The Confusion About Medicare’s Two 3-Day Rules

Recently, one of our primary care physicians was telling me about one of his patients, an 85 year-old woman who had a knee replacement at a different hospital here in Columbus. She was in the hospital for 4 days after her surgery but was very slow to recover and was determined to be unsafe for discharge home without additional rehabilitation so she was discharged to a SNF (subacute nursing facility). She spent a week getting rehab at the SNF and then returned home only to find that she had a bill for the entire stay the nursing facility; Medicare covered none of it. She paid her bills but in doing so, wiped out most of her savings.

 She was a victim of the Medicare 3-day rule.

The 3-day rule is Medicare’s requirement that a patient has to be admitted to the hospital for at least 3 days in order for Medicare to cover the cost of a SNF after the hospitalization. If the patient is admitted for less than 3 days, then the patient pays the cost of the SNF and Medicare pays nothing. So, if this patient was in the hospital for 4 days, why didn’t Medicare cover the cost of the SNF?

It all has to do with when the inpatient stay clock starts and that has nothing to do with when the patient first comes into the hospital for a surgery or a medical condition. It solely depends on when the attending physician entered an order for that patient to be in “inpatient status” as opposed to “observation status”. Medicare considers a patient to be in inpatient status if that patient is anticipated to need to be in the hospital for 2 midnights and in observation status if the patient is anticipated to be in the hospital for less than 2 midnights. Observation status was originally intended to be used to observe the patient to determine whether the patient is sick enough to warrant being admitted to the hospital.

But observation status has evolved into a monster that no longer resembles its original intended form. It no longer matters whether or not the patient needs to be in the hospital, it is now interpreted as the duration of that hospitalization – less than 2 midnights and you are an outpatient and more than 2 midnights you are an inpatient, no matter how sick you really are.

The problem that physicians face is that it is often difficult to predict how long a patient will need to be in the hospital when they first show up in the emergency department for their acute medical illness or in the operating room for their elective surgery. That is why observation status was invented in the first place. However, when it comes to covering the cost of a SNF, since Medicare only counts those hospital days after the physician decides that the patient really does need to be an inpatient. Many patients end up having to pay the cost of the SNF if they spend fewer than 3 midnights after that inpatient order was written, even if they additionally spent several days in the hospital under observation status. Medicare will not count those observation days towards the 3 inpatient days necessary to qualify for a SNF.

Part of the confusion is that even though Medicare won’t count those initial observation status days toward the SNF days, Medicare will pay for the observation status days just like they were inpatient days when it comes to the initial hospitalization. That is because for the purposes of hospital payment, Medicare will pay for up to 3 days in the hospital prior to when an inpatient admission order was placed. In other words, Medicare uses a different 3-day rule in defining inpatient hospital coverage as opposed to defining inpatient qualifying days for SNF coverage.

If a patient is in inpatient status, then Medicare part A covers the entire hospitalization plus all of the medications administered during the hospitalization. However, if a patient is in observation status, then the hospital stay is not covered by Medicare part A but instead is covered by Medicare part B which requires the patient to pay a 20% co-pay for all of the charges plus pay for any medications administered during the hospitalization. Lets take some examples to see how this works for a patient admitted through the emergency department with pneumonia:

