Medicare Observation Status

By Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq.

{4:17 minutes to read} On February 8, 2017, a U.S. district court in Alexander v. Cochran held that the plaintiffs, a class of Medicare beneficiaries, were able to continue their class-action suit challenging their placement as "observation status," rather than being admitted as "inpatients" to the hospital. The class action suit concerns the rights of these Medicare beneficiaries who were admitted in observation status and therefore did not qualify for coverage of post-hospital skilled nursing care.

The court held that factual questions remain as to whether Medicare beneficiaries have a constitutionally protected interest in being admitted to hospitals as "inpatients," rather than as observation status "outpatients." If such an interest exists, beneficiaries could appeal their observation status through Medicare's administrative review process, which they are presently not allowed to do. The opportunity to appeal observation status is critical to Medicare beneficiaries, because of the huge costs which can be incurred by a patient on "observation" status, costs which are covered by Medicare for those considered "inpatient."

Although care provided to patients on "observation" status is indistinguishable from "inpatient" care, observation status is not countable toward the three-day inpatient hospital stay requirement for Medicare coverage of nursing home care. Hence, those on observation status have the burden of paying for extremely costly nursing and rehabilitative care themselves. Specifically, this class action was brought against the Secretary of Health and Human Services by people who were forced to pay up to $30,000 for post-hospital skilled nursing facility care, because they had been classified as outpatients in the hospital.

Because patients who are not admitted as inpatients are not eligible for Medicare Part A or for coverage of any post-hospitalization stay at a nursing home, the lawsuit claimed that being put into observation status cost the beneficiaries thousands of dollars. The group maintains that Medicare's policies promote the use of observation status. The decision referenced plaintiffs' evidence of how Medicare pressures hospitals, through audits and enforcement actions, to place more patients on observation status.

The Secretary of Health and Human Services claims that the question of whether to admit a patient is a complex medical judgment that is best left to the discretion of doctors. The plaintiffs allege that the decision to admit a patient to a hospital is heavily influenced by the Center of Medicare and Medicaid ("CMS") as opposed to being at the sole discretion of a medical professional. If the admission decisions are made by individual doctors at their own discretion, then Medicare beneficiaries lack the necessary property interest. However, if it can be found that CMS "meaningfully channels" the discretion of these doctors by providing "fixed criteria" for when a patient should be admitted, then it is possible that qualifying Medicare beneficiaries have a constitutionally protected interest in being treated as "inpatients."

The U.S. District Court in Connecticut held that there is a dispute of material fact as to whether the beneficiaries have a genuine interest, allowing them to continue to pursue the case. According to the court, questions remain as to whether the federal government "has established objective criteria that hospitals apply in making their inpatient vs. observation status determinations." As a result, the plaintiffs' claim for adequate administrative review procedures survives.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior staff attorney at the firm who has chaired the firm's Medicaid department for over 15 years. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.