The Center for Medicare Advocacy has heard increasingly about beneficiaries throughout the country whose entire stays in a hospital, including stays as long as 14 days, are classified by the hospital as outpatient observation. In some instances, the beneficiaries' physicians order their admission, but the hospital retroactively reverses the decision. As a consequence of the classification of a hospital stay as outpatient observation (or of the reclassification of a hospital stay from inpatient care, covered by Medicare Part A, to outpatient care, covered by Medicare Part B), beneficiaries are charged for various services they received in the acute care hospital, including their prescription medications. They are also charged for their entire subsequent SNF stay, having never satisfied the statutory three-day inpatient hospital stay requirement, as the entire hospital stay is considered outpatient observation.
The Medicare statute and regulations authorize payment for skilled nursing facility (SNF) care for a beneficiary who, among other requirements, was a hospital inpatient for at least three days before the admission to the SNF. The Center has written repeatedly about difficulties in calculating hospital time for purposes of using Medicare's post-acute SNF benefit. In the past, the Center's primary focus was how time in observation status and in the emergency room was not counted by the Medicare program when that time was followed by a beneficiary's formal admission to the hospital as an inpatient. Recently, however, this new barrier to hospital and SNF coverage has emerged and increased.
This barrier to coverage and care directly impacted one of the Center's clients, Lee Barrows of Connecticut. Mrs. Barrows described her husband's five-day stay in a Connecticut hospital as an observation patient and denial of Medicare payment for his subsequent SNF care:
He was taken to a room where he remained for eight days… on the fifth day a neurologist, flanked by [my husband's] doctor and a social worker, ushered me into the hall and said 'we're sorry, but your husband was never admitted.' I was stunned with disbelief. Wrist band, IV, PT, low-salt diet due to unusually high blood pressure… criteria for admission seemed obvious. I tearfully blurted out that I was going to fight this, whereupon [they] both gave me the thumbs up sign saying that this happens once or twice a week.
Neither the Medicare statute nor the Medicare regulations define observation services. The only definition appears in various CMS manuals, where observation services are defined as:
a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.
In most cases, the Manuals provide, a beneficiary may not remain in observation status for more than 24 or 48 hours.
Even if a physician orders that a beneficiary be admitted to a hospital as an inpatient, since 2004 CMS has authorized hospital utilization review (UR) committees to change a patient's status from inpatient to outpatient. Such a retroactive change may be made, however, only if (1) the change is made while the patient is in the hospital; (2) the hospital has not submitted a claim to Medicare for the inpatient admission; (3) a physician concurs with the UR committee's decision; and (4) the physician's concurrence is documented in the patient's medical record. CMS explains that retroactive reclassifications should occur infrequently, "such as a late-night weekend admission when no case manager is on duty to offer guidance."
When a beneficiary is placed in observation status by the attending physician, a hospital may be required to give the patient an Advance Beneficiary Notice (ABN) of noncoverage in order to shift liability to the beneficiary. A critical issue for CMS is whether the service meets the requirements of a Part B-covered service. If the service is a Part B service, but it "falls outside of a timeframe for receipt of a particular benefit," then the hospital must give the beneficiary an ABN. If the service is not a Part B service, an ABN is not required to shift liability to the beneficiary, though the hospital may voluntarily give the patient such notice. Although the precise application of these principles to observation services has not been addressed in any administrative or court decision, the Center believes that placement of a beneficiary in observation status for more than 24 or 48 hours should lead to the requirement that the hospital give the patient an ABN.
Under the Medicare Act, when a determination is made that a service was not medically necessary and that Medicare will not pay for it, payment will nevertheless be made if the beneficiary did not know, and could not reasonably be expected to know, that payment would not be made. A beneficiary is presumed not to know "that services are not covered unless the evidence indicates that written notice was given to the beneficiary [bold font in original]." A provider must inform a beneficiary when services are not medically necessary; its failure to do so will relieve the beneficiary of responsibility of paying for the service.
If a hospital UR committee determines that a patient's inpatient stay is not medically necessary and should be reclassified as outpatient observation, CMS explicitly requires that the beneficiary be notified promptly in writing. The notice is necessary so that the beneficiary "is fully informed about the change in status and its impact on the co-insurance and deductible for which the beneficiary would be responsible."
In the Center's experience, hospitals are not giving patients an ABN when beneficiaries are assigned to observation status in the hospital for time periods exceeding 24 or 48 hours.
Congressional Efforts and Legislation
A Congressional briefing on "observation status," sponsored by Congressman Joe Courtney (D. CT), was held to highlight the harm being caused to Medicare beneficiaries' when their stays in acute care hospitals are labeled "outpatient observation" rather than inpatient admissions. The Center for Medicare Advocacy organized and chaired the briefing for Congressional staff. A broad coalition of organizations including AARP, the Alzheimer's Association, the American Medical Association, the American Medical Directors Association, Leading Age, and the National Committee to Preserve Social Security and Medicare urged Congress to support pending legislation which would ensure a full and fair Medicare program.
Center senior policy attorney Toby S. Edelman outlined the problem of observation status and called on Members of Congress to support the bipartisan legislation, the "Improving Access to Medicare Coverage Act of 2011," which is filed in both the House of Representatives (H.R. 1543) and the Senate (S. 818). She also called for support for Congressman Courtney's alternative efforts to secure an administrative resolution.
