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The Origin and Disposition of Medicare Observation Stays

Feng, Zhanlian PhD*,†; Jung, Hye-Young PhD; Wright, Brad PhD†,§; Mor, Vincent PhD

doi: 10.1097/MLR.0000000000000179
Original Articles

Background: Growing use of hospital observation care continues unabated despite growing concerns from Medicare beneficiaries, patient advocacy groups, providers, and policy makers. Unlike inpatient stays, outpatient observation stays are subject to 20% coinsurance and do not count toward the 3-day stay required for Medicare coverage of skilled nursing facility (SNF) care. Despite the policy relevance, we know little about where patients originate or their discharge disposition following observation stays, making it difficult to understand the scope of unintended consequences for beneficiaries, particularly those needing postacute care in a SNF.

Objective: To determine Medicare beneficiaries’ location immediately preceding and following an observation stay.

Research Design: We linked 100% Medicare Inpatient and Outpatient claims data with the Minimum Data Set for nursing home resident assessments. We then flagged observation stays and conducted a descriptive claims-based analysis of where beneficiaries were immediately before and after their observation stay.

Results: Most patients came from (92%) and were discharged to (90%) the community. Of >1 million total observation stays in 2009, just 7537 (0.75%) were at risk for high out-of-pocket expenses related to postobservation SNF care. Beneficiaries with longer observation stays were more likely to be discharged to SNF.

Conclusions: With few at risk for being denied Medicare SNF coverage due to observation care, high out-of-pocket costs resulting from Medicare outpatient coinsurance requirements for observation stays seem to be of greater concern than limitations on Medicare coverage of postacute care. However, future research should explore how observation stay policy might decrease appropriate SNF use.

Supplemental Digital Content is available in the text.

*RTI International, Waltham, MA

Department of Health Services, Policy and Practice, Brown University, Providence, RI

Department of Public Health, Weill Cornell Medical College, New York, NY

§Department of Health Management and Policy, University of Iowa College of Public Health, Iowa City, IA

Supplemental Digital Content is available for this article. Direct URL citations appear in the printed text and are provided in the HTML and PDF versions of this article on the journal's Website,

Supported by the Retirement Research Foundation (Grant No. 2011-066), the National Institute on Aging (Grant No. P01AG027296), and the Agency for Healthcare Research and Quality (Grant No. 5T32H000011-27). The Medicare enrollment and claims data used in this analysis were made available through a data use agreement (DUA 21845) authorized by the Centers for Medicare and Medicaid Services.

The authors declare no conflict of interest.

Reprints: Brad Wright, PhD, Department of Health Management and Policy, University of Iowa College of Public Health, 100 College of Public Health Building, Iowa City, IA 52242. E-mail:

© 2014 by Lippincott Williams & Wilkins.