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Observation status: What does it mean for Medicare recipients?


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Observation status: What does it mean for Medicare recipients?

By John Glynn

There has been a dramatic rise in the use of “observation status” for Medicare recipients who are in the hospital — or at least think they are. If these patients are in a hospital facility but are designated as under observation rather than formally admitted, they face not only higher costs while in the hospital but also receive no coverage under traditional Medicare for post-hospital rehabilitation in skilled nursing facilities.


And if Medicare will not cover the costs for a skilled nursing facility, neither will a Medigap supplemental policy. Often the first time the patients find out about this is when they receive the bills, which can total thousands of dollars.

The ABA Senior Lawyers Division hosted the webinar “A Medicare Pitfall: What You and Your Clients Need to Know About Observation Status” to help lawyers understand what observation status is, why it is used and how they can help clients in this situation. The webinar also explained the various efforts to change observation status via proposed federal legislation as well as a lawsuit filed by the Center for Medicare Advocacy.

As outpatients on observation status, Medicare recipients’ hospital visits aren’t covered under Medicare Part A, which pays for hospital charges above a $1,184 deductible. Outpatient services are billed under Medicare Part B, which requires patients to pay 20 percent of the cost and imposes no cap on total costs. Observation patients also pay out-of-pocket for the medications they receive in the hospital.

A Brown University study found that the ratio of observation to inpatient admissions increased by 34 percent from 2007 to 2009. “The problem’s not getting better; it’s getting worse,” said panelist Ruth Kleinfeld, a judge at the Social Security Administration’s Office of Disability Adjudication and Review in New Hampshire, speaking in her personal capacity. 

Initially doctors make the decision on observation or inpatient status, but a hospital’s utilization resource committee can retroactively reverse the decision. Medicare contractors review claims, and Medicare can sanction hospitals for “inappropriate” inpatient admissions. Many hospitals use the proprietary InterQual system to make the decision, but InterQual does not make an individualized determination and does not consider patients’ multiple conditions.

“If staying overnight, start asking about the patient’s status then … and remember that the hospital is under a lot of pressure from Medicare,” said panelist Alice Bers, an attorney with the Center for Medicare Advocacy in Willimantic, Conn.

There are five levels of appeal for Medicare coverage denials. After a redetemination and a reconsideration of the denial by Medicare contractors, appeals may be taken to hearings by administrative law judges in the Office of Medicare Hearings and Appeals. An administrative law judge denial can be appealed for a de novo hearing by the Appeals Council. Appeals Council denials can be appealed to the U.S. district courts. However, the process is time-consuming and increasingly backlogged.

The ABA House of Delegates is expected to vote at the Midyear Meeting in February on a resolution from the Senior Lawyers Division urging Congress to provide that individuals receiving outpatient observation services in a hospital be considered an inpatient with respect to satisfying the three-day inpatient hospital stay requirement. This would ensure Medicare coverage of a post-hospitalization stay in a skilled nursing facility.

Both the House and the Senate have bills pending. “Believe it or not, support for the legislation is bipartisan,” said moderator Louraine Arkfeld, retired presiding judge of the Tempe Municipal Court in Arizona.