Ronald Fatoullah & Associates - Elder Law

Observation Status Precludes Medicare SNF Payment


When an individual receives medical treatment in a hospital, how the stay is characterized has ramifications for insurance coverage in the hospital and subsequent nursing home stay, if necessary. The Medicare statute and related regulations authorize payment for skilled nursing facility care for a beneficiary who has a minimum three day hospital stay and who meets certain requirements. Individuals have historically encountered difficulty in calculating the amount of hospitalization time for purposes of determining their skilled nursing home benefit.

In recent years, patients have been finding that their entire stay in a hospital - even if it is over the course of several days - is classified by the hospital as "observation status." In some instances, the patient's physician orders his admission, but the hospital retroactively reverses the decision.

If a stay is classified as 'observation status' without a formal hospital admission, beneficiaries are charged for various services that they would otherwise not be required to pay for. More significantly, when an official hospital admission does not occur, there is no Medicare coverage for any subsequent skilled nursing facility stay.

Neither the Medicare statute nor regulations provide a definition of "observation status." One definition appears in the Centers for Medicare and Medicaid Services Manuals which define observation services as follows: "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."

Reports from hospitals all over the country have revealed that Medicare patients who are in observation status often remain in hospital beds for many days, or sometimes weeks, receiving physician and nursing attention, medical tests, food and supplies. In other words, they are receiving the same care as someone who is actually admitted to the hospital. Beneficiaries are often too ill to be aware of their status or to challenge their continued placement in observation status.

Since 2004, CMS has authorized hospital utilization review (UR) committees to change patients' status from inpatient to outpatient. But retroactive changes may be made 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.

If a skilled nursing facility anticipates that Medicare coverage will be denied because of a technical reason such as a lack of the three-day qualifying hospital stay, it may give the resident a Notice of Exclusion of Medicare Benefits (NEMB), a form that indicates why the facility believes that Medicare will not cover services. The form provides that "The purpose of this notice is to help you make an informed choice about whether or not you want to receive these items or services, knowing that you will have to pay for them yourself or through other insurance that you may have."

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. The plaintiffs alleged 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. The plaintiffs further argued that (i) observation status is no different than inpatient care, (ii) beneficiaries do not receive formal notice that they are in observation status and (iii) that observation status causes financial injury due to the cost of copayment for outpatient services, skilled nursing facility and self-administered drugs.

Seven Medicare beneficiaries or their estates filed the complaint and a motion for certification of a nationwide class on November 3, 2011. The government moved to dismiss and on September 23, 2013 the Court denied the government's motion to dismiss on jurisdictional grounds, but it granted the motion to dismiss for failure to state a claim. Plaintiffs appealed the dismissal, but limited the appeal to the issue of the right to an effective notice and review procedure for beneficiaries placed on observation status. Their opening brief was filed on February 13, 2014. Both the AMA and the American Health Care Association filed amicus briefs in support of plaintiffs, and the American Hospital Association filed an amicus brief that was neutral as to the parties. The Secretary's brief is due on May 15, 2014.

There has been no resolution to the status observation quandary based on the fact that the appeal is pending. We will keep you apprised as to future developments.

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