A new right to appeal ‘Observation Status’ in Medicare

After over a decade of litigation, a court finally held that HHS violates the Fifth Amendment due process rights of beneficiaries when it prohibits appeals by patients who are admitted as inpatients but then reclassified to observation status.

Around 20 years ago, some Medicare beneficiaries started to face unwelcome surprises. Having spent three days or more in the hospital, they assumed they satisfied the “qualifying hospital stay” requirement for Medicare coverage of skilled nursing facility (SNF) care. In traditional Medicare, patients must be hospitalized as inpatients covered by Medicare Part A for three days before they can receive coverage of SNF services.1 Designation as an “inpatient” had not been a concern historically. If you were in the hospital for at least three days, surely you were an inpatient — what else would you be? But then some patients started to be placed in “observation status” and learned that they were considered outpatients covered by Medicare Part B. They were generally on regular hospital floors, often for many days, receiving care that was indistinguishable from that provided to inpatients. But Medicare did not count time spent on observation status toward the three-day hospitalization requirement.

Patients caught in an ‘Observation Status’ trap

What started as a trickle of patients classified as observation status grew into a steady stream over the years, and the consequences were severe for many. Without a three-day inpatient stay, they were not eligible for Medicare coverage of SNF services. Then, at the vulnerable moment of hospital discharge, older and disabled people were forced to quickly spend thousands of dollars — sometimes all they had — to gain admission to a SNF. Sometimes they had to forgo SNF care altogether because they could not afford it. Observation status could also harm people with Medicare Part A but not Part B. With no outpatient Part B coverage, these beneficiaries could find themselves responsible for the full “sticker price” of their hospital services.

Attorneys tried pursuing inpatient coverage for Medicare beneficiaries who were ensnared by the observation status problem. But the U.S. Department of Health and Human Services (HHS), which oversees Medicare, took the position that beneficiaries could not appeal to Medicare on the issue of whether hospital services are classified as inpatient/Part A or observation/Part B. HHS claimed the issue was purely “clinical.” Yet hospitals were telling patients that they were bound by Medicare billing rules and could even be accused of fraud if they got patients’ statuses wrong. A systemic change was needed.

Litigation in favor of patients’ right to appeal

The Center for Medicare Advocacy, along with Justice in Aging and Wilson Sonsini Goodrich & Rosati, brought a class action on behalf of Medicare beneficiaries affected by this problem. After over a decade of litigation, including a trial and two trips up to the Second Circuit Court of Appeals, a court finally held that HHS violates the Fifth Amendment due process rights of beneficiaries when it prohibits appeals by patients who are admitted as inpatients but then reclassified to observation status.2 The court limited the class to people who are reclassified from inpatients to outpatients receiving observation services. This was in part because it found that the “state action” required for a constitutional due process claim was limited to circumstances when the hospital’s “utilization review” staff is essentially conforming the patient’s status to standards dictated by Medicare. It did not find government action when a physician is making a patient status determination in the first instance. While the resulting appeal process is thus available to only a subset of the people affected by the observation status problem, it is a very important right for that group, and advocates continue to press for more comprehensive observation status reform.3