Traditional Fee-for-Service Medicare/Beneficiary Coinsurance for Hospital Outpatient Services


A loophole in Medicare law related to hospital outpatient services (such as diagnostic tests, radiology, and certain surgeries) burdened beneficiaries with nearly half of the cost for those services instead of the standard 20 percent. The increased cost resulted from basing the coinsurance on 20 percent of hospital charges, rather than on the amount Medicare approved.

Since 2000, Congress has mandated that beneficiary coinsurance as a share of payments for hospital outpatient services be reduced each year through a “buy-down” provision. Its intent is to cut beneficiary coinsurance payments to 20 percent of total payments for outpatient services. In 2014, beneficiaries’ copayments accounted for 22 percent of total payments.

Recently MedPAC and CMS noted a rise in the number and length of hospital “observation” stays. Patients in observation status are classified as hospital outpatients, not inpatients, even though they are in a hospital setting for more than 24 hours and are using a hospital bed. The financial impact for Medicare beneficiaries who are classified as “under observation” can be significant. For instance, unlike Medicare coverage for an inpatient stay, for which beneficiaries’ costs are limited to the inpatient deductible amount, beneficiaries under observation must pay a percentage of the allowed charge for each outpatient service, including observation, and there is no cap on how much they may owe for multiple outpatient services.

Additionally, because Part B does not cover the cost of self-administered drugs provided to outpatients, beneficiaries under observation are typically responsible for the full hospital charges for these drugs, which are often many times the cost of buying the same drugs in a non-hospital pharmacy. MedPAC has estimated that, on average, hospitals charge $209 for drugs that cost $43 when self-administered. These out-of-pocket costs can quickly add up, in particular for beneficiaries on fixed incomes. Finally, time spent under observation does not count toward the three-day prior inpatient stay required for Medicare coverage of skilled-nursing facility services. Therefore, someone who needs this postacute care may not qualify for coverage, despite spending more than three days in the hospital under observation. (For related policy, see this chapter’s section Traditional Fee-for-Service Medicare/Provider Payment—Postacute Care.)

Traditional Fee-for-Service Medicare/Beneficiary Coinsurance for Hospital Outpatient Services: Policy

Outpatient coinsurance

In this policy: Federal

CMS should ensure that the phase-down of beneficiary coinsurance for outpatient hospital care continues as rapidly as possible.

Federal policymakers should accelerate the buy-down of beneficiary coinsurance for all outpatient services to the appropriate level of 20 percent of Medicare’s approved amount as quickly as feasible.

Congress should limit the maximum dollar amount of beneficiary copayments for each outpatient service to one-half of the hospital inpatient deductible.

Congress and/or CMS should prohibit hospitals from billing beneficiaries who stay in the emergency room or under observation beyond a maximum length of time (such as 24 to 48 hours) as outpatients, whether or not they are subsequently admitted as inpatients.

Congress should allow any days spent in observation status to be counted toward the current three-day hospital stay requirement for skilled-nursing facility coverage (see this chapter’s section Traditional Fee-for-Service Medicare/Provider Payment—Postacute Care for related policy).