An 11-Year Fight Ends in Right to Appeal Hospital Observation Status Classifications

Andrew Roney, 70, spent three days in a hospital for an intestinal infection, and to his surprise, he got hit with a bill of $5,000. He had Medicare Part A hospitalization coverage and assumed it would cover his hospital stay. The hospital even told him he was classified as inpatient when he first got there, and then his status was changed to observation status without him knowing the ramifications of the change.

Andrew was surprised to get the hefty bill, and despite his best efforts, there was nothing he could do about it except to pay up. “It came as a shock to the system,” said Andrew. “I don’t want anybody else to go through that.” He had given up hope of getting his money back at the time, but as of January 25, 2022, Andrew can now file an appeal!

In Certain Circumstances, Patients Can Appeal Lack of Coverage for Observation Status

Similar to Andrew, many individuals are shocked to learn that they need to pay out of pocket for their hospital stays because Medicare would not cover it. The reason for this is their hospital stays were classified under “observation status” rather than “inpatient” care, even though some of them stayed in the hospital for more than three days and even had surgery.

This past week, a three-judge federal appeals court panel ended an 11-year fight against a rule that left hundreds of thousands of Medicare beneficiaries without coverage for care that was classified as observation status and denied, with no way to challenge a denial. The January 25 ruling will guarantee patients the right to appeal if they were admitted to a hospital as an inpatient but were switched to observation status.

According to the ruling, “Medicare beneficiaries have a property right in coverage under Medicare Part A and the federal government deprives them of due process when they reclassify inpatient hospital stays to observation status without providing an appeal process.” Barrows v. Becerra (2nd Cir., No. 20-1642-cv, Jan. 25, 2022).

For the full text of this decision, go to: https://www.ca2.uscourts.gov/decisions/isysquery/8b1171f1-6040-4176-8811-cafc7a45cb2f/1/doc/20-1642_opn.pdf9

The Right to Appeal Observation Status Went to Trial in 2020

In 2020, U.S. District Judge Michael Shea ruled that “patients are entitled to appeal if they are admitted as inpatients to the hospital by their doctor but later switched to ‘observation status’ by their hospital.” Judge Shea estimated that hundreds of thousands of Medicare beneficiaries would be able to seek refunds for hospital care and follow-up rehabilitation, which requires a three-day stay as an inpatient in a hospital, and other costs that admitted patients don’t pay. You can read more about this in our article on the subject.

The government continued to back the rule not allowing appeals and asked a federal appeals court panel to reverse Judge Shea’s decision. On Jan. 25, 2022, the appeals court judges upheld Shea’s decision. The ruling applies to people who have traditional Medicare, not people who have Medicare Advantage plans.

“The decision to reclassify a hospital patient from an inpatient to one receiving observation services may have significant and detrimental impacts on plaintiffs’ financial, psychological, and physical well-being,” the judges wrote. “That there is currently no recourse available to challenge that decision also weighs heavily in favor of a finding that plaintiffs have not been afforded the [due] process required by the Constitution.”

A DOJ spokesperson declined to comment on whether government lawyers would appeal the new ruling.

Here’s what you need to know about the ruling:

  • Until Congress passed a law that took effect in 2017, hospitals weren’t required to tell patients whether they were receiving observation care and had not been admitted. Under that law, hospitals must now provide written notice.
  • The court ruling noted that CMS (the Center for Medicare and Medicaid Services) “pressures hospitals in their decision making … by CMS’s own acknowledgment of observers’ ‘concerns,’ submitted during rulemaking, that hospitals appear[ed] to be responding to the financial risk of admitting Medicare beneficiaries for inpatient stays that might later be denied upon contractor review by electing to treat beneficiaries as outpatients receiving observation services, rather than admitting them as inpatients.”
  • Evidence at trial showed that CMS encouraged hospitals to respond to this pressure by implementing the Two Midnight Rule. Under this rule, most expected overnight hospitalizations are supposed to be classified as outpatient stays, even if they are more than 24 hours in length, and any medically necessary outpatient hospitalization should be “converted” to inpatient if and when it is clear that a second midnight of hospitalization is medically necessary.
  • The court’s decision applies only to people with traditional Medicare whose status was changed from inpatient to observation. A hospital services review team can make this change during or after a patient’s stay.
  • Medicare patients who were switched from inpatient to observation status after Jan. 1, 2009, will be able to file appeals for hospital stays and rehabilitation coverage and reimbursement for out-of-pocket costs.
  • People currently in the hospital will be able to request an expedited appeal, and others who have recently incurred costs can file a standard appeal by following instructions in their Medicare Summary Notice.
  • A plan for appealing older claims has not yet been arranged.
  • Without a three-day inpatient stay, beneficiaries are ineligible for Medicare’s rehabilitation benefit. So if they need follow-up rehabilitation care in a nursing home or dedicated rehab facility after leaving the hospital, they can face charges of about $600 a day for their rehabilitation.

For more information please read the Center for Medicare Rights’ frequently asked questions about the case.

How to Avoid Observation Status in the First Place

The appeal process may turn out to be a long process. Here are a few steps patients and their advocates should take upon any hospitalization to avoid observation status in the first place:

  • Ask about your status while in the hospital.
  • Advocate for yourself or your loved one. If you are told that you or a family member is in the hospital for observation only, work with hospital staff, and especially the patient’s physician, to have the classification changed.
  • Appeal. When you get the Medicare summary notice after a hospital stay or a notice of non-coverage from a skilled nursing facility or dedicated rehab facility, submit an appeal.

How Do I Initiate an Appeal?

It isn’t certain yet how the agency will implement the court’s ruling, including how notice will be provided or which contractors will handle the appeals. We do know that it will be necessary to show that the hospitalization should have been categorized as “inpatient” for the entire length of the stay. If the patient went from a hospital into rehabilitation, the beneficiary should also show that he or she required care in the hospital for at least three midnights. Documents that will support these claims are hospital medical records, letters from doctors, etc., so be sure to compile this information if you are planning on initiating an appeal.

The Center for Medicare Advocacy created a Self-Help Packet for challenging and appealing observation status designations that can be helpful.

Medicare Does Not Cover Long-Term Care

Medicare, the public health insurance system for seniors over 65 and disabled adults, does not pay one penny for long-term care. Medicare only pays for medical care delivered by doctors and hospitals and, in certain cases (i.e., after a minimum three-day inpatient stay at a hospital), short-term rehabilitation which typically takes place in a nursing home and occasionally in a dedicated rehabilitation facility, but there are not many dedicated rehabilitation facilities.

When it comes to Medicaid, it gets very complicated to complete and file the application and, in most cases, it takes an experienced Elder Law firm, such as the Farr Law Firm, to help protect your assets first and then file for Medicaid. Without proper planning and legal advice from an experienced Elder Law attorney, such as myself, many people spend much more than they should on long-term care and unnecessarily jeopardize their future care and well-being, as well as the security of their family.

If you need our help, please call to make an appointment for a no-cost initial consultation:

Medicaid Asset Protection Attorney Fairfax: 703-691-1888
Medicaid Asset Protection Attorney Fredericksburg: 540-479-1435
Medicaid Asset Protection Attorney Rockville: 301-519-8041
Medicaid Asset Protection Attorney DC: 202-587-2797

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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