Appeals Court Keeps Observation Stay Case Alive, Questions Role of Doctors

Medicare beneficiaries can continue to press their case that hospitals’ observation stay practices are violating patient rights, a federal appeals court ruled.

In the case of Barrows vs. Burwell the 2nd Circuit Court of Appeals addressed the issue of whether Medicare Beneficiaries have a property interest in their hospital admission status under the Due Process Clause.

Medicare beneficiaries filed a putative class action suit on behalf of themselves and other Medicare beneficiaries against the Secretary of Health and Human Services alleging that the Secretary’s use of “observation status” deprives plaintiffs of Medicare Part A coverage to which they are entitled. Plaintiffs claim Medicare billing rules incentivise hospitals to admit patients under “observation status,” which is covered by Medicare Part B, rather than “inpatient status,” which is covered more comprehensively by Medicare Part A. Plaintiffs claim they were admitted to hospitals under “observation status” and as a result incurred hundreds of dollars in copays and thousands of dollars in post hospitalization nursing care bills. Plaintiffs claim these costs would have been covered under Medicare Part A to which they are entitled if they had been admitted as inpatients. The district court dismissed the complaint in its entirety and Plaintiffs appealed. The Second Circuit affirmed the dismissal of the Medicare Act claim, but vacated the dismissal of the Due Process Clause claim, remanding the case for limited discovery as to whether plaintiffs have a property interest in their hospital admission status.

 The full text of the opinion may be found at http://www.ca2.uscourts.gov/de…ced1b/1/hilite/

As inpatients, Medicare beneficiaries are entitled to Medicare Part A coverage. Medicare Part A is titled “Hospital Insurance Benefits for Aged and Disabled” and creates an entitlement to inpatient hospital services and post hospitalization extended care. Under Part A, beneficiaries pay a one-time deductible for the first sixty days in the hospital. As observation patients, Medicare beneficiaries are entitled to Part B coverage. Medicare Part B is titled “Supplementary Medical Insurance Benefits for Aged and Disabled” and covers visits to doctors and other outpatient treatments. Under Part B, patients owe a co-pay for each service received and post hospitalization nursing care is not covered.

Plaintiffs allege the Secretary’s use of “observation” status deprives them of Medicare Part A coverage to which they are entitled. Plaintiffs claim that the use of observation status and the average length of stay for a patient admitted under observation status has increased dramatically in recent years. Plaintiffs attribute that increase to a Medicare billing rule, which states that “if a beneficiary is admitted but that admission is later found to be improper, the hospital must refund the Part A payment to Medicare but cannot rebill under Part B.” Plaintiffs claim the rule incentivizes hospitals to admit patients under observation status because that ensures that the hospital will receive payment.

Plaintiffs’ complaint pled nine causes of action including violations of the Medicare Act, the Administrative Procedure Act, the Freedom of Information Act, and the Due Process Clause. Plaintiffs sought a permanent injunction (1) prohibiting the Secretary to allow Medicare beneficiaries to be placed on observation status, (2) directing the Secretary to provide written notification to any Medicare beneficiary who is placed on observation status of the nature of the action and the consequences for coverage and the right to review the action, and (3) directing the Secretary to establish a procedure for administrative review of a decision to place a beneficiary on observation status. The district court dismissed the complaint in its entirety and Plaintiffs appealed two claims.

The issue on appeal is whether the Secretary’s failure to provide expedited written notice and administrative review of Medicare beneficiaries’ placement into “observation status” violates the Medicare Act and the Due Process Clause. The Second Circuit affirmed the dismissal of the Medicare Act claim holding, first, that Plaintiffs lack standing to challenge the adequacy of the notice they received and, second, nothing in the Act entitles Plaintiffs to the process changes they seek. The Circuit held the district court erroneously relied on the Secretary’s assertion that the decision to place a patient into “observation” or “inpatient” status is a complex medical decision left to the discretion of the doctor, rather than accepting Plaintiffs’ assertion that, in practice, the decision is based on fixed Medicare criteria, and not left to the discretion of doctors. The impermissible finding of fact led the court to conclude that Plaintiffs lacked a property interest in their hospital admission status. This determination was the sole ground for dismissing the Due Process claim. The Second Circuit remanded the case for limited discovery on the issue of whether Plaintiffs possess a property interest in their hospital admission status.  A U.S. District Court in Connecticut was wrong in dismissing the entire case in 2013, according to the Second Circuit Court of Appeals. The federal court revived certain Due Process claims, and remanded this part of the case back to the District Court.

The case stems from Medicare beneficiaries who were kept in observation status at the hospital even though they allegedly received inpatient-type care. Because they were not classified as inpatients, they did not qualify for Medicare coverage of post-hospital skilled nursing care, costing them thousands of dollars. The District Court ruled that the plaintiffs did not have a so-called “property interest” in bringing charges, based on the fact that physicians rightfully exercise their medical judgment in designating someone as an inpatient versus under observation.

However, the plaintiffs contend that hospitals are placing people under observation because of government policies and pressures, not due to medical judgments. Namely, the Centers for Medicare & Medicaid Services has created “commercial screening guides” defining how patients should be classified. Also, the actions of government contractors such as Medicare auditors influence how patients are categorized, the complaint states.

These claims are “plausible,” and further discovery is needed to establish whether the claims in fact establish the needed “property interest” for moving the case forward, the Court of Appeals ruled.