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Hospital 'Observation' Status Prompts Federal Class Action Suit

 |  By cclark@healthleadersmedia.com  
   November 09, 2011

Medicare wrongfully denies thousands of beneficiaries coverage of acute, post-acute and prescription drug expenses each year because hospitals do not "admit" them as inpatients for at least three days as they should, claims a class action lawsuit filed by two advocacy groups.
Instead, the care of these patients is classified under the controversial "observation" category—intended for a period of up to 48 hours—even though their hospital stays may last as long as seven days and sometimes longer.

In each case, the lawsuit says, patients "received a hospital level of care and should have been formally admitted."

The Center for Medicare Advocacy and the National Senior Citizens Law Center filed their petitions this month against Health and Human Services Secretary Kathleen Sebelius and names seven patients as plaintiffs. They ask for declaratory, injunctive, and mandamus relief in the U.S. District Court in the District of Connecticut.

"We want to end the use of observation status as a way of depriving people of Part A Medicare coverage," said Gill Deford, the Center for Medicare Advocacy's Director of Litigation, who says the advocacy groups filed the claim as a class action because they are "getting overwhelmed by these complaints" from around the country.

Collectively, the seven patients or their estates were billed more than $130,000 for prescription drugs, skilled nursing facility care, and certain outpatient hospital care services under Part B that the advocates say Medicare should have paid under Part A, according to the claim.

Additionally, the complaint says that Medicare fails to notify the patients that they are on "observation status," and many don't find out until after their claims are denied, or they are notified by the skilled nursing facility that Medicare won't pay the bill.

"Beneficiaries who are placed on observation status are not informed that they have any appeal rights to challenge that placement and to contend that they should be formally admitted and be covered under Part A," the lawsuit says.

"If you're going to have a process or system that effectively deprives people of coverage, the government has a basic obligation under due process to give them information about it and the right to challenge it," Deford insists.

The complaint was filed on behalf of seven individuals denied coverage in Massachusetts, Connecticut and Texas, or the executors of their estates because some are now deceased.

"It's clear this is a problem for thousands of people – maybe hundreds of thousands – and the few that try to fight it often end up contacting us," Deford says.

A spokeswoman for the Centers for Medicare & Medicaid Services said the agency would not respond to a claim that is under litigation.

The controversial Medicare policy was designed to discourage hospitals from admitting patients who don't meet certain illness criteria, while at the same time provide a billing category for hospitals to monitor the status of patients while deciding whether they are sick enough for admission. The period for observation was supposed to be generally no more than 24 to 48 hours, and longer "only in rare and exceptional cases," according to the claim.

Officials for one hospital interviewed by HealthLeaders Media last year, the hospital bills Medicare for about one-third the amount it would ordinarily bill if the patient were officially admitted.

If hospitals do admit patients who don't meet criteria, they are subject to audits by Medicare's Recovery Audit Contractors, and stand to lose substantial revenue.  As a result, in recent years many hospitals have been shifting their admissions practices to err on the side of caution. Sometimes patients are placed in a bed in a special observation unit or in a typical acute care unit. During that time, they may undergo screening tests and procedures to make sure nothing is more seriously wrong, but they are supposed to be discharged within a day.

According to the lawsuit, however, the practice has gotten out of hand. A Medicare Payment Advisory Commission report 14 months ago says that between 2006 and 2008, the number of observation status claims increased by 22.4% "and the claims for periods of 48 hours or longer increased by 70.3%, which accounted for 8% of all claims in 2006 and 12% of all claims in 2008," according to the lawsuit.

The lawsuit does not make any claims that the patients were harmed, but in an interview, Deford said that because this practice is now so commonplace, many patients who should be receiving skilled nursing facility care are not getting it. "And as a consequence, some of them will suffer health consequences."

The advocacy groups' petition to the court also notes that the practice of placing patients in observation often violates the Medicare statute because whether a patient's hospital admission is appropriate is frequently determined by "commercially available screening tools, such as those from the McKesson Corporation (Interqual) and Milliman," the lawsuit says.

"These are proprietary systems that are not publicly available," the lawsuit says. Additionally, Medicare allows its utilization review committees "to reverse the decision of a beneficiary's physician to formally admit the beneficiary as an inpatient, and to retroactively place that beneficiary on observation status," a practice the lawsuit claims interferes with the practice of medicine in violation of the Medicare statute.

Retired physician Richard Bagnall, 91, who had a history of myocardial infarction, congestive heart failure, tremors, atrial fibrillation, and chronic kidney disease, is one plaintiff named in the lawsuit. He was taken to the emergency room of John Dempsey University of Connecticut Health Center after an episode of lightheadedness.

"He received IV infusion, EKG and X-ray and was started on an atrial fibrillation monitor," and was treated for hypertension.

He signed a notice indicating he was a hospital inpatient and was moved to a hospital floor. But he never actually was technically admitted as an inpatient, leaving him responsible for paying Part B co-insurance for outpatient claims and $5,685 for skilled nursing facility care he received after he left the hospital, according to the lawsuit.

Another patient, the late Nettie Jean Sapp, 77, had a history of breast cancer, Parkinson's disease and rheumatoid arthritis, according to the complaint. Just before she was taken to the hospital, she experienced profound weight loss, weakness, and episodes of memory loss.

When she fell in her home, she was taken to Scott and White Hospital. There, during a five-day stay, she received a head CT, X-ray of the lumbar spine, an EKG, a bilateral carotid ultrasound, and a brain MRI, the lawsuit says. She was diagnosed with a urinary tract infection and received oral and intravenous antibiotics.

But "because she was not formally admitted to the hospital and therefore did not satisfy the three-day rule, her subsequent care in a skilled nursing facility, from April 26, 2010 through June 24, 2010, was not covered," the lawsuit says. She subsequently moved to an assisted living facility, where she died, because she could not afford the cost of the nursing facility.

Bills in Congress would correct part of the problem by allowing the time a patient spends in observation to be counted as inpatient care to satisfy the three-day rule. They were introduced by Sen. John Kerry, D-Mass and Rep. Joe Courtney, D-CT.

"Given the tenor of the times," Deford acknowledges, "those bills are unlikely to go anywhere."

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