The use of Medicare observation status in hospitals has increased dramatically over the past several years. The most notable adverse consequence of Observation Status on beneficiaries is financial liability for any post-hospitalization care at a Skilled Nursing Facility. However, many of the beneficiaries the Center assists also find themselves facing large hospital bills for drugs they received while in "outpatient" observation status.
When a patient is in outpatient observation status at a hospital, Medicare Part B is billed, and pays for, 80% of the hospital services provided (Part A pays for inpatient hospital admissions). However, outpatient prescription drugs received in the hospital while a patient is in observation status are not billed to Part B. Instead, the patient must submit a claim to his/her outpatient drug plan, usually a Medicare Part D plan, to receive reimbursement for these drugs.
Part D plans are required to have a process in place to pay claims submitted by beneficiaries who received drugs while they are hospital outpatients. According to Chapter 5 of the Medicare Prescription Drug Benefit Manual, Section 60.1, all Part D plans must ensure that enrollees have access to Part D-covered drugs dispensed at "out-of-network pharmacies." These out-of-network pharmacies include "institution-based" pharmacies, like those in a hospital. In essence, patients in observation status at a hospital cannot be expected to get their outpatient drugs from a pharmacy that contracts with their Part D plan (like a CVS or Walgreens). Rather, they must take the drugs given to them by the hospital, dispensed from the hospital's out-of-network pharmacy.
To submit claims, beneficiaries should call their Part D plan and request an out-of-network pharmacy claim form as soon as they are able, and should check their Part D Evidence of Coverage for any applicable deadlines. The Centers for Medicare and Medicaid Services has provided Part D plans with a model claim form for this purpose. However, individual plans will likely have different forms. Beneficiaries should submit the completed claim form supplied by their plan and include the bill for medications from the hospital as well as a letter explaining that they were in observation status at the hospital and could not get to an in-network pharmacy. They should cite Chapter 5, Section 60.1 of the Medicare Prescription Drug Benefit Manual in their letter to the plan to remind the Part D plan of their responsibility to pay.
Beneficiaries should remember that if the drugs they received in the hospital are not on the Part D plan's formulary, they may need to ask the Part D plan for an exception to have the drugs covered. Also, after the Part D plan covers the drugs, beneficiaries will still be liable for co-pays. These co-pays may be higher because the hospital pharmacy is an out-of-network pharmacy. Unfortunately, "outpatient" hospital observation status continues to be a problem for Medicare beneficiaries.
 See Sharp Rise In Medicare Enrollees Being Held In Hospitals For Observation Raises Concerns About Causes And Consequences Health Affairs (June 2012) 31:61251-1259; Office of the Inspector General, Memorandum Report: Hospitals’ Use of Observation Stay and Short Inpatient Stays for Medicare Beneficiaries ( July, 2013)
 See The Center for Medicare Advocacy, Observation Status and Bagnall v. Sebelius, https://www.medicareadvocacy.org/medicare-info/observation-status/
 The Medicare Prescription Drug Benefit Manual Chapter 5: Beneficiary Benefits and Protections, 60.1 – Out-of-Network Pharmacy Access available at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/MemoPDBManualChapter5_093011.pdf
 The Centers for Medicare and Medicaid Services Model Coverage Determination Request Form, available at www.cms.gov/Medicare/Appeals-and-Grievances/MedPrescriptDrugApplGriev/Downloads/ModCovDetReqForm-and-InstrctnsOct-2011-508-.zip
 For information on how to request a coverage determination and seek an exception or pursue a Part D appeal see https://www.medicareadvocacy.org/medicare-info/medicare-part-d/#Appeals%20and%20Grievances.