Observation Stay Lawsuit Dismissed in Court, Leaving Many with Out of Pocket Costs

The Medicare observation stay “loophole” has been frustrating to both hospitals and Medicare beneficiaries for the past several years. The three day in-patient stay requirement has been confusing and unclear to patients, and hospitals have RAC auditors breathing down their necks as they take a hard look at short-term hospital stays. Thus, many who require skilled nursing services after a visit to the hospital are left high and dry to pay for these necessary – but expensive – services on their own since they do not meet Medicare Part A coverage requirements. Earlier this year, the Office of the Inspector General issued a report, “Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries,” that in part looks at the impact of observation stays on Medicare beneficiaries who may not qualify for post-acute care.

This week, the Federal Court in Connecticut dismissed a lawsuit that provides a strong example of the confusion surrounding observation stays versus inpatient status and how it pertains to qualifying for Medicare coverage. Bagnell v. Sebelius, filed in 2011, highlights the stories of 14 Medicare beneficiaries who received what they thought were inpatient services at hospitals in Connecticut, but who ultimately were all classified as outpatients under observation status. This resulted in many out of pocket fees for the patients – including one skilled nursing facility charge of about $30,000. The plaintiffs’ argument hinged on the fact that as patients, they had received inpatient hospital services, but were “improperly classified” as outpatients.

The ruling judge cited a similar 2008 case, Estate of Landers vs. Leavitt for his decision. In Landers, the Second Circuit Court had upheld the Secretary’s decision to define “inpatient status” as a reference to formal hospital admission. The plaintiffs in Landers had all spent a minimum of three days in the hospital, but were not admitted as inpatients, and were seeking Part A benefits to cover their required post-acute services. The issue was that at least one night each of the patients spent was in the emergency room or under observation status, so they did not meet the 3 day qualifying inpatient requirement. The plaintiffs made the argument that they received “inpatient hospital services” even though they were considered under observation status, and that it should be counted as inpatient time towards the requirement.

The judges in Landers stated that the services provided would have been considered inpatient hospital services if . . . well . . . if the plaintiffs in the case had been inpatients. Similarly, the judge in Bagnell noted that while the plaintiffs in Bagnell used the term “observation status,” that the matter regarding “inpatient” had already been decided in Landers, so it really did not warrant more discussion. However, he made a point that the Secretary of CMS, by defining terms in the Medicare Benefit Policy Manual, could define terms without requiring further regulatory language to make them valid. Pertinent to this case were the Manual’s definitions of “inpatient” and “observation care.”

  • Definition of “Inpatient” – An inpatient is a person who has been admitted to a hospital for bed occupancy for purposes of receiving inpatient hospital services. Generally, a patient is considered an inpatient if formally admitted as inpatient with the expectation that he or she will remain at least overnight and occupy a bed even though it later develops that the patient will be discharged or transferred to another hospital and not actually use a hospital bed overnight.
  • Definition of “Observation Care” – Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge.

The judge also cited the Policy Manual definition for admission criteria for hospitals, which was also heavily relied upon by CMS to explain its new “Two Midnight Rule” regarding inpatient status for Medicare Part A coverage.

  • Admission Criteria: The physician or other practitioner responsible for a patient’s care at the hospital is also responsible for deciding whether the patient should be admitted as an inpatient. Physicians should use a 24-hour period as a benchmark, i.e., they should order admission for patients who are expected to need hospital care for 24 hours or more, and treat other patients on an outpatient basis. However, the decision to admit a patient is a complex medical judgment which can be made only after the physician has considered a nursing of factors, including the patient’s medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital’s by-laws and admissions policies, and the relative appropriateness of treatment in each setting.
    • Factors for Admission
      • Severity of signs and symptoms exhibited
      • Medical predictability of an adverse reaction
      • Need for diagnostic studies that appropriately are outpatient services to assist with assessing whether a patient should be admitted
      • Availability of diagnostic procedures at the time when and at the location where the patient presents

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