  1. A patient comes to the emergency department with pneumonia and the physician writes an order for inpatient status when first coming into the hospital. The patient stays in the hospital for 5 days (all 5 in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the entire hospital stay plus any related outpatient charges for the 3 days prior to the inpatient order being written (i.e., the ER visit)
    • The patient has no hospital co-pay
    • Medicare part A pays for the SNF
  2. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. Two days later, the physician determines that it really is pneumonia and changes the order from observation status to inpatient status. The patient stays in the hospital for 5 days in total (3 days in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the entire hospital stay plus the ER visit and the 2 days in observation status.
    • The patient has no co-pay for the hospitalization
    • Medicare part A pays for the SNF
  3. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. The physician later determines that the patient has pneumonia but does not change the order from observation status to inpatient status until 4 days later. The patient stays in the hospital for 5 days in total (1 day in inpatient status) and gets discharged to a SNF.
    • Medicare part A pays for the last 3 of the 4 days the patient was in observation status plus the day that the patient was in inpatient status.
    • Medicare part B pays pays 80% of the first of the 4 days the patient was in observation status and 80% of the ER visit.
    • The patient pays for 20% of all of the hospital charges for the first observation status day and 20% of the ER visit
    • The patient pays for all of the medication charges for the ER visit and the first hospital observation status day
    • The patient pays for the SNF (Medicare will not cover the SNF since there were fewer than 3 inpatient days)
  4. A patient comes to the emergency department with fever and cough but the physician is not sure if it is pneumonia at first so the physician writes an order for the patient to be in observation status when first coming into the hospital. The physician later determines that the patient has pneumonia but forgets to change the observation status order to an inpatient status order. The patient stays in the hospital for 5 days in total (all in observation status).
    • Medicare part B pays for 80% of the entire hospital stay plus the ER visit.
    • The patient pays 20% of the entire hospital charges plus 20% of the ER visit charge
    • The patient pays for all medications received in the ER and during the hospitalization.
    • The patient pays for the SNF (Medicare will not cover the SNF since there were fewer than 3 inpatient days)

Next, let’s see how Medicare applies the 3-day rule for an elective knee replacement surgery:

  1. A patient comes into the hospital for knee replacement. The patient has no significant co-morbid medical conditions.  The surgeon writes an order for the patient to be in observation status at the time of the surgery. The patient spends 1 night in the hospital and is discharged home the next day.
    • Medicare part A pays for nothing
    • Medicare part B pays for 80% of the surgery and hospital charges
    • The patient pays 20% of the surgery and hospital charges
    • The patent pays for all medications received in the hospital
  2. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure so the surgeon anticipates that the patient will need to stay in the hospital for more than 2 midnights after the surgery to care for the medical conditions. The surgeon writes an order for the patient to be in inpatient status at the time of the surgery. The patient spends 4 nights in the hospital and is discharged home.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing
  3. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure so the surgeon anticipates that the patient will need to stay in the hospital for more than 2 midnights after the surgery to attend to the medical conditions. The surgeon writes an order for the patient to be in inpatient status at the time of the surgery. The patient spends 4 nights in the hospital but still need more rehabilitation so the patient is discharged to a SNF.
    • Medicare part A covers the entire surgery and hospital stay
    • The patient pays nothing
    • Medicare pays for the SNF
  4. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure but the surgeon thinks that the patient will only require one night in the hospital post-operatively. The surgeon writes an order for the patient to be in observation status at the time of the surgery. After 2 days, the surgeon changes the order to inpatient status. The patient spends 4 nights in the hospital and is discharged home.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing
  5. A patient comes into the hospital for knee replacement. The patient has difficult-to-control diabetes, heart failure, sleep apnea, and kidney failure but the surgeon thinks that the patient will only require one night in the hospital post-operatively. The surgeon writes an order for the patient to be in observation status at the time of the surgery. After 2 days, the surgeon changes the order to inpatient status. The patient spends 4 nights in the hospital but still need more rehabilitation so the patient is discharged to a SNF.
    • Medicare part A pays for the entire surgery and hospital stay
    • The patient pays nothing for the surgery and hospital stay
    • The patient pays for the SNF (Medicare will not pay for the SNF)

Confused? You are not alone. It is because Medicare actually has two 3-day rules and they work totally differently. When an observation status order is changed to an inpatient status order, Medicare will consider the 3 days prior to the inpatient order being written as being inpatient for the purposes of covering hospital charges. However, for SNF coverage decisions, Medicare will not count the 3 days prior to the inpatient order toward the 3 inpatient days that Medicare requires in order for Medicare to pay for SNF charges.

Medicare’s coverage rules are byzantine and indecipherable for the average patient. Even physicians often do not fully understand the nuances of the two 3-day rules. But if you want to make a patient unhappy with their hospital stay and with their surgeon, there is no better way than to slap that patient with an unexpected $20,000 co-pay and SNF charge after their elective knee surgery. It is incumbent on all physicians to get the inpatient status order correct as early in the hospitalization as possible to ensure that Medicare appropriately covers inpatient charges and SNF charges. If there is any chance that the patient will need to go to a SNF after hospitalization for a medical illness or a surgery, then the initial order should always be for inpatient status and not observation status.

July 13, 2019