Long term and post-acute care (LT/PAC) providers are applauding a decision issued by Judge Michael Shea of the U.S. District Court in Hartford, Conn., that said certain Medicare beneficiaries classified as being in observation status at hospitals and not admitted as inpatients can appeal this designation to the Medicare program.

The ruling in the Alexander v. Azar case is significant to LT/PAC providers and their residents nationwide, advocates for the profession say.

“This is an important win and a positive step for our residents,” says Dana Ritchie, senior director of not for profit and constituent services, American Health Care Association/National Center for Assisted Living (AHCA/NCAL). “The three-day stay rule causes many outpatients who need follow-up care to be on their own or in debt with thousands in out-of-pocket costs because they do not qualify for Medicare coverage in a nursing center.”

She says for years AHCA/NCAL has advocated to eliminate what is a “confusing policy barrier by recognizing observation stays as qualifying stays for the purposes of the three-day stay requirement or eliminating the three-day requirement altogether.”

Ritchie says, “We appreciate the court’s decision in allowing for these appeals to help our residents receive the quality care they deserve.”

The importance of an individual’s categorization as inpatient or in observation status lies in the fact that Medicare only pays for subsequent care in a skilled nursing facility for patients who were hospitalized as inpatients for three or more consecutive days.

Those in observation status are labeled as outpatients and cannot receive coverage for care in a skilled nursing center.

Judith Stein, attorney and executive director for the Center for Medicare Advocacy, which represented the plaintiffs in the case, said, “The court heard the voices of our clients, who represent the thousands of Medicare beneficiaries faced with the baffling observation issue—when they are already dealing with a hospitalization for significant illnesses and injuries.

“Fairness and due process require that they have an opportunity to appeal their hospital observation status to Medicare, just as they can for most other issues affecting their Medicare coverage,” she said.

In his ruling on what was a class-action suit lasting nearly a decade in litigation, Shea said he found some class members, specifically, “those who were initially admitted as inpatients by a physician but whose status during their stay was changed to observation, have demonstrated that the Secretary [of Health and Human Services] is violating their due process rights.”

Shea said the trial evidence showed that such changes are invariably caused by utilization review staff applying mandatory, nationwide standards set by the Centers for Medicare & Medicaid Services in response to significant pressure from the Secretary.

“For class members whose inpatient status was changed to observation, then, there is enough involvement by the government to find that the deprivation of their property interest in Part A coverage was fairly attributable to the Secretary and thus a product of ‘state action,’ a necessary element of a due process claim,” Shea said.

“Just as the Secretary cannot deprive these beneficiaries of Part A coverage directly without affording them the procedural protections to which the Constitution entitles them, the Secretary cannot do so indirectly through a hospital’s utilization review process.”

However, the judge said other members of the class—those whose physicians initially placed them on observation status and who were never admitted as inpatients—have failed to prove their due process claims, because the physicians’ decisions generally did not constitute state action.

“These class members have also failed to prove a separate property interest in inpatient admission, because a physician’s admission decision is not governed by the sort of mandatory standards that can create a property interest under the law,” Shea said.

To this end, he ordered the Secretary to establish a procedure that will allow the following modified class of Medicare beneficiaries to challenge decisions by hospitals to place them on “observation” status:
“All Medicare beneficiaries who, on or after Jan. 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 had 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 Sept. 4, 2011, are excluded from this definition.”
​