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Hospitals' Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries


CMS and others have raised concerns about hospitals' use of observation stays and short inpatient stays. They are concerned about beneficiaries spending long periods of time in observation stays without being admitted as inpatients. In particular, they are concerned that beneficiaries may pay more as outpatients than if they were admitted as inpatients. Moreover, beneficiaries who are not admitted as inpatients may not qualify under Medicare for skilled nursing facility (SNF) services following discharge from the hospital. In addition, CMS is concerned about improper payments for short inpatient stays when the beneficiaries should have been treated as outpatients. To address these concerns, CMS recently proposed policy changes-through a Notice of Proposed Rulemaking (NPRM)-that, if promulgated as proposed, would substantially affect how hospitals bill for these stays.


We based this study on an analysis of Medicare Part A and Part B hospital claims from 2012 and SNF Part A claims for beneficiaries who received these hospital services. We determined the number and characteristics of observation stays, long outpatient stays, and short inpatient stays. Finally, we determined the number of hospital stays in which beneficiaries spent at least 3 nights in the hospital but did not quality for SNF services.


We found that Medicare beneficiaries had 1.5 million observation stays; these beneficiaries commonly spent 1 night or more in the hospital. Beneficiaries had an additional 1.4 million long outpatient stays; some of these may have been observation stays. Beneficiaries also had 1.1 million short inpatient stays, which were often for the same reasons as observation stays. On average, short inpatient stays cost Medicare and beneficiaries more than observation stays. Some hospitals were more likely to use short inpatient stays, whereas others were more likely to use observation or long outpatient stays. Beneficiaries had over 600,000 hospital stays that lasted 3 nights or more but did not qualify them for SNF services. For 4 percent of these stays, beneficiaries received SNF services for which they did not qualify; Medicare inappropriately paid $255 million for these services.

Our results indicate that under the policies proposed in the NPRM, the number of short inpatient stays would be significantly reduced; however, the number of observation and long outpatient stays may not be reduced if outpatient nights are not counted towards the proposed 2 night presumption. Our results further indicate that, under the policies proposed in the NPRM, some hospitals would likely follow the provisions and continue to bill these as outpatient stays; other hospitals-given strong financial incentives and few barriers-would likely not follow the provisions and would admit beneficiaries as inpatients as soon as possible to meet the 2 night presumption. Lastly, our results raise concerns about SNF services for beneficiaries in observation stays, long outpatient stays, and short inpatient stays. CMS should consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost sharing for SNF services.