Category: Elder Law


Beginning August 6, 2016, the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act)[1]requires hospitals to provide written and oral notice, within 36 hours, to patients who are in observation or other outpatient status for more than 24 hours. The notice must explain the reason that the patient is an

outpatient (and not an admitted inpatient) and describe the implications of that status both for cost-sharing in the hospital and for subsequent “eligibility for coverage” in a skilled nursing facility (SNF).

In final regulations for inpatient hospital reimbursement that were put on display at the Office of Federal Register on August 2, 2016, the Centers for Medicare & Medicaid Services (CMS) announces that the final rules, including rules to implement the NOTICE Act, become effective October 1, 2016 and that the required written notice to patients – the Medicare Outpatient Observation Notice (“MOON”) – will not become effective until 90 days following approval of the MOON by the Office of Management and Budget (OMB). As of August 4, OMB had not approved the MOON. What the CMS final rules mean is that the NOTICE Act will not be implemented until the late Fall of 2016, at the earliest.

Observation Status

The Center for Medicare Advocacy (Center) has written extensively about patients in hospitals who receive medically necessary care, tests, treatment, and medications ordered by their physicians but are in observation status or are otherwise called outpatients, rather than admitted inpatients.[2] The consequences for these patients are generally not medical. CMS confirms that physicians can order whatever care their patients need, regardless of whether they are labeled inpatients or outpatients.[3] A primary consequence for patients of the inpatient/outpatient Medicare billing distinction is financial: Medicare will not pay for post-hospital care in a SNF unless a patient is classified as an inpatient for at least three consecutive days, not counting the day of discharge. Observation status and outpatient status are not inpatient and they do not qualify a patient for Medicare Part A coverage of SNF care.

CMS’s Implementation of the NOTICE Act

The Centers for Medicare & Medicaid Services (CMS) described its proposed implementation of the NOTICE Act, and its development of a standardized notice, the MOON, that all hospitals must use, in proposed rules for Medicare reimbursement for inpatient hospital care.[4] In the preamble to the proposed rules, CMS indicated that it had submitted the MOON, form CMS-10611, to the Office of Management and Budget (OMB) for review under the Paperwork Reduction Act. As of August 4, OMB’s approval had not been received.

Final rules

On August 2, 2016, the final rules for hospital inpatient reimbursement went on display at the Federal Register.[5] They are currently scheduled to be published in the Federal Register on August 22, 2016.

The Center for Medicare Advocacy (“Center”) believes that the most controversial issue in the final rules is CMS’s description of which patients must receive written and oral notice. CMS writes repeatedly throughout the preamble that the NOTICE Act requires hospitals to give notice only to Medicare beneficiaries who receive “observation services as an outpatient” for more than 24 hours. CMS states explicitly, “not all outpatients receive observation services.”[6] The Center believes this interpretation is contrary to the NOTICE Act and will result in many outpatients not receiving information about their outpatient status.

The NOTICE Act says that notice must be given to “each individual who receives observation services as an outpatient.”[7] However, the Congressional Report for the NOTICE Act makes clear that the intention of the legislation is to inform all patients who are outpatients and not inpatients of their status. The Report describes the Purpose and Summary of the legislation as follows: “The bill, H.R. 876, reported by the Committee on Ways and Means on February 26, 2015, is legislation to provide certainty to beneficiaries regarding their status as an outpatient under observation (or any similar status) and not as an inpatient.”[8] Informing hospitalized patients that they are not inpatients is the purpose of the NOTICE Act. CMS’s limiting notice to patients who “receive observation services” not only misinterprets the clear intent of the NOTICE Act. It also makes no sense as a way of making meaningful distinctions among patients and, as discussed below, may exclude as many as half the patients nationwide who are classified as outpatients by their hospitals.

There is no definition of specific services that hospitals use to bill Medicare for observation. Moreover, CMS has repeatedly stated that physicians can order whatever medical services and tests that a patient needs, regardless of a patient’s status as an inpatient or outpatient.[9] “Observation services” do not reflect distinctions in care.

If observation services means that a patient gets a MOON only if the hospital codes the patient’s stay as outpatient, the limitation excludes patients whose hospitals do not code their outpatient stay as observation.

The HHS Office of Inspector General reported in 2013 that in calendar year 2012, 1.5 million patients had hospital stays that were coded as observation (because the hospital billed Medicare for observation hours) and another 1.4 million patients had long outpatient stays that may or may not have been not coded as observation (because the hospital may not have billed Medicare for observation hours).[10] Both observation stays and long outpatient stays often began in the emergency department and both types of stays involved similar medical issues.[11] The Inspector described an additional 1.1 million short inpatient stays in 2012, “which were often for the same reasons as observation stays.”[12]

Although patients in observation and outpatient stays receive medically necessary care, hospitals add a revenue code – either 0760 (general classification category) or 0762 (observation unit) – to signal an observation stay.[13] Observation stays are billed by the hour,[14] although hospitals may or may not be paid extra for coding a stay as observation.[15] The Inspector General found that some hospitals classify only 5% of their patients as receiving observation services, while other hospitals classify 90% of their outpatients in this way.[16]

Classifications of observation stays, long outpatient stays, and short inpatient stays do not reflect meaningful distinctions between patients or the care they need and receive.

