New Federal Law Requiring Notification to Medicare Patients Placed in Observation Status

September 3, 2015

To: Hospital Chief Financial Officers, Chief Operating Officers, Legal Counsel and Government Affairs
From:  Andrew Busz, Policy Director, Finance
Claudia Sanders, SVP Policy Development
Staff Contact:  Andrew Busz,, 206-216-2533

Purpose: To inform hospitals about the new federal law Public Law 114-42, The NOTICE Act (H.R.876), that requires hospitals to provide oral and written notification to Medicare patients placed into observation status for longer than 24 hours. Also to let hospitals know of WSHA’s plans to provide opportunities for WSHA-member hospitals to share and communicate best practices and prepare for the new law.

Applicability/Scope: The new federal notification law applies to all hospitals that have a Medicare agreement with the Department of Health and Human Services (DHHS) and place Medicare patients in observation status. This includes both prospective payment system and critical access hospitals.

WSHA Recommendations: WSHA recommends all hospitals that place patients in observation status learn about the new notification requirements and begin preparations to implement new communications procedures and content, as necessary. WSHA will be providing opportunities for staff at member hospitals to share best practices and approaches in complying with the law.

Background: The federal government has a number of rules and policies that limit when a patient can be considered as an inpatient. If a hospital does not follow the rules and guidelines, it can be subject to penalties, including claim denials and take-backs from the Recovery Audit Contractor program. To adhere to the rules and policies, hospitals often place patients needing prolonged monitoring into observation status until it can be determined they meet the criteria for an inpatient admission. Generally, hospitals must adhere to the “Two-Midnight” rule, where a patient stay must span the 24-hour period between two midnights to be eligible to be billed as an inpatient admission. Because observation is considered by payors such as Medicare and commercial insurance to be an outpatient service subject to outpatient benefits, patients often experience a greater cost share for time in observation status than if they had been admitted as an inpatient. Another complication for Medicare patients is they must have a minimum three-day inpatient stay to qualify for Medicare skilled nursing benefits following the hospitalization. Time spent in observation does not count toward meeting the three-day inpatient requirement.

To help patients plan in these circumstances, a number of states have passed laws requiring hospitals to notify patients when they are placed in observation status. The recently passed federal law requires hospitals provide notification for all Medicare patients placed in observation for more than 24 hours.

Implementation Date of Federal Law: The law will go into effect 12 months from its enactment date of August 6, 2015. The reason for the delay is that specific details regarding the content of the communications will be determined by the Centers for Medicare & Medicaid Services through the federal rulemaking process. WSHA will review and comment on the proposed rule when it is released. While some specifics of the notification language have not yet been determined, WSHA recommends hospitals begin their planning for the operational aspects of the law as soon as possible.

Specific Provisions of the Federal Law

Time required to provide notification. The law allows for a maximum of 12 hours for the hospital to provide the notification once the patient has been in observation status for 24 hours. The language also requires the oral and written notification be provided prior to the patient’s release from the hospital and requires that the hospital obtain a signature from the patient or person acting on behalf of the patient acknowledging receipt of the information.

Form of notification. The law requires both oral and written communication. Both the content and the manner of documentation of compliance will be determined by the Secretary of DHHS and communicated through the rulemaking process.

Detail of notification. The notification must explain the patient’s status as outpatient rather than inpatient. Hospitals should consider the appropriate degree of detail in explaining to patients the reasons for such status. Hospital staff may be able to explain that the patient’s condition does not meet current federal billing requirements for inpatient status rather than going into clinical detail, particularly as the “Two-Midnight” rule adopted by CMS is essentially a time standard rather than a clinical standard.

The notification also must explain the possible financial implications of the patient’s observation status. We believe a simple statement alerting the patient that observation status may result in a greater level of patient cost-sharing and could impact qualification for skilled nursing benefits should suffice for these purposes. Hospitals are not in a position to know the specific financial impact for a patient and should be able to refer the patient to the patient’s health insurance payor for additional information if necessary. We will monitor the proposed rule and comment should the expectation in the rule be unreasonable.

We do not know if CMS will require hospitals to provide any additional information as part of the notification. WSHA will monitor the proposed rule and comment should any additional unreasonable requirements be added.

Signature requirement. Hospitals must obtain a signature from either the patient or a person acting on a patient’s behalf acknowledging receipt of the information. We do not yet know how “person acting on a patient’s behalf” will be defined or applied under the law. The purpose of the signature is to document the patient’s acknowledgement of receipt of the notification, not their agreement with the decision of being placed in observation rather than inpatient status. In cases where the patient or person acting on the patient’s behalf refuses to sign the notification, hospital staff can attest that the notification information was presented. Again, this provision assumes the notification will be provided while the patient is at the hospital. It is not known how CMS will monitor compliance with these provisions. WSHA will seek information on best practices for obtaining and documenting signatures.

Language flexibility. The law requires that the notification be provided in “plain language,” yet some specific wording will be determined by CMS.  It is unclear how much flexibility hospitals will have with wording or into which additional languages the written notification will need to be translated. We will monitor the proposed rule and comment should the expectation in the rule be unreasonable.

WSHA Next Steps

WSHA will host a webinar to provide an overview of the federal law and provide hospitals an opportunity to share best practices for oral and written notification as well as obtaining and documenting signatures. We will be sending out additional information regarding the webinar in the near future. WSHA will also review and comment on the proposed rule when it is released in coordination with the American Hospital Association.


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