Groundbreaking Decision Made on Observation Status Appeals

Q. My mother, Ellen, spent a week in the hospital and ended up having surgery. She was seen by doctors and nurses, given several tests, had the surgery, and then got sent to a nursing home for two weeks of rehabilitation. She is certain that she was “inpatient” and then later switched to “observation status.” She didn’t think to ask, so she’s not sure how this even happened. After her stay, she received a monstrous bill from the hospital and an even larger bill from the nursing home. Medicare did not cover the first week in the hospital and did not cover the time in the nursing facility for rehab. She was sent bills totaling nearly $10,000 from the hospital and nursing home because of what the attending physician wrote on his chart. She was told that Medicare isn’t paying because the hospital had her in “observation status” rather than “inpatient” care during the week, and that Medicare doesn’t pay for “observation status” in the hospital.

Can anything be done to help my mother?

A. For seniors similar to Ellen who are on a fixed income, thousands of dollars in unexpected medical bills can be hard to handle. Hundreds of thousands of Medicare beneficiaries have been denied coverage for nursing home stays because their status in the hospital was changed from “inpatient” to “observation status.” Now, after a ruling from a federal judge last week, these patients can appeal to Medicare for reimbursement.

The rules previously forced many Medicare beneficiaries to either pay thousands of dollars out of pocket for rehabilitative care or to forgo the needed care altogether. While people with Medicare can appeal virtually any issue affecting their coverage, the Centers for Medicare and Medicaid Services (CMS) has blocked attempts by beneficiaries to appeal their hospital status.

What is Observation Status?

Many individuals were forced to pay out of pocket for their skilled nursing facility stays because Medicare would not cover it. The reason for this is because 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, similar to your friend, Ellen. In order to receive coverage for nursing home care, patients must first be admitted to the hospital as inpatients for three consecutive days. Time spent in the hospital for observation doesn’t count, even though they may stay overnight and receive some of the same treatment and other services provided to inpatients. While inpatients can file an appeal with Medicare if they question any other coverage denial, observation patients could not. In 2011, seven Medicare beneficiaries and their families sued the Department of Health and Human Services, in what became a nationwide class action lawsuit.

The Right to Appeal Observation Status Went to Trial

Alexander v. Azar, the nationwide class action lawsuit filed by the Center for Medicare Advocacy, initially went to trial in August 2019. You can read more details about this development in our newsletter article on the topic. On Tuesday, March 24, 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.” Here’s what else his decision means:

  • Patients whose doctors initially place them in observation care under Medicare’s “two-midnight” rule cannot appeal because that rule requires doctors to base their decision on medical judgment. If the doctor determines that a patient’s stay is unlikely to stretch over two midnights, the patient would most likely receive observation care, though there are exceptions.
  • Shea’s decision applies to all traditional Medicare beneficiaries who experienced such a switch since Jan. 1, 2009, spent at least three days in the hospital, and were enrolled in Medicare’s Part A hospital benefit. If they win their appeal, most hospital expenses and any nursing home bills they paid would be reimbursed under Part A.
  • Hundreds of thousands of beneficiaries will now be able to seek repayment.

The Center for Medicare Advocacy, which represented the patients, applauded the court’s decision this week. A Department of Justice spokesperson declined to comment on the decision or whether the government would appeal. They have until May 25 to decide.

The Two-midnight Rule is Temporarily Being Lifted at this Time for Medicare Patients Affected by Coronavirus Emergency

Traditionally, Medicare requires you to have an inpatient hospital stay that lasts at least three days before it will cover a stay in a skilled nursing facility (SNF) or nursing home. In a recent waiver letter, CMS Administrator, Seema Verma indicated that “SNF care without a 3-day inpatient hospital stay will be covered for beneficiaries who experience dislocations or are otherwise affected by the (coronavirus) emergency, such as those who are (1) evacuated from a nursing home in the emergency area, (2) discharged from a hospital (in the emergency or receiving locations) in order to provide care to more seriously ill patients, or (3) need SNF care as a result of the
emergency, regardless of whether that individual was in a hospital or nursing home prior to the emergency.” Please note that this is only temporary and limited to those affected by the Coronavirus emergency, as described above.

How to Challenge “Observation Status” Decisions by Hospitals

Based on the decision, CMS Administrator, Seema Verma, established a procedure that will allow the following modified class of Medicare beneficiaries to challenge decisions by hospitals to place them on “observation status,” as follows:

“All Medicare beneficiaries who, on or after Jan. 1, 2009: (1) have been or will have been formally admitted as a hospital inpatient; (2) have been or will have been subsequently reclassified as an outpatient receiving ‘observation services;’ (3) have received or will have received an initial determination or Medicare Outpatient Observation Notice (MOON) indicating that the observation services are not covered under Medicare Part A; and (4) either (a) were not enrolled in Part B coverage at the time of their hospitalization; or (b) stayed at the hospital for three or more consecutive days but were designated as inpatients for fewer than three days, unless more than 30 days has passed after the hospital stay without the beneficiary’s having been admitted to a skilled nursing facility. Medicare beneficiaries who meet the requirements of the foregoing sentence but who pursued an administrative appeal and received a final decision of the Secretary before Sept. 4, 2011, are excluded from this definition.”

For more details about “observation status,” please see Medicare’s Self-Help Packet for Observation Status. Please note that it was written in 2017 and has not yet been updated with this new ruling (but it still offers a wealth of helpful information). Please also see our articles on the topic of “observation status” for updates throughout the years.

Medicaid Planning in Virginia, Maryland, and Washington, DC

If your friend or loved one needs long-term nursing home care, the time to plan is now. To protect your family’s hard-earned assets from the catastrophic costs of long-term care, there is no time like the present to create a long-term care strategy. Generally, the earlier someone plans for long-term care needs, the better. But it is never too late to begin the process of Long-term Care Planning, also called Lifecare Planning and Medicaid Asset Protection Planning.

If you have a family member nearing the need for long-term care or already getting long-term care or if you have not done Long-Term Care Planning, please call us as soon as possible to make an appointment for an initial consultation. We offer videoconference or phone appointments in lieu of in-person meetings (but as an essential business we are still open for in-person meetings and signings, of course carefully observing social distancing requirements and sanitary requirements):

Medicaid Asset Protection Planning Fairfax: 703-691-1888
Medicaid Asset Protection Planning Fredericksburg: 540-479-1435
Medicaid Asset Protection Planning Rockville: 301-519-8041
Medicaid Asset Protection Planning 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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