Also testifying at the briefing were representatives of the American Health Care Association (Gail Sheridan, a nursing home operator from Minnesota) and the American Medical Directors Association (Eric Tangalos, M.D., professor of medicine at the Mayo Clinic).
Although both bills mentioned above have bi-partisan support, there has been no action to pass them, and the harm to beneficiaries continues. Thus, on November 3, 2011, the Center for Medicare Advocacy, and co-counsel National Senior Citizens Law Center, filed a lawsuit on behalf of seven individual plaintiffs from Connecticut, Massachusetts, and Texas who represent a nationwide class of people harmed by the illegal "observation status" policy and practice.
The case, Bagnall v. Sebelius (No. 3:11-cv-01703, D. Conn), states that the use of observation status violates the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution.
To stay on top of the issue, register now for our December webinar at: https://salsa.democracyinaction.org/o/777/p/salsa/event/common/public/?event_KEY=72136, and see https://www.medicareadvocacy.org/medicare-info/observation-status/ for more information and to hear a recording of the news conference regarding Observation Status and the Bagnall case.
What You Can Do
The Center would like to hear about your experiences as we work to solve the hospital observation problem. In the meantime, the Center suggests that:
- Beneficiaries appeal from hospital and SNF notices that they do receive so that the Medicare program can make an initial determination of coverage.
- Beneficiaries who do not receive a notice from the hospital should file a request with the Medicare Administrative Contractor, asking that the contractor review the information and determine whether they met the inpatient criteria.
- Beneficiaries should appeal denials of Medicare coverage for the subsequent SNF stay at the same time as they appeal their observation status in the hospital.
- Beneficiaries who are billed for prescription drugs during their hospital stay should use their Part D plan's process for submitting claims from an out-of-network pharmacy (assuming the hospitals' pharmacies do not participate in Part D plans, as most do not).
All time in a hospital – whatever it is called, including admission or observation – should be considered inpatient hospital care for Medicare Part A and Skilled Nursing facility coverage. Beneficiaries who have paid into the Medicare system for years should be able to get Part A hospital payment and nursing home care coverage when they need it, regardless of the label attached to their time in the hospital. It is unfortunate that this hasn't been the case. Hopefully the legislative and court efforts now underway will soon ensure that it is remedied.
 Litigation challenging CMS's method of calculating hospital time was unsuccessful. Estate of Landers v. Leavitt, 545 F.3d 98 (2d Cir. 2008).
 Medicare Benefit Policy Manual, CMS Pub. 100-02, Chapter 6, §20.6; same language in Medicare Claims Processing Manual, CMS Pub. 100-04, Chapter 4, §290.1.
 Medicare Claims Processing Manual, CMS Pub. No. 100-04, Chapter 1, §50.3, originally issued as CMS, "Use of Condition Code 44, 'Inpatient Admission Changed to Outpatient,'" Transmittal 299, Change Request 3444 (Sep. 10, 2004).
 CMS, "Clarification of Medicare Payment Policy When Inpatient Admission Is Determined Not To Be Medically Necessary, Including the Use of Condition Code 44: 'Inpatient Admission Changed to Outpatient,'" MedLearn Matters (Sep. 10, 2004). Use of Condition Code 44 is not intended to serve as a substitute for adequate staffing of utilization management personnel or for continued education of physicians and hospital staff about each hospital's existing policies and admission protocols. As education and staffing efforts continue to progress, the need for hospitals to correct inappropriate admissions and to report condition code 44 should become increasingly rare. Question and Answer 3.
 Id. Use of Condition Code 44 is not intended to serve as a substitute for adequate staffing of utilization management personnel or for continued education of physicians and hospital staff about each hospital's existing policies and admission protocols. As education and staffing efforts continue to progress, the need for hospitals to correct inappropriate admissions and to report condition code 44 should become increasingly rare.
 Medicare Benefit Policy Manual, CMS Pub. 100-02, Chapter 6, §20.6.C.
 42 U.S.C. §1395pp, 1879 of the Social Security Act.
 Medicare Claims Processing Manual, CMS Pub. 100-04, Chapter 30, §30.1.
 Hospital ABNs are discussed in CMS, "Preliminary Instructions: Expedited Determinations/Reviews for Original Medicare," Transmittal 594, Change Request 3903 (June 24, 2005), which will be put in the Medicare Claims Processing Manual, Chapter 30, at §80. This Transmittal includes 10 different forms for Hospital –Issued Notices of Noncoverage (HINNs), none of which addresses observation status.
 CMS, "Clarification of Medicare Payment Policy When Inpatient Admission Is Determined Not To Be Medically Necessary, Including the Use of Condition Code 44: 'Inpatient Admission Changed to Outpatient,'" MedLearn Matters (Sep. 10, 2004).
 CMS, "Clarification of Medicare Payment Policy When Inpatient Admission Is Determined Not To Be Medically Necessary, Including the Use of Condition Code 44: 'Inpatient Admission Changed to Outpatient,'" Question 8, MedLearn Matters (Sep. 10, 2004).