Medicare officials have proposed changes in hospital admission rules that they say will curb the rising number of beneficiaries who are placed in observation care, but are not admitted, making them ineligible for nursing home coverage.

“This trend concerns hospitals and doctors because of the potential financial impact on Medicare beneficiaries,” medical officials wrote in an announcement Friday, April 26, 2013.

Patients must spend three consecutive inpatient days in the hospital before Medicare will cover nursing home care ordered by a doctor.

Observation patients do not qualify, even if they have been in the hospital for three consecutive days because they are coded as outpatients or observation not as inpatient or admitted.

Outpatients or observation patients also have higher out-of-pocket costs than inpatient or admitted while still in the hospital, including higher copayments and sometimes paying exorbitant charges for non-covered drugs.

Under the proposed Medicare changes, with some exceptions, if a physician expects a senior will stay in the hospital for less than two days, the patient would be considered an outpatient receiving observation care.

If the physician thinks a patient will need a longer observation stay, he will be required to place the patient under admitted care.

Setting deadlines for observation stays, for example only two days, would also limit the growing length of time that may be needed, another trend medical officials said was troubling.

The reaction from patient advocates, doctors, and hospitals has been swift and surprisingly unanimous: they say, “it’s a bad idea.”

The number of observation patients has jumped 69 percent in the past five years, to 1.6 million in 2011, according to federal records. They also are staying in the hospital longer, even though Medicare suggests that hospitals admit or discharge them within 24 to 48 hours. Observation visits exceeding 24 hours has nearly doubled to 744,748 patients.

Medical officials said the longer observation stays occur because hospitals are not sure Medicare will pay them if patients are admitted.

The proposed Medicare changes are intended to address these questions.

The proposed admission changes are part of a 1,400-page annual hospital payment update released Friday, April 26, 2013. If adopted, the new admission rules would apply to more than 3,400 acute care hospitals, and Medicare estimates it will result in 40,000 more inpatient or admitted hospital stays.

In order to offset the expected additional cost of $220 million, Medicare would cut hospital payment by 0.2 percent.

“I can’t imagine anyone is going to like this proposed rule because it makes time the determining factor in whether the services are provided on an inpatient or observation basis,” said Toby Edelman, senior policy attorney at the Center for Medicare Advocacy.

“This proposal is not about what the hospital is actually doing for a patient or what kind of care the patient needs or is receiving.”

Edelman said the Medicare proposal does nothing to help observation patients because it keeps the three-inpatient-days requirement in place, doesn’t require hospitals to tell patients when they are held for observation and doesn’t give patients a right to appeal their observation status.

The center is representing 14 seniors who have filed a lawsuit against the government to eliminate the observation care designation.

A federal judge held the lawsuit’s first hearing on Friday, May 10, 2013 in Hartford, Connecticut, to consider the government’s request to throw out the case because seniors should follow Medicare’s lengthy appeals process before going to court.

On Tuesday, April 30, 2013, government lawyers submitted the proposed rule change to the judge to bolster its argument for dismissal, claiming it clarifies “when we believe hospital inpatient admissions are reasonable and necessary, based on how long beneficiaries have spent or are reasonably expected to spend time in the hospital.”

The American Medical Association is still reviewing the proposed changes, which do not include steps it asked Medicare to take last year:

either drop the three-day policy or count observation days toward the requirement.

“This policy is of great concern to the physician community because it has created significant confusion and tremendous, unanticipated financial burden for Medicare patients,” James Madara, the AMA’s executive vice president, wrote to Medicare.

He also criticized hospitals’ ability to overrule the physician decision to admit a patient, which creates more confusion when the physician bills Medicare for inpatient services and the hospital bills for observation services.