Increasingly, hospital patients are finding that they have been considered "Observation Outpatients," although they have been cared for in the hospital for many days and nights. On November 3, 2011, the Center for Medicare Advocacy, and co-counsel National Senior Citizens Law Center, filed a nationwide class action lawsuit to challenge this illegal policy and practice. 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.
Observation Status is a designation used by hospitals to bill Medicare. Unfortunately, it can hurt hospital patients who rely on Medicare for their health care coverage.
People who receive care in hospitals, even overnight and for several days, may learn they have not actually been admitted as inpatients. Instead, the hospital has classified them as Observation Status, which is an “outpatient” category. This designation can happen even for people who are extremely sick and spend many days in the hospital. For example, we have heard from people with recent hip and pelvic fractures who were designated as Observation Status.
The "outpatient" classification is often a surprise to patients; many do not realize their status until the patient is getting ready to leave the hospital. Most of the time hospital patients are not told or given a written notice when they are designated as outpatients on Observation Status. (Note: The NOTICE Act will provide notice that a patient is on Observation Status, but no means to appeal the decision).
Why does this matter?
When hospital patients are classified as outpatients on Observation Status, they may be charged for services that Medicare would have paid if they were properly admitted as inpatients. For example, patients may be charged for their medications. (Thus, people may want to bring their medications from home if they have to go to the hospital.)
Most significantly, patients will not be able to obtain any Medicare coverage if they need nursing home care after their hospital stay. Medicare only covers nursing home care for patients who have a 3-day inpatient hospital stay – Observation Status doesn’t count towards the 3-day stay.
Outpatient Observation Status is paid by Medicare Part B, while inpatient hospital admissions are paid by Part A. Thus, Medicare beneficiaries who are enrolled in Part A, but not Part B, will be responsible for their entire hospital bill if they are classified as Observation Status.
What can a patient do if the hospital puts her on Observation Status?
- If the patient is still in the hospital:
- Seek the doctor’s help to “admit the patient as an inpatient.”
- If the hospital insists on Observation Status, ask for a written notice stating this fact and;
- Tell the hospital the patient wants their status changed because the care is “medically necessary” and an “inpatient hospital level of care.” Support from the doctor will help.
- If the patient is no longer in the hospital:
- The patient might be able to appeal the hospital care after-the-fact, however, winning Medicare coverage in Observation cases is increasingly difficult. Try to get the patient’s physician to assist.
Remember: If the patient needs nursing home care after the hospitalization, it is particularly important that the hospitalization is considered an “inpatient admission.” (Medicare will only cover nursing home care after a 3-day inpatient hospital stay.)
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 for Medicare Advocacy has written before 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. In recent months, however, a related issue has arisen.
The Center has heard repeatedly about beneficiaries throughout the country whose entire stay in a hospital, including stays as long as 14 days, is 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 hospital stay requirement.
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 patients' 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." Although CMS anticipated in 2004 that reclassifications would be used less frequently over time, the Center has heard about this practice only recently.
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; 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."
Skilled Nursing Facility (SNF)
SNFs that believe that Medicare coverage will be denied because of a technical reason, such as a lack of the three-day qualifying hospital stay, may give the resident a Notice of Exclusion of Medicare Benefits (NEMB). Use of the notice by SNFs is optional.
The NEMB-SNF informs the beneficiary that, in the SNF's view, Medicare will not pay for the resident's care. The form offers the beneficiary three options:
Option 1: checking "Yes" means that the beneficiary wants to receive the services and wants Medicare to make a decision about coverage. This option requires the SNF to submit the claim, with supporting evidence, to Medicare. If Medicare denies payment, the beneficiary agrees "to be personally and fully responsible for payment."
Option 2: checking "Yes" means that the beneficiary wants to receive the services, but does not want the claim to be submitted to Medicare.
Option 3: checking "No" means that the beneficiary does not want to receive the services and that no claim will be sent to Medicare.
