Representatives Joe Courtney (D-CT), Glenn Thompson (R-PA), Suzan DelBene (D-WA) and Ron Estes (R-KS) introduced H.R. 3650 this week, which would allow observation stays to be counted toward the three-day mandatory inpatient stay for Medicare coverage of a skilled nursing facility. This would effectively eliminate the “observation status” loophole, also known as the “Two Midnight Policy.”

Currently, Medicare beneficiaries who are not officially admitted to a hospital may be classified under “observation status,” which is treated as an outpatient procedure for billing purposes. Unfortunately, the common practice of placing a beneficiary on observation status can have significant financial consequences for Medicare beneficiaries, since Medicare Part A and its related coverage rules only apply to actual inpatient care admissions. This may lead patients, many who are extremely sick and may need skilled nursing care, to spend many days in the hospital and be charged for services that Medicare would have otherwise paid had they been admitted. Furthermore, hospitals have up to one year to retroactively change admission status to observation, leading unsuspecting beneficiaries with thousands of dollars in bills for SNF care they believed would be covered by Medicare.

The issue stems from policies designed to prevent unnecessary hospital readmissions, where Medicare would penalize hospitals when patients would be re-hospitalized within a month of being discharged. Hospitals with readmission rates above the national average would receive lower Medicare reimbursements, thereby in theory incenting hospitals to adequately treat patients the first time and avoid re-admissions. However, in response to the policy, some hospitals increasingly placed patients under observation status, allowing them to provide care for patients whose conditions were not poor enough to be admitted without the hospital being penalized for a re-admission. Regardless if care was performed in the inpatient unit, these visits would be classified as outpatient procedures and billed under Medicare Part B, which could result in higher cost-sharing for the patient.

This “observation status” loophole has been temporarily waived during the pandemic, but as of now it will be enforced again once the public health emergency comes to an end.  Due to NAHU’s advocacy efforts, Representatives Joe Courtney (D-CT), Glenn Thompson (R-PA), Suzan DelBene (D-WA) and Ron Estes (R-KS) introduced H.R. 3650, a bipartisan bill which would amend the Social Security Act to count a period of receipt of outpatient observation services in a hospital toward satisfying the three-day inpatient hospital stay requirement for coverage of skilled nursing facility services under Medicare, and for other purposes. A Senate companion bill is currently pending.

NAHU is calling on all members to contact their federal legislators and urge them to co-sponsor H.R. 3650 through our recently released Operation Shout campaign.