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Judge Rules for Patients in Medicare 'Observation Status' Lawsuit

Beneficiaries can appeal admission status that cost them thousands in health care costs

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En español | Some Medicare beneficiaries may get reimbursed for thousands of dollars in nursing home charges they paid because of the way they were classified during a hospital stay, under a recent federal court ruling.

Under current Medicare policy, if an enrollee who has been in the hospital needs to go to a skilled nursing facility for more care, Medicare will pay for those services only if the patient has spent at least three days in the hospital. (Officials at the Centers for Medicare and Medicaid Services have suspended that three-day rule during the COVID-19 pandemic.) But sometimes, Medicare patients who go into the hospital and think they have been admitted as inpatients are instead changed to what Medicare calls observation status, meaning they are considered outpatients even if they remain in the hospital for days.

"Unfortunately, the financial impact for Medicare beneficiaries who spend time in observation can be burdensome and significant." 

— David Certner, AARP's legislative counsel and legislative policy director

Outpatients can lose out two ways. In the hospital, they are subject to Medicare Part B rules for outpatients and so are responsible for 20 percent of the bills for their hospital care. That 20 percent can be more than they would pay if they were admitted as a regular patient and classified under Medicare Part A, which covers inpatient hospital services. And when they move from the hospital to a skilled nursing facility, they don't qualify for Medicare coverage and so have to pay out of pocket.

The difference in charges can amount to thousands of dollars. And though Medicare allows enrollees to appeal if they are denied many services or charged for things they don't believe they should be, Medicare has not allowed patients to appeal their status in a hospital, saying such decisions are for doctors to make based on their medical judgment.

Nearly a decade ago, a group of Medicare beneficiaries sued the U.S. Department of Health and Human Services in what became a nationwide class action. Last week, in a ruling in that suit, U.S. District Judge Michael Shea of Connecticut said patients can appeal their hospital status if their doctor admitted them as a regular inpatient but the hospital later classified them as under observation. The U.S. Justice Department has until May 25 to appeal the decision.

Shea's decision applies to all traditional Medicare beneficiaries whose status was switched since Jan. 1, 2009, who spent at least three days in the hospital and who were enrolled in Medicare's Part A hospital benefit. If they win their appeal, most hospital expenses and any nursing home bills they paid will be reimbursed, as long as they satisfied any deductibles and copays.

"The ruling acknowledges that Medicare patients are in a very vulnerable position when they are hospitalized and particularly when they require care at a skilled nursing facility after hospitalization,” said Alice Bers, litigation director for the Center for Medicare Advocacy, which serves as lead counsel for the class.

Congress passed a law in 2019 that requires hospitals to tell patients what status they are being treated under, but advocates say more is needed.

Bills introduced in the U.S. House of Representatives and Senate would allow the time patients spend in the hospital under observation status to be counted toward the three-day hospital stay Medicare requires before it will pay for care in a skilled nursing facility. Those bills have languished in Congress so far.

AARP has strongly supported the measures. “Unfortunately, the financial impact for Medicare beneficiaries who spend time in observation can be burdensome and significant,” David Certner, AARP's legislative counsel and legislative policy director, said in letters of support to the authors of the measures.

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