Can a Medicare Beneficiary Assigned to Observation Services Appeal the Decision?

The wheels of justice may grind slowly but, as the saying goes and as the latest developments in the observation services saga attest, they grind finely. On July 31, 2017, Judge Michael P. Shea, of the U.S. District Court of Connecticut, issued a 20-page ruling in the case of Alexander v. Price. His decision: a specific group of Medicare beneficiaries could proceed with a class action lawsuit against the Department of Health and Human Services (HHS) and Centers for Medicare & Medicaid Services (CMS). According to the ruling, the issue was whether “Medicare beneficiaries have a right to administrative review of the decision to treat their hospital stays as ‘observation' rather than ‘inpatient'—a decision that can have significant financial consequences.” Hundreds of thousands of Medicare beneficiaries each year may meet the criteria for membership in the class (described below).

Observation services are billed as outpatient services under Medicare Part B, with copays and separate fees for each service, including prescription drugs. Hospital services are covered more comprehensively under Medicare Part A. A few days of care designated as observation services can add up to a bill that is unaffordable for a patient or family. Even more compelling, a hospital stay billed as observation services does not count in the three-day requirement for coverage for rehabilitation services in a skilled nursing facility, so patients have to pay thousands of dollars for that care on their own. This requirement is not the “two-midnight” rule, which sets out benchmarks for determining when a hospital stay should be presumed to be an admission. That rule remains in effect, although CMS has eliminated the 0.2 percent payment cuts for inpatient services for FY 2017.

This latest decision was preceded by a February 8, 2017, ruling, also by Judge Shea, in the case of Alexander v. Cochran, denying the then acting HHS Secretary's appeal for a summary judgment dismissing the case.

Appealing an Observation Services Decision: Not for the Faint of Heart

If an admitted hospital patient wants to appeal a hospital discharge, there is an administrative review process that provides an efficient, if not necessarily positive, answer. But if a Medicare beneficiary learns—through the federally required Medicare Outpatient Observation Notice, or MOON, and notices required by some states (including New York)—that hospital care was for observation and additional costs might apply, there is no reliable way to appeal the decision. What is supposed to pass for administrative appeal is cumbersome, confusing, and unreliable.

Just how confusing and cumbersome is described in the class action ruling. “[Plaintiff Dorothy Goodman's son] allegedly attempted to challenge her coverage determination by communicating with the hospital, the skilled nursing facility, the Centers for Medicare & Medicaid Services (‘CMS') regional office, the state Medicare counseling office, and a Medicare contractor; none could provide him with a ‘clear method of addressing or challenging his mother's hospital classification.' He ultimately contacted his congressperson, which led CMS's regional office to steer him to some ‘redetermination' forms that he used. Even then, however, he did not secure a review of the merits of the denial of Part A coverage by the Medicare Appeals Council.” Ms. Goodman, 91 years old at the time of her hospitalization, died before this ruling, as did some other plaintiffs. Their interests will be represented by their estates or they will be replaced as part of the class.

Who Decides? The Role of Commercial Screening Tools

Patients and families may assume that the decision about hospital admission or outpatient services is one that should be made by an experienced physician. Yet, as Judge Shea points out in his ruling in Alexander v. Cochran, hospitals commonly use commercial screening tools such as InterQual or Milliman to accept or overrule physicians' recommendations. The problem is not that those tools are illegal or concealed by hospitals but that their use may deny patients due process in asking for administrative appeal. When decisions are reviewed by a Medicare Administrative Contractor (MAC), “The treating physician's order ‘plays a role' in the MAC decision but ‘is not dispositive or even presumed to be correct.'” Further reviews by Recovery Audit Contractors (RACs) also use these screening tools “to maintain consistency and uniformity” but generally do not challenge decisions made with screening tools.

What Next?

The class action ruling does not grant the right to an expeditious administrative appeal but allows, despite HHS objections, class action status to go forward, with Center for Medicare Advocacy, Inc., Justice in Aging, and the law firm of Wilson, Sonsini Goodrich & Rosati acting as class counsel. All had been involved in prior advocacy on this issue.

The class certified under the Federal Rule of Civil Procedure includes “All Medicare beneficiaries who, on or after January 1, 2009: (1) have received or will have received ‘observation services' as an outpatient during a hospitalization; and (2) have received or will have received an initial determination that the observation services are covered (or subject to coverage) under Medicare Part B.” Excluded from the class are Medicare beneficiaries who meet these requirements but who pursued an administrative appeal and received a final decision from the Secretary before September 4, 2011.

What should potential members of the Medicare class do? Judith Stein, executive director of the Center for Medicare Advocacy, says, “We will be required to get a notice out for potential class membership when the case reaches the appropriate stage. No action is required now but we encourage people to share their observation stories and to sign up for updates on the case through links on the Center's website.”

Aug. 16, 2017
Focus Area
Quality and EfficiencyClinical-Community Partnerships
Family Caregiving