Medicare beneficiaries have been spending a lot more on hospital and nursing home care because of the problem of “observation status.”  “Observation status” means that even though you are in a hospital bed, you are not classified as a hospital inpatient. You may be receiving the same nursing and medical care, tests, food, and medications as other hospital patients. But for purposes of Medicare payment, you are considered to be an outpatient.

Your hospital status (whether you are classified an “inpatient” or “outpatient”) affects how much you pay for hospital services (like X-rays, drugs, and lab tests) and may also affect whether Medicare will cover care you get in a skilled nursing facility (SNF)

Although it’s counter-intuitive, you can spend a week or more in a hospital room and still not be considered to be a hospital “inpatient.” As a result your treatment, and any subsequent stay in a nursing home, may cost you a lot more.

The sad case of Larry and Lee Barrows

Consider the case of Larry and Lee Barrows. On July 3, 2009 Larry Barrows was taken by ambulance to an ER at his local hospital. After numerous tests in the ER he was taken to a hospital room where he remained for 8 days. While he was in the hospital Larry received physical therapy, IVs a low salt diet and numerous additional tests.

But Larry was never formally “admitted” as an inpatient to the hospital.

“After five days of treatment in the hospital, my husband’s neurologist, physician and social worker ushered me into the hallway to tell me that my husband was never admitted. I was stunned with disbelief and tearfully blurted out that I would fight this,” said Mrs. Barrows in a press release. “His doctors then indicated that this happens once or twice a week.”

Outpatient status meant that Lee Barrows would not qualify for Medicare Part A coverage. And he would not later be eligible for Medicare skilled nursing facility coverage because he did not meet the requirement of a prior 3 day hospital inpatient stay.

After 7 days in the hospital Larry was released from the hospital and taken to a skilled nursing facility. The stay in the nursing facility was very costly because it wasn’t covered by Medicare. After he had spent a costly 3 months in the nursing facility Larry’s family took him home where he soon died of pancreatic cancer.

Added Costs in the Hospital

What is going on here?  How can you spend a week in a hospital bed without being an inpatient in the hospital? Like much of the confusion surrounding health care these days, it turns out to be a payment issue. Both Medicare and private health insurance can pay less if you are deemed to be an outpatient. The insurers save money while the patient ends up paying more. Here is how it works for Medicare.

Hospital inpatient services are paid for by Medicare Part A (also known as “Hospital Insurance”). Generally, this means you pay only a one-time deductible ($1,184 in 2013) for all of your hospital services for the first 60 days.

But if you are not classified as an inpatient you get no coverage under Medicare Part A. Instead, you have to rely on Medicare Part B. If you are classified as being on outpatient “observation status” you will have to pay a co-payment (20% of the Medicare-approved amount) for each individual service you receive. Your total co-payment for all outpatient services may be substantially more than the inpatient hospital deductible.

And Part A has much better drug coverage. Part A payments made to the hospital or skilled nursing facility generally cover all drugs provided during a covered stay. But most prescription and over-the-counter drugs you get as an outpatient are not covered by Part B.

No Coverage if you need Nursing Home Care

If you need skilled care (like physical therapy) in an approved nursing facility, Medicare Part A will pay the entire nursing home cost for the first 20 days but only you have spent at least three full days in a hospital as an admitted inpatient. Medicare Part A coverage can continue to help pay a more limited amount for up to 100 days of your nursing home stay.

But if your hospital stay was as an outpatient “under observation” you will not qualify for Medicare nursing home coverage. With nursing home costs in Pennsylvania averaging $259 a day twenty days of lost Medicare coverage can cost you over $5,000 out of pocket.  And your drugs are generally not covered.

Why is this Happening?

The observation status problem is a result of federal Medicare regulations and increased oversight of hospitals which is designed to reduce Medicare expenditures.

Medicare has been telling hospitals that they will be audited if patients have been admitted as inpatients but should have been classified as outpatients.  Hospitals, wanting to avoid an audit, have become much more conservative in classifying admissions.

Hospitals are also concerned about Medicare financial penalties for re-admissions. To avoid a re-admission problem, hospitals can just not admit the patient in the first place.

In a recent article on the observation status problem the York Daily Record reports:

“[D]octors said the Medicare Recovery Audit Contractor [RAC] program has so cowed hospitals that they gladly accept a smaller reimbursement to avoid an audit. The RAC auditors are paid by Medicare based on what they find, doctors said, so they have incentive to find problems.

