Federal Class Action Lawsuit Fights Medicare’s Observation Status Rule

A class action lawsuit has been filed in Connecticut against the government, citing Medicare’s observation status rule as being an unfair policy that has dwindled the life savings of many. Observation status is when a hospital classifies a patient as such instead of as an admitted inpatient, a distinction meaning very little in terms of the care provided. An admitted patient is also able to receive nursing home care after discharge according to Medicare. In order to be able to receive nursing home coverage, an admitted patient must be treated for 3 nights at a hospital.

Unlike a patient classified as ‘admitted’ to a hospital, hospital charges for those listed as observation status are filed under Medicare Part B, which requires a monthly premium payment, an out of pocket payment until a deductible is met, as well as a 20% copay for all Medicare-approved services. Nursing home care after discharge is not covered under Medicare for patients classified as observation status. If a patient has not enrolled in Medicare Part B and is listed as observation status, that patient has to pay the entire hospital bill out of pocket.

The class action, filed by the Center for Medicare Advocacy, seeks to give patients the right to appeal observation status, a right that is currently not afforded to Medicare recipients. The suit asks that interested patients who were listed as observation status from January 1, 2009 on be eligible for inclusion in the class.

Observation Status Increasing
While the inability to appeal observation status has long been an issue, the hurt has intensified by the relatively recent push for hospitals to slash readmission rates within 30 days of discharge. As a result, hospitals are putting more Medicare patients on observation status, which allows them to avoid classifying a patient as being admitted. A lower number of admitted inpatients translates into a lower number of readmitted patients. The Naples Daily News cited a Brown University study that found 918,000 Medicare recipients had been placed on observation status in 2009 alone. With readmission rates under a watchful eye, experts estimate that number of Medicare recipients placed on observation status in recent years has grown even larger than 2009 levels.

Another factor influencing rising observation status designations is that Medicare has been closely watching hospitals with high admittance numbers of Medicare patients. The reason for the increased scrutiny lies in the fact that Medicare reimbursement is greater for those who are technically admitted vs. those that are listed under observation status. The higher the number of admitted patients, the more suspicion a hospital draws. While the lawsuit was just given the ok by a federal judge to proceed, the first hurdle has been cleared, giving hope to many that they may be able to appeal a decision that they were never given a part in making.


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