriately” classified as “admissions.”

So hospitals play it safe and classify more and more Medicare patients as “observation” status.

Who gets stuck in the middle?

The patients … many of whom worked their lives and paid into a system so that they would have medical care when they reached age 65.

Now they’re finding that they only have “insurance.”

WhiteCoat is an emergency physician who blogs at WhiteCoat’s Call Room at Emergency Physicians Monthly.

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