And while the Centers for Medicare & Medicaid Services has proposed a rule change in which the hospital could submit claims for inpatient care for those patients who justifiably spend at least two midnights in the hospital, many worry that it won't be enough to resolve concerns. That proposal would take effect in October.
A patient rights organization, the Center for Medicare Advocacy, has filed a lawsuit against the federal government seeking an end to observation status altogether.
The dollars lost to hospital revenue isn't the only downside.
Observation status creates tension and sours relationships between hospitals and their patients, who are surprised to learn that because they weren't considered inpatients, they aren't covered under Medicare Part A, and instead must absorb a 20% share of costs for their care under Medicare Part B.
Patients also aren't eligible for Medicare coverage for expensive skilled nursing facility care they may need after discharge unless they meet Medicare's inpatient criteria for at least a three-day stay, although a bipartisan bill seeks to fix that problem as well.
"We still have a lot of patients who are being financially hurt by this rule," Sheehy says. "Patients come in and have a much larger out-of-pocket bill, because Medicare Part B doesn't cover them, and they're not eligible for nursing home coverage, even though they're in the hospital for at least three days.