For years, elder law attorneys have warned clients about a troubling, curious quirk in the Medicare system. Many times, when older patients are hospitalized, instead of being officially admitted, they are placed on “observation status,” which was originally meant as a temporary designation for individuals who were receiving medical care and tests in a hospital setting until they were released, or a diagnosis was made and they were officially admitted.

Medicare Observation Status

Unfortunately, over a decade, the number of observation stays has increased exponentially and is being used even when patients have a diagnosis and have been admitted by their own physicians. This is due to the Medicare claims review process in which hospitals risk nonpayment for inpatient services billed without documentation of certain diagnosis and level of care. As a result, hospitals often err on the side of caution by designating a patient on observation status. For the hospital, there is little downside. An observation stay is still covered by Medicare but under Part B instead of Part A.

However, the financial consequences for the Medicare beneficiary are substantial. First, the denial of Part A inpatient coverage means that the beneficiary pays deductibles and copayments for each individual service. Likewise, the prescription drugs received while in the hospital will be billed separately instead of being included under the Part A inpatient payment.

The most significant impact of the observation status issue is the denial of Medicare coverage for post-hospital care. Medicare will only cover rehabilitation in a facility if the beneficiary was admitted to a hospital for a period of at least three days, not including any days on observation status. This can prevent beneficiaries from receiving up to 100 days of nursing facility coverage. This can occur even if the beneficiary’s personal physician admits them to the hospital because hospitals can change the status retroactively. Until recently, patients had no recourse if the hospital changed their status.

Rehab Payment Reimbursement

In a recent class-action case, Alexander v. Azar, a federal judge in Connecticut held that Medicare beneficiaries whose hospital stays were changed to observation status can now appeal to Medicare for reimbursement of their rehab stays. Patients whose doctors initially placed them on observation status still cannot appeal. This ruling opens the doors for hundreds of thousands of Medicare beneficiaries to recover payment for their nursing home rehabilitation stays.