“Hospitals are very fearful of RAC audits,” [Dr. Richard Schott, president of the Pennsylvania Medical Society] said, adding that the system forces hospitals to be cautious. “If a patient comes in on observation status and their case turns out to be more complex … they can very easily be changed from observation status to an admission.

“There’s very little downside to the hospital in doing that. If it’s the reverse, it’s much more problematic.” (Quoted in York Daily Record, April 14, 2013)

The result is the growing use of observation stays at hospitals and added financial detriment to patients.

“Five years ago, we had virtually none for observation,” said Dr. Dan Wehner, who is chairman of the Department of Emergency Medicine at Memorial Medical Center in Johnstown [Pennsylvania]. “Three years ago, approximately 5 percent were observation, and now about 25 percent are observation.” (Quoted in York Daily Record, April 14, 2013)

What Can You do to Protect Yourself

It’s very difficult to protect yourself.  Even if your doctor orders that you be admitted to the hospital as an inpatient, a hospital utilization review (UR) committee can change your status from inpatient to outpatient. You can be initially classified as “admitted” but then later reclassified as “observation” without your consent.

A Federal Government booklet: “Are You a Hospital Inpatient or Outpatient? If You Have Medicare – Ask!” makes the following suggestions:

  • If you’re in the hospital more than a few hours, always ask your doctor or the hospital staff if you’re an inpatient or an outpatient.
  • Learn about the differences in Original Medicare coverage for hospital inpatients and outpatients, and how these rules apply to some common situations. If you have a Medicare Advantage Plan (like an HMO or PPO), costs and coverage may be different. Check with your plan.
  • If you disagree with decisions about health care payment, coverage of services, or prescription drug coverage get a review (appeal). For more information about your rights, the different levels of appeals, and Medicare notices, visit to view the booklet “Your Medicare Rights and Protections.” You can also call 1-800-MEDICARE (1-800-633-4227). TTY users should call 1-877-486-2048.

That is not much help. The truth is you are going to be pretty much stuck with what the hospital decides. You can’t really protect yourself. Seniors need the Medicare regulations and oversight procedures to change.

Legislative or Judicial Intervention is Needed

On March 18, 2013 the federal government’s Centers for Medicare and Medicaid (CMS) proposed additional rules regarding observation status (78 Fed. Reg. 16,632). But these new rules will not help beneficiaries at all, says the Center for Medicare Advocacy. “In fact, CMS’s prediction that hospitals will increasingly bill hospital stays under Part B will further reduce beneficiaries’ access to Medicare coverage in skilled nursing facilities (SNFs).”

Legislation has been introduced in Congress to address the observation status problem. Senate bill (S569) and House bill (HR 1179) would amend the law to provide that time spent under observation in a hospital counts as inpatient time under Medicare. These changes would allow seniors and others on Medicare to get the full benefit of their Medicare Part A coverage for hospital and skilled nursing care.

If enacted in their present form, these bills would apply retroactively to patients who were classified as being in observation status during periods after January 1, 2013. However, the beneficiary would need to file an appeal with regard to the services in question within 90 days of the enactment of the amendment of the law.

So, if observation status has resulted in your failure to qualify for Medicare Part A payment for a hospital or skilled nursing facility stay after January 1, 2013, you will want to follow the progress of these legislative proposals. And be sure to let your Congressional representatives know that you support the enactment of a legislative fix.   Unfortunately, the current political climate does not appear to be conducive to the passage of these proposals.

A more hopeful source of remedy may be the courts. A class action lawsuit, Bagnall v. Sebelius (No. 3:11-cv-01703, D. Conn) has been filed in federal court in Connecticut. Lee Barrows is one of the plaintiffs in that litigation. The lawsuit seeks a finding that the use of observation status violates the Medicare Act, the Freedom of Information Act, the Administrative Procedure Act, and the Due Process Clause of the Fifth Amendment to the Constitution.  Motions for class certification and a government countermotion to dismiss are scheduled for oral argument on May 3, 2013.

Until something changes, the observation status problem seems likely to continue and many seniors will end up paying more for their hospital and nursing home stays.

For More Information:

Observation Status & Bagnall v. Sebelius (Center for Medicare Advocacy)

Are You a Hospital Inpatient or Outpatient? (Centers for Medicare and Medicaid Services)

The law firm of
Marshall, Parker & Weber, LLC has offices in Williamsport, Wilkes-Barre, Jersey Shore and
Scranton. For more information visit or call 1-800-401-4552.

Share this Article:

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print