AARP Fights to Protect Right of Medicare Patients to Challenge 'Observation Status'

In April 2020, a federal district court judge ruled that beneficiaries are entitled to appeal their designation as being under observation to the Medicare program and recoup some of their hospital and rehab expenses if they win that challenge. The federal government has appealed that ruling to the U.S. Court of Appeals for the 2nd Circuit, headquartered in New York City.

"The court's decision will have broad ramifications for older adults and people with disabilities covered by Medicare,” said William Alvarado Rivera, AARP Foundation senior vice president for litigation. “Vulnerable members of this population who require skilled rehabilitation care after they leave the hospital can face dire financial consequences — including tens of thousands of dollars in surprise bills. Because of the potential financial burden, many of them may decide they cannot afford the care they so desperately need.”

'Observation’ can be costly

For example, the AARP and AARP Foundation brief tells the story of Betty Goodman, a former high school teacher from Rhode Island who had to pay $7,000 for the rehab she received in a nursing facility after she had knee replacement surgery. Even though Goodman was in the hospital for three days as a result of the surgery, she was classified as being under observation and Medicare wouldn't cover her rehab stay, something she said “didn't seem fair … after paying for Medicare all these years.”

The brief explains that hospitals are increasingly classifying patients as being under observation status because they are worried about CMS financially penalizing them for admitting too many patients. Someone treated under observation status doesn't show up on a hospital's rolls as an inpatient.

"Medical debt resulting from outpatient hospital stays and uncovered post-hospital [skilled nursing facility] care can lead to protracted financial insecurity, even bankruptcy, and threaten Medicare beneficiaries’ ability to avoid unnecessary institutionalization,” the brief says. Sometimes when Medicare patients learn the program will not pay for rehab they decide not to get the care and jeopardize their health, the brief adds.

In 2019, Congress passed a law requiring hospitals to provide patients with a notice explaining what being under observation status means. “Yet many hospitalized older adults and patients with disabilities cannot comprehend this notice,” the brief says, especially older adults with cognitive issues.

Legislation strongly supported by AARP has been introduced in recent Congresses that 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. Congress has not acted on those bills.