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.
- Read the press release.
- Listen now to a recorded news conference regarding Observation Status and the Bagnall case (you will simply need to input a user name and hit enter to listen).
- See national news related to the case
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.
The Center anticipates that more beneficiaries may be placed in observation status next year as the Recovery Audit Contractor (RAC) program moves 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
- "Odd Medicare Rule Affects Hospital Tab," The Virginia Gazette, September 6, 2012.
- "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
- New Study: CMS’s New 2-Midnight Rule Increases Hospital’s Use of Observation Status February 20, 2014
- Center and “Observation Status” on NBC Nightly News January 10, 2014
- Three Observation Status Bills Have Been Introduced; Only Congressman Courtney’s Has Immediate Promise November 27, 2013
- New CMS Rules Do NOT Change Requirement for 3-Day Qualifying Inpatient Hospital Stay October 31, 2013
- Disappointing Decision from Court in Challenge to “Observation Status” Highlights Need to Pass Legislation September 26, 2013
- Observation Status Round Up September 5, 2013
- Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries August 29, 2013
- Observation Status: OIG Provides an Analysis and CMS Issues Final Regulations August 8, 2013
- Observation Status: “Morphed Into Madness” August 1, 2013
- CMS Addresses Observation Status Again… And Again, No Help for Beneficiaries May 16, 2013
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.
Question and Answer 3.
 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.