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

Legal brief asks court to let beneficiaries appeal hospital decisions that can cost them thousands

Doctors discussing a patient's case at his hospital bed.

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En español | Medicare beneficiaries who are treated in the hospital under a so-called “observation status” instead of being formally admitted should be allowed to appeal that categorization, AARP and AARP Foundation argue in a legal brief filed as part of a long-standing federal lawsuit. The way patients are classified can cost many older Americans thousands of dollars in health care costs, especially for rehabilitative care they need in skilled nursing facilities after being discharged from the hospital.

The way Medicare works, if someone needs to go from the hospital to a skilled nursing facility for more care, Medicare will pay for those services only if the beneficiary has spent at least three days in the hospital before being transferred to rehab. (The Centers for Medicare and Medicaid Services [CMS] has suspended that rule to some extent during the COVID-19 pandemic.) Such aftercare is common for people who have had strokes or other injuries and illnesses for which they no longer need to be in the hospital but who require more care before they can safely go home.

Medicare enrollees could lose out financially even if they don't have to go to rehab. If someone is in the hospital but classified as an outpatient, Medicare says they are subject to Medicare Part B rules, making them responsible for 20 percent of the bills for their hospital care. Medicare Part B pays for outpatient services. That 20 percent can be more than they would have to pay if they were admitted as a regular inpatient and classified under Medicare Part A, which covers inpatient services after a deductible is paid.

Patients often in the dark about their status

What often happens is that Medicare enrollees who go into the hospital think they have been admitted as a regular patient but instead are classified as being under observation, even if they get the exact same treatments and care as that of someone who is formally admitted. When they go to a rehab facility or later see their hospital bill, beneficiaries who were under observation status are often surprised to learn that Medicare has not picked up the tab and they owe thousands of dollars out of pocket because they weren't officially inpatients.

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.”


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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.

Dena Bunis covers Medicare, health care, health policy and Congress. She also writes the “Medicare Made Easy” column for the AARP Bulletin. An award-winning journalist, Bunis spent decades working for metropolitan daily newspapers, including as Washington bureau chief for the Orange County Register and as a health policy and workplace writer for Newsday.

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