Traditional 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) had subjected beneficiaries to much higher cost-sharing than the standard 20 percent. Nearly 50 percent was not uncommon. 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 the Medicare Payment Advisory Commission and the Centers for Medicare & Medicaid Services noted a rise in the number and length of hospital “observation” stays. Patients in observation status are classified as hospital outpatients, not inpatients, even if they are in a hospital setting for more than 24 hours and are using a hospital bed. The consequences and costs of this classification can be significant. For an observation stay, beneficiaries must pay a percentage of the allowed charge for each outpatient service, including observation. There is no cap on how much they may owe for multiple outpatient services. As an inpatient, their costs would be limited to the inpatient deductible amount ($1484).

Additionally, 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 nonhospital pharmacy (e.g., $209 for drugs that cost $43 outside the hospital).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 to cover subsequent 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 (see also Traditional Medicare Provider Payment—Postacute Care).



Decreasing outpatient coinsurance

The Centers for Medicare & Medicaid Services 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 amount of beneficiary copayments for each outpatient service to one-half of the hospital inpatient deductible.

Federal policymakers should prohibit hospitals from billing beneficiaries who stay in the emergency room or under observation beyond a maximum length of time (such as 24 or 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 to qualify for skilled-nursing facility coverage (see also Traditional Medicare Provider Payment—Postacute Care for related policy).