Observation Status Sparks Legal Firestorm

Lawmakers and the courts have been drawn into the controversy over the complicated distinction between observation status and a hospital admission, which carries a high cost differential.

Several states are adopting or studying laws to alert hospital patients about the potential financial consequences of observation vs. admission status.

This month, a new Connecticut law requires hospital staff to inform patients in writing about the nuances of observation status, which include exposure to out-of-pocket expenses.

Under the law, a written notice provided to patients must indicate "that observation status may affect the patient's Medicare, Medicaid, or private insurance coverage for (A) hospital services, including medications and pharmaceutical supplies, or (B) home or community-based care or care at a skilled nursing facility upon the patient's discharge."

The written notice must also recommend "that the patient contact his or her health insurance provider or the Office of the Healthcare Advocate to better understand the implications of placement in observation status."

Victoria Veltri, JD, who leads Connecticut's Office of the Healthcare Advocate, says her agency is monitoring the new law. "We will be watching the implementation of this bill closely, tracking the calls that come in on this bill, and may intervene, when warranted, on the behalf of an individual consumer to challenge observation status," she says.

Early Adopters
According to the Connecticut Health I-Team, Connecticut, Maryland, and New York are the first states to adopt observation status notification laws, with Massachusetts, New Jersey, and Pennsylvania considering similar legislation.

Officials at the Maryland Hospital Association said that state's observation status law is helping patients navigate the complicated distinction between observation and admission.

"The state and MHA worked with hospitals on a standardized communication template that provides this information to patients, in addition to sharing best practices for hospitals to tailor to their individual situations," the hospital association officials said in a prepared statement.

MHA officials say the Maryland law is adequately crafted to ensure patients are informed about the consequences of being listed in observation status.

"Since the move to observation status was strongly encouraged by the state rate setting commission, federal government, and commercial insurance companies to cut costs by shifting them from insurance companies to patients, patients have understandably been confused when they [have] found themselves in a hospital bed but categorized as outpatients and responsible for the accompanying extra out-of-pocket costs," the MHA said. "We think the law and hospitals' response to it will help patients."

The "standardized communication template" recommended for use at Maryland hospitals starts with this advisory: "When a patient is at the hospital the doctor caring for you must determine whether you require care as an inpatient or an outpatient. Your doctor has assigned your status as an outpatient in observation. You have not been admitted as an inpatient to the hospital."

The Maryland communication template lists information targeted specifically at holders of commercial health insurance and Medicare coverage.

Financial Liabilities
One of the biggest financial liabilities Medicare patients face when designated for observation status is paying a high share of the bill if they are transferred to a nursing home or other skilled nursing facility. The Maryland communication template includes an advisory to patients about this potential cost.

'A Burden on Top of a Burden'
Hartford Hospital, an 819-bed acute care facility in Connecticut, says its state's new law, which is similar to Maryland's, places an undue burden on medical staff.

Maureen Zukauska, RN, is the nurse manager who leads the Hartford Hospital Case Coordination Department, which is charged with advising patients about outpatient status. "Our focus is supposed to be caring for the patient, and it's very prickly to get into conversations about finances," she said.

Mitchell McClure, MD, director of the Hartford facility's Division of Hospital Medicine, says the new observation status law puts doctors in a difficult position. "Physicians have certainly talked about this with patients before, but not in a formal way," he said. "It is an issue that has been contentious with patients, and I understand that. We're in the middle of this conversation."

McClure says hospital staff members were already feeling pressure to comply with a dizzying array of rules and regulations before the new law was enacted. "It's a burden on top of a burden that was already there," he says.

Ajay Kumar, MD, chief of the Hartford Hospital Department of Medicine, says officials at the Centers for Medicare & Medicaid Services who have been the driving force behind patient admission status reform need to take more responsibility for educating the public.

"I have found that very little has been done by CMS and Congress to inform the public," he says. "We do not find that the beneficiaries are well-educated."

Placing the educational onus on hospitals requires a burdensome amount of time to train staff members, he says. "It is an enormous amount of undertaking for us. We're educating a lot of staff in a short period of time."

CMS officials did not respond to a request for comment about Connecticut's new law or about a federal lawsuit linked to observation status. The federal agency does have information online that clarifies the differences between hospital observation status and admission.

Pressing the Feds
In 2011, the Willimantic, CT-based Center for Medicare Advocacy filed a class action lawsuit against the federal government on behalf of Medicare beneficiaries who were placed on observation status at hospitals and then paid thousands of dollars for post-hospital skilled nursing facility care because they had not been admitted to hospitals for at least three days.

"The case challenged Medicare's use of observation status, as well as the lack of an appeal mechanism for beneficiaries to challenge the classification," Alice Bers, an attorney at CMA, said last week.

"In September 2013, the court dismissed the case. We have appealed to the U.S. Court of Appeals for Second Circuit, but limited the appeal to the issue of the right to an effective notice and appeal process for beneficiaries placed on observation status."

Oral arguments on the class action lawsuit appeal have been scheduled for later this month.

Terry Berthelot, senior attorney at CMA, says there is a pressing need for federal legislation to help clear up confusion about the difference between observation status and admission.

"There should be federal legislation requiring both notice and expedited appeal rights for Medicare beneficiaries admitted to the hospital as outpatients," she says. "Whether a patient requires an inpatient level of care is a factual issue. When the hospital and the patient disagree as to whether the patient needs to be hospitalized or could be treated in an outpatient setting, a third party arbiter should step in and review the case. A meaningful appeal process would ensure that Medicare beneficiaries receive the kind of care they need without having to spend large sums of money out-of-pocket."

Pending Bill
Berthelot says federal legislation sponsored by U.S. Rep. Joe Courtney, (D-CT), and U.S. Sen. Sherrod Brown, (D-OH), would help clear up the controversy. "If Medicare counts time on observation status toward the three-day qualifying hospital stay required for Medicare coverage of subsequent care in a nursing home, the observation status problem would largely go away," she said.