Hospital Observation Status Can Be Financially Devastating

Medicare laws passed by Congress say a hospital patient can get post-hospital extended care services, if he or she was an inpatient for three consecutive days before his or her discharge from the hospital. The law covers care in skilled nursing facilities and nursing homes.

Medicare will pay for up to 100 days of nursing home care, as long as the patient stayed in the hospital for three consecutive calendar days, remaining in hospital for three midnights, following his or her day of Admission.

However, recent application of these laws and regulations have frustrated caregivers and patients alike.

Treated, but never ‘admitted'

Larry Barrows, for example, spent over a week in a Connecticut hospital, but was denied Medicare coverage for nursing home rehabilitation. Larry had ataxia, a chronic condition characterized by cerebral degeneration that affected his balance and coordination. According to Larry's wife, Lee Barrows, Larry had worn a hospital wristband, was on an IV, and was given a special diet due to unusually high blood pressure. But he got caught in a hospital billing practice that keeps patients in the outpatient category because they are only on "observation status."

Lee describes how Larry was given a hospital "room where he remained for eight days, undergoing PT, being medicated, and further testing and monitoring. At this point, he could walk only a few yards with two men supporting him."

Lee recalls how she found out that Larry was only an "outpatient."

"On the fifth day, a neurologist flanked by Larry's doctor and a social worker, ushered me into the hall and said ‘we're sorry, but your husband was never admitted.'" That revelation left Lee "stunned with disbelief."

Hospitals hedge their bets

Even though it pays them a lower rate, hospital billing departments use "observation status" if they're afraid they won't get paid for a patient who is admitted for "inpatient" care. The hospitals fear Medicare auditors might overturn a doctor's decision to admit the patient, which means the hospital won't get paid.

When hospital patients are admitted for "observation," the Center for Medicare Advocacy (CMA) explains, "hospitals bill Medicare Part B for hospital outpatient care rather than Medicare Part A for inpatient care."

To avoid the chance of losing Medicare reimbursement, the hospital decides to play it safe, charge Medicare the lower rate, and put the patient on "observation status." But "inpatient" status is key to Medicare coverage for nursing home care that might be needed after the hospital discharge. While the hospital is guaranteed Medicare payment at a lower "observation" rate, the patient is denied Medicare coverage for post hospital rehabilitation.

Make sure you know your status and your options

The CMA urges people to "find out whether you have been admitted as an inpatient or on observation status. Ask your treating physician. If your physician is unclear regarding your status, ask to speak to someone in the case management department."

The lack of notification of observation status has been recognized in Massachusetts, where some members of the legislature tried to pass a law requiring prompt notice of "observation" status, as soon as the patient is admitted to the hospital.

If you do find out that you are on "observation," the CMA urges you try to get that status changed. If "you are not successful with changing your hospital observation status, but need follow up medical care," you have serious decisions to make.

"If you can safely return home," the CMA suggests that you "ask your hospital or community physician to order home health care. So long as you are homebound (leaving home requires a taxing effort and occurs infrequently) and you require skilled care (skilled nursing or physical or speech therapy), Medicare should pay for this care. Have this care set up for you by the hospital before you leave as part of your safe discharge plan."

Decide if you want to appeal observation status decisions

Larry Barrows didn't have the home care option.

His physician wouldn't authorize him to return home, so Lee had no choice but to admit him to a nursing home. "After stabilizing his blood pressure he was released and taken to a rehab facility as a private pay patient, since the three day rule did not apply. He remained for three months, suffering various symptoms and becoming increasingly despondent," she says.

"If you cannot safely return home, and the discharge physician has ordered care for you in a skilled nursing facility," the CMA reminds us that the nursing home will be prevented from billing Medicare since you "were not admitted to the hospital as an inpatient." The CMA's self-help guide lists steps you can take to appeal this decision.

Lee Barrows decided to appeal when Larry was still in the hospital. "I tearfully blurted that I was going to fight this. Whereupon Larry's doctor and the social worker both gave me the thumbs up sign, saying this happens at least once or twice a week," she says.

Again, the CMA reminds us that "filing an appeal does not prevent the nursing home from requiring you to pay for your care, pending the outcome of the appeal." You will need to gather hospital and nursing home records to prove your case if you decide you want to try to get Medicare to reimburse you for the nursing home bill.

After three months in the nursing home, Larry Barrow's family decided to try to bring him home. "He was 24 home hours when his blood pressure became dangerously low and he was severely dehydrated," she recounts. "His primary doctor ordered him to the hospital, a different one. Six days later, he was dead of pancreatic cancer."

Lee Barrows' Medicare appeal is still going on. "I eventually had a hearing. Six months later it was denied," she says. Lee and six other Medicare beneficiaries (or their estates) filed the complaint and a motion for certification of a nationwide class action. They have submitted written discovery to a federal court in Connecticut, but that has been put on hold while the motion to dismiss is pending. Seven more plaintiffs have intervened.

In a recorded testimony, Lee says: "I keep thinking of past and future victims who might not have the awareness level or tenacity to navigate this economically driven system. The impact is devastating."


Editor's Note: Congress has voted to require hospitals to tell Medicare patients when they are under observation care and have not been admitted to the hospital. When signed by the President, the law will require hospitals to provide patients receiving at least 24 hours of observation care with written notification of this status no later than 36 hours after treatment starts. This notification must explain that they have not been admitted to the hospital, the reasons why, and the potential financial implications. Hospitals will have 12 months to begin complying with the patient notice requirements. More information on this decision is available here.

John L. Roberts, J.D., is an Elder Law Attorney serving clients in Hampden County, MA. After practicing for 15 years, he confronted the challenges of family caregiving when his own father developed dementia. The experience transformed his practice, enabling him to help clients who are family caregivers from a place of true understanding.

Visit Law Office of John L. Roberts

View full profile

You May Also Like See all guides >

Veterans' Benefits

Find federal benefits available to your family.

Home Care

How to find, hire and manage home care.

Caregivers' Survival

Everything you need to care for an elderly family member.

Get the latest care advice and articles delivered to your inbox!