Under the final rules, patients will not be given notice of their outpatient status unless their hospital codes them as receiving “observation services,” i.e., if the hospital bills Medicare for observation hours. Congress clearly did not intend this result.

In the final rules, CMS requires that hospitals provide notice to Medicare patients receiving observation services for more than 24 hours who (1) are later admitted as inpatients (because outpatient time does not count towards meeting the three-day inpatient requirement for SNF care),[17] (2) receive their Medicare coverage through Medicare Advantage (MA) plans,[18] (notice may not be relevant, since many MA plans do not require a three-day inpatient hospital stay in order to qualify for coverage of a SNF stay), (3) do not have Part B [19] (and therefore have no Medicare coverage of their hospital stay), (4) have Medicare as their secondary payer,[20] and (5) have their inpatient status reversed to outpatient, under Condition Code 44, following review by the hospital’s utilization review committee.[21] CMS specifically rejects public comments to require hospitals to provide the MOON “to all Medicare beneficiaries in outpatient status.”[22]

With respect to the timing of notice, the final rules require that notice be given within 36 hours after observation services are initiated, or sooner, if the patient is transferred, discharged, or admitted.[23] The hospital can give the notice before the patient has received observation services for 24 hours, but CMS cautions that hospitals should not generally deliver the MOON at the initiation of observation services because “patients may be completely preoccupied with concern for their safety and well-being, as they may be unsure of their diagnosis at a time when the signs and symptoms of their presenting condition(s) may be at the height of their clinical acuity” and “also may be overwhelmed and confused by notices and hospital paperwork that are presented at the time, often simultaneously.”[24]

Some states have enacted state laws requiring hospitals to provide information to patients about their outpatient status. CMS says that hospitals will have to determine if the MOON satisfies state law requirements. Hospitals may want to comply with state law by attaching additional information or a copy the state notice to the MOON, but they may not revise the MOON form.[25]

The final rules make some changes to the written notice, which is still in draft form and open for public comment. At present, the draft MOON does not require identification of the physician or the date and time observation services begin.[26] Nor does the draft MOON include contact information for the Quality Improvement Organization, which process appeals of inpatient discharges and quality of care complaints.[27] CMS suggests that hospitals write in the new “Additional Information” section such information as the date and time of inpatient admission (if relevant)[28] and whether the hospital waives drug costs.[29]

Hospitals must retain a signed copy of the MOON.[30]

CMS expects hospitals to use “usual procedures for delivering notice,” such as translators, interpreters, and assistive technology.[31]

CMS confirms that the NOTICE Act does not give patients appeal rights to challenge their observation status.[32]


On August 1, 2016, CMS published a new version of CMS-10611 on its website. The MOON is labeled “draft” and does not have an OMB approval number[33] The preamble indicates that the public has a 30-day comment period for the MOON,[34] but it is not clear whether the 30 days begin to run from August 2 (the date that the final rules went on public display) or from the date the final rules are published in the Federal Register (anticipated as August 22). OMB review begins after the public comment period ends and the MOON becomes effective 90 calendar days after OMB approval.[35]

The new MOON is considerably different from the April 27 draft. It is shorter, crisper, and easier to read than the April draft, although it continues to deny patients an opportunity to appeal their observation status.

The first section at the top of the form now requires the hospital to explain the reason for the patient’s outpatient status, reciting “You are not an inpatient because” and leaving a space blank for the hospital to fill in. This is a significant change from the earlier draft, which did not require hospitals to explain the reason for the patient’s status.

In its current form, the revised MOON separates out potential costs for patients both in the hospital (“Being an outpatient may affect what you pay in a hospital”) and afterwards (“Observation services may affect coverage and payment of your care after you leave the hospital”) and includes a separate section “Your costs for medications” at the hospital.

What Can Patients Expect on August 6?

Probably nothing. The effective date of the regulations, including the NOTICE Act, is October 1, 2016. It is unlikely that hospitals will implement the NOTICE Act until the MOON is approved by OMB and in effect. CMS require hospitals to give patients the MOON beginning 90 days after the form is approved by OMB. Realistically, the NOTICE Act will not be implemented until the late Fall of 2016, at the very earliest.


Medicare beneficiaries and their families and advocates should comment on the draft MOON.

Once patients begin receiving the MOON, they should take action. Although there is no formal way to change a patient’s status from outpatient to inpatient, patients and their families and advocates should do whatever they can to get the patient’s status changed to inpatient while the patient is still in the hospital. Ask the attending physicians to help.

The Center wants to hear your experiences with observation status in general and with the MOON. Please send your experiences to:

August 4, 2016 – T. Edelman


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