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Federal Court Orders Appeal Rights on “Observation Status” Issue for Certain Medicare Hospital Patients

Dana Ritchie

In a decision issued on March 24, 2020, Judge Michael P. Shea of the U.S. District Court in Hartford, Connecticut found that certain Medicare beneficiaries who are placed on “observation status” at hospitals, rather than being admitted as “inpatients,” have the right to appeal to Medicare. The case, Alexander v. Azar, is a nationwide class action case filed by the Center for Medicare Advocacy that went to trial in August 2019. The ruling finds that as a matter of constitutional due process, patients who are initially admitted as inpatients by a physician, but whose status is later changed to observation by their hospital, have the right to appeal to Medicare and argue for coverage as hospital inpatients. 

The decision opens the door to medically necessary services in skilled nursing facilities that Medicare beneficiaries might otherwise have to forgo because they cannot afford to pay for it themselves. The distinction between being labeled a hospital “inpatient” versus being placed on observation status is important because Medicare only covers subsequent care in a skilled nursing facility for patients who were hospitalized as inpatients for three or more consecutive days. Patients in observation status are considered “outpatients” and thus ineligible for coverage of care at nursing facilities. You can read the full press article about this on the Center for Medicare Advocacy’s website here. 

As a result of this case, the Secretary of HHS must establish a procedure to allow certain Medicare beneficiaries to challenge decisions by hospitals to place them on observation status. The court outlines the beneficiaries who will be eligible to challenges these decisions:

All Medicare beneficiaries who, on or after January 1, 2009:

1. have been or will have been formally admitted as a hospital inpatient; 
2. have been or will have been subsequently reclassified as an outpatient receiving “observation services”; 
3. have received or will have received an initial determination or Medicare Outpatient Observation Notice (MOON) indicating that the observation services are not covered under Medicare Part A; and 
4. either 
   • (a) were not enrolled in Part B coverage at the time of their hospitalization; or 
   • (b) stayed at the hospital for three or more consecutive days but were designated as inpatients for fewer than three days, unless more than 30 days has passed after the hospital stay without the beneficiary’s having been admitted to a skilled nursing facility. Medicare beneficiaries who meet the requirements of the foregoing sentence but who pursued an administrative appeal and received a final decision of the Secretary before September 4, 2011, are excluded from this definition. 

The federal government may appeal this decision of the District Court but has not formally done so at this time.  In addition, the ruling has no effect on the current waiver of the 3-day stay requirement that CMS issued under the public health emergency and the section 1812(f) waiver. 

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