Medicare News: Beware of hospital "Observation Status" Classification

Increasingly, hospital patients are finding that they have been deemed to be "Observation
Outpatients," although they have been cared for in the hospital for many days. The
"outpatient" classification is often a surprise to patients, who do not realize their status until
the patient is getting ready to leave the hospital.
Why does this matter? 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, such as medications. Most significantly, patients 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 (the "two-midnight rule"), and Observation Status doesn't count towards the 3-
day stay requirement. Outpatient Observation Status is paid by Medicare Part B, while
inpatient hospital admissions are paid by Part A. Thus, Medicare beneficiaries who are
enrolled in Part A, but not Part B, will be responsible for their entire hospital bill, out-ofpocket,
if they are classified as Observation Status.
Neither the Medicare statute nor the Medicare regulations define observation services. The
only definition appears in various Centers for Medicare and Medicaid Services (CMS)
manuals, where observation services are defined as, "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." In most cases, the Manuals provide, a beneficiary may not remain in
observation status for more than 24 or 48 hours. (Note: The Centers for Medicare &
Medicaid Services is a federal agency within the Department of Health and Human Services.
It administers the Medicare program and works in partnership with state governments to
administer Medicaid and health insurance portability standards).
Even if a physician orders that a beneficiary be admitted to a hospital as an inpatient, since
2004 CMS has authorized hospital utilization review (UR) committees to change patients'
status from inpatient to outpatient. Such a retroactive change may be made, however, 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.
Under the Medicare Act, when a determination is made that a service was not medically
necessary and that Medicare will not pay for it, payment will nevertheless be made if the
beneficiary did not know, and could not reasonably be expected to know, that payment
would not be made. A beneficiary is presumed not to know, "that services are not covered
unless the evidence indicates that written notice was given to the beneficiary." A provider
must inform a beneficiary when services are not medically necessary; its failure to do so will
relieve the beneficiary of responsibility of paying for the service.
If a hospital UR committee determines that a patient's inpatient stay is not medically
necessary and should be reclassified as outpatient observation, CMS explicitly requires that
the beneficiary be notified promptly in writing. The notice is necessary so that the
beneficiary "is fully informed about the change in status and its impact on the co-insurance
and deductible for which the beneficiary would be responsible."
What can a patient do if the hospital puts her on Observation Status? If the patient is still in
the hospital, seek the doctor's help to admit the patient as an inpatient. If the hospital insists
on Observation Status, ask for a written notice stating this fact and tell the hospital the
patient wants to appeal the Observation Status, because the care is "medically necessary"
and an "inpatient hospital level of care."
If the patient is no longer in the hospital, the patient might be able to appeal. Try to get the
patient's physician to assist. For more detailed instructions on how to appeal, go to the
following website: http://www.medicareadvocacy.org/self-help-packet-for-medicareobservation-status/