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

In a decision issued today, 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 very costly care at nursing facilities. This has forced many Medicare beneficiaries to either pay thousands of dollars out of pocket for that care or to forgo the needed care altogether. While people with Medicare can appeal virtually any issue affecting their coverage, the Centers for Medicare & Medicaid Service (CMS) has blocked attempts by beneficiaries to appeal their hospital status.

“The ruling acknowledges that Medicare patients are in a very vulnerable position when they are hospitalized and particularly when they require care at a skilled nursing facility after hospitalization,” said Alice Bers, Litigation Director for the Center for Medicare Advocacy, which serves as lead counsel for the class. “We are heartened that the court recognized that the ability to appeal the observation status issue to Medicare is a question of fundamental fairness. Medicare sets the rules that doctors and hospitals must follow with regard to patient status. It is only just that Medicare patients — older adults and people with disabilities — be able to appeal this issue to Medicare.” In addition to the Center for Medicare Advocacy, the nationwide class-action lawsuit was litigated by Justice in Aging and the law firm of Wilson Sonsini Goodrich & Rosati. The Center for Medicare Advocacy is particularly grateful for the pro bono assistance provided by Wilson Sonsini Goodrich & Rosati. For more information about observation status see the Center for Medicare Advocacy’s website here.

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