Federal Court Dismisses Lawsuit by Medicare Beneficiaries Over "Observation Status"

Medicare beneficiaries were lawfully denied skilled nursing facility coverage after spending more than three nights in a hospital while under observation status, a federal district court in Connecticut has ruled.

The suit was brought by 14 plaintiffs who alleged that the U.S. Department of Health and Human Services (HHS), the defendant in the case, failed in its duty to force hospitals to comply with Medicare obligations.

The plaintiffs had sought to eliminate observation status altogether; or, in the alternative, require HHS to order hospitals to inform Medicare beneficiaries that they are in observation status and provide them a process to appeal the hospital's decision.

"Observation status" means that a Medicare beneficiary is not formally admitted as a hospital inpatient. Once the patient is admitted and spent three nights, the patient will be eligible for Medicare coverage in a skilled nursing facility (SNF).

Even after spending three or four days in a hospital, some Medicare beneficiaries are not aware that some of those days were spent in observation status, thereby not qualifying them for Medicare SNF coverage.

In his opinion, Judge Michael P. Shea acknowledged that observation patients “have a greater financial responsibility for the hospital services they received – and for any subsequent SNF stay — than if they had been admitted as inpatients,” and cited the case of a Connecticut woman who paid $30,000 for nursing home care that Medicare would not cover.

Judge Shea held that HHS was acting in accordance with the law by allowing hospitals and doctors to determine whether the patient should be admitted to the hospital.

Since 2008, the use of observation status has increased significantly. Under Medicare rules, a hospital that decides incorrectly on admitting the Medicare beneficiary as an inpatient must refund its Part A payment to the government. However, the hospital can bill Medicare under Part B for services provided to a person on observation status, even if not admitted. Medicare rules prohibit the hospital from reclassifying the patient from Part A to Part B.

Efforts are being made in Congress and by the American Medical Association to eliminate observation status.

And in a 2013 rulemaking, HHS sought to clarify observation status; but the new rule has disappointed observers who had hoped that the government would eliminate or severely restrict its use.

Bagnall v. Sebelius, Sept. 25, 2013.

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