Medicare Advantage

New Medicare Outpatient Classification Law

For more information on Medicare, please call the number below to speak with a healthcare specialist


Medicare patients could save thousands of dollars thanks to a new law passed last year. The Notice Act, a bipartisan law signed in 2015, requires medical providers to alert Medicare patients when they get placed into observation status. The law is designed to protect seniors and other Medicare beneficiaries who get treated at a hospital without being admitted.

Placing patients under observation status – and treating them under the “outpatient” label – has become common practice to avoid penalties instituted by Medicare. The Hospital Readmission Reduction Program penalizes hospitals for readmissions that happen too soon after a patient gets discharged. Hospitals stand to lose up to 3 percent of their reimbursement amount from Medicare for high readmission rates. In 2016, Medicare fined more than half of the country’s hospitals for high readmission rates – to the tune of $420 million.

Observation stays do not impact a hospital’s readmission rate, making them a good workaround for hospitals trying to avoid the penalty. Until last year, there was no legal requirement in place to let patients know whether they were being treated on an inpatient or outpatient basis. The Notice Act, which stands for Notice of Observation Treatment and Implication for Care Eligibility, requires that hospitals and critical access hospitals furnish patients with a notice if they’re being kept at a hospital under observation status with an outpatient label.

The notice must explain the patient’s status in detail and why he isn’t being admitted; discuss the cost ramifications and coverage eligibility for a skilled nursing facility; go over any additional, relevant information; and be signed by the person receiving care, her representative or a hospital staff member if the patient refuses to sign. Also, the notice has to be written in plain language in a language that the patient understands.

Hospitals have to deliver oral and written notification to patients once patients have been in observation status for over 24 hours. The notice has to come within 36 hours from the time treatment begins. In 2012, 1.5 million Medicare patients were placed on observation status. Beneficiaries tend to pay less for these stays than they do for short inpatient hospital stays. A brief stay at the hospital as an inpatient cost an average of $725 in 2012. Observation stays cost $401. Medicare also pays less for these stays – $5,142 for an inpatient stay compared to $1,741 for an observation stay.

The problem comes with lengthy stays in the hospital as an outpatient. Patients who stay longer than a few nights are charged substantially higher fees, and Medicare doesn’t offer the same coverage for outpatient stays as it does for inpatient treatment. Furthermore, Medicare does not pay for skilled nursing care unless a patient has been admitted to the hospital for at least three consecutive days. As a result, patients who spend three or more nights at the hospital under observation status without being fully admitted have faced exorbitant out-of-pocket costs.

Proponents of the law agree that it’s a step in the right direction, but they also say that more needs to be done to help protect Medicare beneficiaries. The Notice Act does not prevent hospitals from placing patients under observation status. Instead, it simply alerts patients to the financial issues at stake, allowing them to make informed decisions about their health care. It’s estimated that hospitals will generate 1.4 million notices a year under the new law.