A recent OIG report examined “Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries.” The report was conducted in response to concerns about hospitals’ use of observation stays, which may be resulting in Medicare beneficiaries paying more as outpatients than if they were admitted as inpatients, and which may prevent beneficiaries from qualifying under Medicare for SNF services following discharge from the hospital. In addition, CMS is concerned about improper payments for short inpatient stays when the beneficiaries should have been treated as outpatients. Based on a review of claims from 2012, the OIG found that Medicare beneficiaries had 1.5 million observation stays, commonly spending one night or more in the hospital. Beneficiaries had an additional 1.4 million long outpatient stays; some of these may have been observation stays. Beneficiaries also had 1.1 million short inpatient stays, which the OIG notes typically cost Medicare and beneficiaries more than observation stays. In addition, beneficiaries had more than 600,000 hospital stays that lasted 3 nights or more but did not qualify them for SNF services, while Medicare inappropriately paid $255 million for SNF services for which beneficiaries did not qualify (CMS will refer these SNFs to CMS so the agency can look into recoupment). The OIG points out that that the CMS proposed IPPS rule for FY 2014 (which subsequently was finalized, as discussed above) would substantially affect how hospitals bill for these stays. While the number of short inpatient stays would be significantly reduced under the proposed rule, the number of observation and long outpatient stays may not be reduced if outpatient nights are not counted towards the proposed two night presumption. The OIG suggests that CMS consider how to ensure that beneficiaries with similar post-hospital care needs have the same access to and cost sharing for SNF services. In a related matter, a nationwide class action lawsuit filed November 3, 2011 on behalf of 14 named seniors by the Center for Medicare Advocacy and the National Senior Citizens Law Center challenging CMS’s observation day policy and practice is still pending in federal district court. Bagnall v. Sebelius, No. 11-1703 (D. Conn. filed Nov. 3, 2011). The lawsuit alleges that the use of observation status violates the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution.