Disappointing Decision from Court in Challenge to “Observation Status” Highlights Need to Pass Legislation

On September 23, a federal judge in Connecticut dismissed a lawsuit filed by the Center for Medicare Advocacy and the National Senior Citizens Law Center on behalf of Medicare beneficiaries who have been placed on "observation status."[1]  When hospital patients are placed on observation status they are labeled "outpatients," even though they are often on a regular hospital floor for many days, receiving the same care as inpatients.  Because patients must be hospitalized as inpatients for three consecutive days to receive Medicare coverage of post-hospital nursing home care, people on observation status do not have nursing home coverage.  They must either privately pay the high cost of nursing care or forgo that skilled care.  The number of people placed on observation status has greatly increased in recent years.  The lawsuit seeks to end the use of observation status and alternatively to provide a clear appeal system for beneficiaries to challenge the observation status classification.  In a 50-page decision, Judge Michael P. Shea granted the government's motion to dismiss the action.

Judge Shea agreed with the plaintiffs that the court had jurisdiction to hear the case, even though some of the plaintiffs had not completed Medicare's administrative appeal process. The court's jurisdiction was based in part on the "irreparable harm" the plaintiffs could experience if denied benefits.  He found that all of the beneficiaries in the case "faced grave and deteriorating health conditions, and possible death."[2]  However he then dismissed all of the plaintiffs' claims and denied the pending class certification motion as moot.

The plaintiffs' main substantive claim is that observation status violates the Medicare statute because it deprives them of coverage they are entitled to by law.  The judge dismissed this claim by relying on a federal appeals court case which held that it is permissible for Medicare to consider someone an inpatient only if she has been formally admitted by a hospital. [3]  In theory, this leaves the determination to the admitting doctor alone.  The reality, however, is that hospitals and doctors have been strongly pressured by Medicare to classify more and more people in the hospital as outpatients.[4]  Medicare also relies on outside corporations' proprietary guidelines to determine whether inpatient admissions are "appropriate."  It is these guidelines and Medicare's enforcement of them that determine admissions in reality.

Another part of the case dealt with beneficiaries' inadequate notice and appeal rights.  The judge held that the plaintiffs did not have standing to challenge the adequacy of the notice that they were considered "outpatients," even though most beneficiaries do not learn of their status until they are being discharged from the hospital and it is too late to take any action. The judge also ruled that the plaintiffs could not mount a constitutional due process challenge because they lacked a "property right" in the Medicare benefits they were requesting.[5] This conclusion is particularly troubling as it contravenes well-settled case law about the right to a fair hearing about denied benefits.

At the Center, we continue to hear daily from people around the country who are dealing with the terrible consequences of observation status.  One caller's mother sold her life insurance policy to pay for her post-hospital skilled nursing home care.  Our website has a self-help packet with advice for people who wish to appeal their observation status classification.  The appeals process is difficult and time-consuming.  Observation Status appeals are typically denied at lower levels, which makes the court's rejection of the plaintiffs' due process claim all the more disturbing.

We are analyzing the court's ruling and considering next steps in the case.  The decision underlines the need for passing Rep. Joe Courtney's bill, the Improving Access to Medicare Coverage Act of 2013 (H.R. 1179), which would make all time in the hospital count toward the three-day stay requirement.  The bill has bipartisan support and a growing list of cosponsors in the House and Senate.  We encourage people to contact their Representative and Senators to ask that they cosponsor the bill.

For more information, contact attorney Alice Bers (abers@medicareadvocacy.org) in the Center for Medicare Advocacy's Connecticut office at (860) 456-7790.