Federal judge dismisses lawsuit challenging observation care status

A federal court judge in Hartford, Conn., dismissed a lawsuit Monday which was filed against the government by 14 Medicare beneficiaries who were denied nursing home coverage. The lawsuit sought to eliminate the observation classification, or alternatively, require hospitals to tell patients when they are under observation and then create a clear appeals process that observation patients could follow to challenge Medicare’s coverage decisions.

Under Medicare rules, only patients admitted to a hospital for at least three consecutive days are eligible for coverage of follow-up nursing home care.

The beneficiaries who brought the suit stayed in the hospital for observation and that time doesn’t count toward the three-day requirement. They claimed there is little difference between admitted and observation status in the hospital, yet, as observation patients, they had to pay tens of thousands of dollars in nursing home bills.

Lawyers representing the Department of Health and Human Services had argued that the case should be dismissed because seniors should have first completed their appeals before filing a lawsuit, among other reasons. Judge Michael P. Shea dismissed that argument but still ruled against the seniors. His ruling is based mostly on a 2008 federal court decision that upheld the right of the HHS secretary to let hospitals and doctors determine whether patients should be admitted to the hospital. He also cited the federal law that limits Medicare nursing home coverage to admitted patients, or inpatients.

“We are very disappointed with the court’s decision,” said Alice Bers, an attorney at the nonprofit Center for Medicare Advocacy, which represented the seniors and is reviewing the judge’s 50-page ruling.

“The decision removes much of the responsibility for observation status from the Secretary of Health and Human Services and places it on hospitals and doctors, even though the Secretary is in charge of making sure that hospitals meet their Medicare obligations,” Bers said in an e-mail.

The judge acknowledged that observation patients “have a greater financial responsibility for the hospital services they received – and for any subsequent SNF [skilled nursing facility] stay — than if they had been admitted as inpatients,” and cited the case of a Connecticut woman who paid $30,000 for nursing home care that Medicare would not cover.

More Medicare beneficiaries are entering hospitals as observation patients every year. The number rose nearly 70 percent in five years, to 1.6 million nationally in 2011, according to the most recent federal statistics.  At the same time, Medicare hospital admissions have declined slightly.

The American Hospital Association is also suing Medicare to eliminate the observation classification because hospitals have to refund payment for an admitted patient if the agency’s auditors later determine that patient should have been on observation status.

Medicare officials did not respond to requests for comment about the decision.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.