HHS Rule on Observation Hospital Stays Upheld; Inpatient Status Up to Physicians

By Eric Topor  

Sept. 25 --A federal district court in Connecticut Sept. 23 dismissed a complaint filed by a group of Medicare beneficiaries protesting their denial of inpatient status during hospital stays, ruling that the specific treatment provided to a beneficiary is irrelevant to whether the beneficiary is granted coverage under Medicare Part A (Bagnall v. Sebelius, D. Conn., No. 3:11-cv-01703-MPS, 9/23/13).

The U.S. District Court for the District of Connecticut held that the Department of Health and Human Services' regulations concerning the classification of certain Medicare beneficiaries on “observation” status under Medicare Part B coverage did not violate the Medicare Act or the Administrative Procedure Act (APA).

In addition, the court said Medicare beneficiaries could not challenge their classification as observation patients rather than inpatients on due process grounds because Medicare beneficiaries had no property right in classification of their hospital stay as an inpatient admission allowing coverage under Medicare Part A.

Instead, the court said it was up to the medical discretion of the treating physician as to whether a patient was admitted as an inpatient or kept for observation (see related item in the Legislative News section).

Advocates' Response to Decision

Alice Bers, an attorney with the Center for Medicare Advocacy (CMA) representing the plaintiffs, told Bloomberg BNA in a Sept. 25 e-mail that the CMA was “disappointed with the decision.”

Bers said the court's decision “removes much of the responsibility for observation status from the Secretary of Health and Human Services and the Medicare program and places it on doctors and hospitals.” She added that “doctors and hospitals are responding to strong pressure and directives from Medicare on the issue.”

Bers said the CMA was currently evaluating its appeal options. Bers said the decision put renewed emphasis on the proposed Improving Access to Medicare Coverage Act (H.R. 1179) sponsored by Rep. Joe Courtney (D-Conn). She said the proposed legislation “would make all time in the hospital count toward the three-day stay [Medicare Part A coverage] requirement.”

Bers said Medicare beneficiaries who find out that their hospital stays were classified as observational rather than inpatient face difficult financial realities when seeking subsequent skilled nursing care not covered by Medicare. some beneficiaries are forced to pay out of pocket with savings, or with their own life insurance policies, or “simply forgo the nursing home care,” she said.

Skilled Nursing Coverage Differences

The plaintiff group was composed of 14 Medicare beneficiaries or their estate representatives who were hospitalized anywhere between three and seven days, but were either never formerly admitted to the hospital as an inpatient, or were admitted for less than three days. The bulk of the plaintiffs' hospital stays were instead classified as observation periods, which are covered under Medicare Part B.

Under Part B coverage, beneficiaries must pay for a larger portion of their care, incurring a deductible fee for every service provided, rather than one deductible for the entire hospital stay as provided under Part A. Whether a Medicare beneficiary is admitted as an inpatient or for observation purposes is a determination made by the hospital and the treating physician under Medicare regulations.

More critically for the plaintiffs, beneficiaries who received hospital treatment under Part B rather than Part A coverage are not eligible for Medicare coverage of subsequent care at a skilled nursing facility (SNF). As a result, the plaintiffs were faced with SNF out-of-pocket costs of between $4,000 and $10,000.

Additionally, the plaintiffs were unaware that their hospital stays had been classified as Part B observation stays rather than Part A inpatient stays until they received a Medicare Summary Notice several weeks or months after their hospital stay.

Medicare Observation Status Challenged

The plaintiffs' complaint made several types of claims against the HHS's “use” of observation status for beneficiaries receiving treatment in hospital settings.

The plaintiffs claimed that observation status violated the purpose of the Medicare Act, was arbitrary and capricious, violated the APA and Medicare Act's notice and comment requirements and violated the plaintiffs' due process rights.

The plaintiffs also argued that the observation status rules had not been adequately outlined in the Federal Register, the notices mailed to beneficiaries informing them of their observation status were deficient and the use of observation status improperly interfered with the practice of medicine.

The government filed a motion to dismiss the plaintiffs' complaint on the grounds that it did not state a claim for which relief could be granted.

Similar Claims in Another Case

Judge Michael P. Shea said that the core of the plaintiffs' complaint was that there was no fundamental difference in care a beneficiary received whether the beneficiary was admitted as an inpatient or kept in the hospital for observation, and the differing classifications were simply for billing purposes, an artifact of Medicare rules and regulations.

Shea said that this argument was already rejected by the U.S. Court of Appeals for the Second Circuit in Estate of Landers v. Leavitt, 545 F.3d 98 (2d Cir. 2008), and ultimately doomed the plaintiffs' claims, as well.

In Landers, Shea said that the HHS was entitled to deference in its interpretation of when a patient is deemed an inpatient, and was aware of the potential issues surrounding observation patients, but ultimately declined to modify its definition of inpatient. The Landers court said the HHS's interpretation of 42 U.S.C. §1395x(b) that left it up to a hospital to decide whether a patient was an inpatient or an observation patient was reasonable under the statute.

Observation Status Not 'Arbitrary'

The court said that the plaintiffs' claim that allowing hospitals to classify a patient receiving comprehensive care for days at a time as an observation patient rather than inpatient was a rehash of the Landers “ 'form over substance' argument,” and failed for identical reasons. Shea said the HHS regulation tying Part A coverage to whether a patient was formally admitted as an inpatient was “a valid interpretation of the Medicare statute” under the Landers precedent.

Shea also rejected the argument that allowing hospitals to classify the plaintiffs as observation status patients was arbitrary and capricious, and violated the APA. He said the HHS's interpretation of §1395x(b) could not be arbitrary if it was already deemed reasonable by the Landers court.

The court also said that the plaintiffs failed to show that the HHS interpretation of §1395x(b) was subject to notice and comment rules or created “new law, rights, or obligations” that would subject the interpretation to notice and comment rules.

Shea also said that the interpretation of §1395x(b) did not violate the Freedom of Information Act for failure to appear in the Federal Register because it in fact did appear in the Federal Register in 2006 (71 Fed. Reg. 67960, 68151 (Nov. 24, 2006), and because its absence from the Federal Register would not have altered the Medicare benefits that a beneficiary would have received.

No Due Process Standing

The plaintiffs made two claims of due process violation, arguing that the failure to receive adequate written notice of their observation status violated their due process rights, as did the HHS's failure to allow for administrative review of being classified as an observation patient rather than an inpatient. The court ruled that the plaintiffs did not have standing on either claim.

Shea said that there was no “causal link” between the notices the plaintiffs received informing them of their observation status and the determination of their benefits and that the plaintiffs had no standing to challenge them.

Likewise, Shea said that the plaintiffs had no standing to challenge their classification as observation patients because they lacked a property interest in Part A coverage through classification as an inpatient. Shea said that status as an inpatient was under the discretion of a treating physician, and beneficiaries did not have a property right in receiving inpatient Part A coverage simply because they were receiving treatment in the hospital.

The court also rejected the claim that the HHS's use of observation status interfered with the practice of medicine and said that while a beneficiary's status as an observation patient “may influence some medical decisions,” it did not qualify as an improper direction of medical services.

The plaintiffs were represented by Center for Medicare Advocacy attorneys Alice Bers, Judith A. Stein, Gill W. Deford and Mary T. Berthelot in Willimantic, Conn., and Toby S. Edelman in Washington. The government was represented by Department of Justice attorneys Joel L. McElvain and Justin M. Sandberg in Washington and Assistant U.S. Attorney for the District of Connecticut Carolyn A. Ikari.