A growing number of seniors who think they've been hospitalized are finding that they really weren't.

The problem isn't memory loss, confusion or dementia. Instead, seniors on Medicare who did in fact spend multiple nights in the hospital are learning later on that they weren't formally admitted. Instead, they had "observation status"––a Medicare classification that can cost seniors thousands of extra dollars if they need post-hospital nursing care.

Medicare covers the first 100 days of care in skilled nursing facilities, but only for patients who were first formally admitted to a hospital for three consecutive days.

But federal data shows that the number of Medicare patients classified as under observation has jumped sharply in recent years, to 1.4 million in 2011 from 920,000 in 2006. And the trend isn't limited to patients who spend short periods of time in the hospital: The number of observation stays lasting more than 48 hours stood at 112,000 in 2011, compared with just 27,600 in 2006.

The problem stems from a well-intentioned effort by Medicare to control costs through a program that audits hospitals for possible overpayments, which began during the George W. Bush administration. When that program identifies improper admissions, hospitals must refund all the Medicare payments it received, and that has spurred many to be more cautious about admissions they think could be challenged.

Hospitals receive lower reimbursements for observation status patients––they are covered under the Part B outpatient program, rather than Part A, hospitalization. But at least they know they'll get something.

The situation prompted the non-profit Center for Medicare Advocacy to file a class action in 2011 (Bagnall v. Sebelius) to force the federal government to change its policy––a legal battle that it has been losing in the lower courts, but continues to appeal.


It has also fueled a regulatory skirmish in Washington that is intensifying, with a growing coalition of seniors, advocacy groups and healthcare providers pushing for reform on Medicare rules.

There's also momentum in Congress for legislation to straighten out the mess. Senator Sherrod Brown (D-Ohio) is sponsoring legislation that would force Medicare to count all overnight hospital stays as formal admissions, and similar legislation has been introduced in the House of Representatives.