Observation vs. Inpatient Status Is Focus of Lawsuit, Proposed Medicare Changes

One of the most complex and significant decisions a physician can make when treating a Medicare beneficiary at a hospital is whether to admit the patient as an inpatient or merely observe the patient for a day or so on an outpatient basis. If a beneficiary is admitted, then the inpatient services are covered under Medicare Part A. If the patient is under observation, he or she is considered an outpatient, and all services are covered and billed under Part B. The decision directly impacts the amount Medicare pays the hospital, the amount of the beneficiary’s liability, and whether the beneficiary is eligible for Medicare-covered care at a skilled nursing facility (SNF) after discharge from the hospital.

To further complicate the issue, a physician’s decision to admit a beneficiary as an inpatient can challenged and changed retroactively by a Medicare administrative contractor (MAC) or recovery audit contractor (RAC). The Part A payment may be denied even after the beneficiary has received post-hospital SNF care, greatly increasing the beneficiary’s liability with little or no way to appeal the contractor’s decision.

The confusion surrounding the choice between admission and observation has led to at least one lawsuit now underway in a federal district court in Connecticut. The HHS Office of Inspector General (OIG) is studying how much Medicare and beneficiaries paid for observation and related services in 2011 and the extent to which hospitals inform beneficiaries about observation services. And now CMS is proposing a formal definition of inpatient admission that would replace the current vague standard for deciding who is and who isn’t an inpatient.

Observation vs. Inpatient Admission

  Under current CMS policy, “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 can be discharged or transferred to another hospital and not actually use a hospital bed overnight.” (Medicare Benefit Policy Manual, Pub. 100-02,  ch. 1, §10.) Observation services are short-term treatments and assessments that hospitals use to determine whether a beneficiary should be admitted as an inpatient or discharged. (Medicare Claims Processing Manual, Pub. 100-04, ch. 4, § 290.1.)

CMS noted in its fiscal year 2014 proposed rule for the inpatient prospective payment system (IPPS) that the number of cases of Medicare beneficiaries receiving observation services for more than 48 hours had increased from about 3 percent in 2006 to about 8 percent in 2011. CMS said that this increase is partially attributable to the fact that MACs and RACs are increasingly denying inpatient determinations when they review hospital claims, and hospitals, in trying to avoid the cost of a later denial, are holding patients for longer periods of time for observation rather than admitting them.

CMS noted that beneficiaries who are treated for extended periods of time as hospital outpatients receiving observation services may incur greater financial liability than they would if they were admitted as hospital inpatients. In addition to the Part B copayment and any drugs not covered under Part B, the beneficiary is liable for the cost of post-hospital SNF care because Soc. Sec. Act sec. 1861(i) requires a prior three-day inpatient hospital stay to cover SNF care. In contrast, if the beneficiary was considered an inpatient, he or she would pay a one-time deductible for all hospital inpatient services provided during the first 60 days in the hospital, and a subsequent transfer to a SNF would be covered by Medicare Part A.

Bagnall v. Sebelius

In November 2011, a group of Medicare beneficiaries who had been hospitalized and then later discharged to SNFs only to discover that their nursing home stays were not covered by Medicare because they were considered to be under observation, as opposed to admitted, by the hospital, filed suit in the district court of Connecticut. The seven plaintiffs in Bagnall v Sebelius all incurred unexpected Part B coinsurance charges as well as thousands of dollars each in nursing home costs. A hearing in the case was scheduled for May 10, 2013.

The complaint notes that the beneficiaries were deprived of Part A coverage to which they were entitled, and thus forced to bear the financial responsibility for hospitalization and prescription drugs that are covered under Part A. They were then denied the right to coverage of their skilled nursing care, which in turn forced them either to pay the cost of that care or to be unable to obtain that care at all. Finally, the complaint notes that the beneficiaries did not receive notification of their observation status, and did not have any right under current Medicare law to appeal that status, depriving them of administrative review of their placement in observation status.

The beneficiaries want the court to decide if CMS’ policy of allowing hospitals to impose observation status on Medicare beneficiaries — even reversing a physician’s order to formally admit a beneficiary — violates the Administrative Procedure Act, the Medicare statute, the Freedom of Information Act, and the Due Process Clause. The class action includes all Medicare beneficiaries who, on or after January 1, 2009, have had or will have had any portion of a stay in a hospital treated as observation status and therefore not covered under Medicare Part A.

A recent report from the American Hospital Association  noted that patients who are admitted to a hospital from the emergency department (ED) are counted as inpatients rather than ED outpatients. However, as Medicare contractors, particularly RACs, have rejected more claims for inpatient services on the ground that they should have been furnished as outpatient services, hospitals have kept ED visitors in observation status more often and for longer periods of time. Patients in observation status receive many more services than other ED patients, and are those exposed to more out-of-pocket costs than beneficiaries admitted as inpatients.

The 2013 OIG Work Plan

As part of its work plan for 2013 the HHS OIG will examine the use of observation services from 2008 to 2011 and the characteristics of beneficiaries receiving observation services in 2011. OIG will determine how much Medicare and beneficiaries paid for observation and related services in 2011 and the extent to which hospitals inform beneficiaries about observation services.

CMS’ Proposal

CMS is proposing a specific definition for inpatient admissions as part of the IPPS update for fiscal year 2014 (see pgs. 657 to 681 and pgs. 1106 to 1108). The proposal states that hospital inpatient admissions spanning at least two midnights (i.e., more than one Medicare utilization day), would presumptively qualify as appropriate for payment under Medicare Part A. Conversely, those admissions that are less than two midnights would be inappropriate for Part A payment. This change is meant to provide more guidance on when a patient is paid as an inpatient under Medicare, which has left many beneficiaries having a longer outpatient hospital stay due to the hospital’s uncertainly about Medicare payments.

CMS also is proposing this standard as a benchmark for medical review of inpatient admissions: Medicare contractors would presume that hospital inpatient admissions are reasonable and necessary for beneficiaries who receive care over two midnights. Hospital services provided over a period of less than two midnights will be presumed to be provided on an outpatient basis. These proposals, if finalized, would go into effect October 1, 2013.