“Observation Status” is not about the location of medical services or the care a patient actually receives. It is solely a billing code used by hospitals to bill Medicare. Although care provided to patients on observation status is indistinguishable from inpatient care, there are important differences that can result in substantially higher patient bills, both during and after the hospital stay.
When hospital patients are classified as outpatients on observation status, they may be charged for services that Medicare would have paid if they were properly admitted as inpatients. Outpatient observation status services are paid by Medicare Part B, while inpatient hospital admissions are paid by Part A. As a result, Medicare beneficiaries who are enrolled in Part A, but not Part B, will be responsible for their entire hospital bill if they are classified as observation status. Even if patients have Part B coverage, they may not have supplemental insurance to cover the deductibles and 20% co-pays of Part B. Medicare beneficiaries in observation status usually must pay for prescription drugs in the hospital, which comes as an unwelcome surprise on the bill. They also cannot appeal the hospital’s observation status determination in an effort to be reclassified, after the fact, as inpatient for Medicare.
Most alarming, patients in observation status will not be able to obtain any Medicare coverage if they need nursing home care after their hospital stay. Medicare only covers nursing home care for patients who have a 3-day inpatient hospital stay. Observation status does not count toward the 3-day stay. This leaves beneficiaries with the burden of paying for extremely costly nursing and rehabilitative care themselves, or forces them to go without the necessary care. (Of course, residents that need more than a few weeks of rehab and who will be staying in the nursing home on a long-term basis can qualify for the Medi-Cal program.)
The Center for Medicare Advocacy (www.medicareadvocacy.org) is pursuing a class action lawsuit in Federal District Court in Connecticut. They are joined by attorneys from Justice in Aging and the law firm of Wilson Sonsini Goodrich & Rosati. The lawsuit, entitled Alexander v. Cochran, is a proposed nationwide class action brought by individuals who were forced to pay up to $30,000 for post-hospital skilled nursing facility care because they had been classified as “outpatients in observation status” during their hospitalizations.
The plaintiffs have so far presented evidence of how Medicare pressures hospitals, through audits and enforcement actions, to place more patients on observation status. The lawsuit seeks to establish that Medicare beneficiaries have a constitutionally protected interest in coverage of their hospitalizations as inpatients rather than as outpatients on observation status. If such an interest exists, beneficiaries could appeal their observation status through Medicare’s administrative review process, a right which they presently do not have.
One bright spot is that, effective March 8, 2017, hospitals are now required to give patients both oral and written notice when they are outpatients and not admitted as inpatients. Hospitals must use the written notice developed by the Centers for Medicare & Medicaid Services (CMS), entitled the “Medicare Outpatient Observation Notice” abbreviated as the “MOON.”
The MOON requires the signature of the patient or the patient’s representative. The representatives can be a formal appointed representative, (e.g., the patient’s legal guardian or conservator, or someone appointed in accordance with a properly executed medical power of attorney or Advance Health Care Directive); or an informal representative acting on the patient’s behalf, such as a family member or close friend. The hospital staff person who initiates contact with the family member or close friend must annotate the MOON and record the date, time, and method of contact (in person or by telephone).
If the MOON cannot be given in person to the patient, the hospital may make “an off-site delivery to the representative.” The hospital must communicate all of the information contained on the MOON to the representative by telephone and then must send “a copy of the annotated MOON” to the representative “by certified mail, return receipt requested, or any other delivery method that can provide signed verification of delivery, (e.g., FedEx, UPS).” The MOON must be mailed on the same day as the telephone call.
Effective January 1, 2017, similar California notification requirements took effect under legislation sponsored by the California Nurses Association. The California law, SB 1076, requires hospitals to give written notice as soon as practicable to patients in inpatient or observation units that the patient is on observation status. The notice shall state that while on observation status, the patient’s care is being provided on an outpatient basis, which may affect the patient’s health care coverage reimbursement. SB 1076 also includes additional safeguards such as increased nurse staffing requirements that have long applied to inpatient hospital patients.