The Center for Medicare Advocacy believes that CMS requires hospitals to give a beneficiary an advance beneficiary notice if the beneficiary's observation status exceeds the period of time authorized for observation services.
CMS explicitly requires hospitals to give written notice to a beneficiary when the hospital's utilization review committee reverses an attending physician's determination to admit a patient as an inpatient.
CMS has prepared a form that SNFs may use for technical denials of coverage, including failure to meet the three-day stay requirement, but use of the NEMB-SNF is optional for SNFs
The Center for Medicare Advocacy Wants to Hear from You
In the Center's experience, hospitals and SNFs are not giving beneficiaries notice of non-coverage. Hospitals are not complying with the notice requirements and are not giving patients an ABN when beneficiaries are assigned to observation status in the hospital for time periods exceeding 24 or 48 hours.
As the Center anticipated, more beneficiaries have been placed in observation status as the Recovery Audit Contractor (RAC) program moved from demonstration status to a permanent, nationwide program. RAC was authorized by §306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) to detect and correct improper payments in the traditional Medicare program, both overpayments and underpayments. The review of the three-year demonstration program found that RAC contractors, who were paid on a contingency basis, identified $1.03 billion in improper payments — $992.7 million (96%) in overpayments and $37.8 million (4%) in underpayments. Most of the overpayments (85%) were collected from inpatient hospitals. The review also reported that only 14% of providers appealed and only 4.6% of RAC overpayment determinations were overturned on appeal.
The Center would like to hear your experiences as we work on solutions to these issues. 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).
- Center and Observation Status on NBC Nightly News, January 9, 2014
- "For Hospital Patients, Observation Status Can Prove Costly," Ina Jaffe, NPR , September 4, 2013
- "In the Hospital, But Not Really a Patient," The New York Times, New Old Age blog, June 22, 2012. http://newoldage.blogs.nytimes.com/2012/06/22/in-the-hospital-but-not-really-a-patient/ And read more, in Dr. lasky's own words, here.
- Hospitals Caught Between a Rock and A Hard Place Over 'Observation' – http://bit.ly/aWwTPL
- Medicare Rules Give Full Hospital Benefits Only to Those with 'Inpatient' Status – http://www.washingtonpost.com/wp-dyn/content/story/2010/09/06/ST2010090602347.html?sid=ST2010090602347
- (external link) CMS Hears Provider Concerns Over 'Observation' Status – http://bit.ly/ageJNA
- "Medicare Fraud Effort Leaves Elderly Surprise Hospital Bills" July 12, 2010 Bloomberg News article by Drew Armstrong, based on Center for Medicare Advocacy's efforts, features Center attorney Toby S. Edelman with one of our clients.
- Recorded Web Seminar: Overcoming Barriers to Medicare Coverage of Skilled Nursing Facility Care
- A Model to Waive the Three-Day Inpatient Hospital Stay Requirement for Care in a Skilled Nursing Facility July 20, 2016
- Further Center Comments on the NOTICE Act – June 2016 July 8, 2016
- More on Observation Status: CMS Halts Review of Hospitals’ Compliance with Two-Midnight Rule May 25, 2016
- Observation Status and the NOTICE Act: Advocates Not Over the MOON April 27, 2016
- CMS Hosts Tele Town Hall on Hospital Observation NOTICE Act; Comments Accepted until January 4, 2016 December 23, 2015
- Office of Inspector General Authorizes Hospitals to Discount or Waive Certain Drug Charges for Patients Classified as “Outpatients” December 10, 2015
- Revisions to “Two-Midnight Rule” Do Not Help Hospitalized Medicare Patients in Observation Status December 2, 2015
- Solution to Medicare Part B Cost Increases? Look at “Outpatient” Observation Status October 23, 2015
- Observation Status Again! August 20, 2015
- Observation Status: The NOTICE Act Will Soon Be Law August 6, 2015
For older articles, please see our archive.
 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.
 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).
 The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, page 2 (June 2008), http://www.cms.gov/RAC/Downloads/RAC%20Evaluation%20Report.pdf.