More out-of-pocket costs

The suit alleges that the practice of putting patients in observation status not only denies them coverage for post-hospital rehab care in a skilled nursing facility, so they must either pay the full bill — more than $30,000 in the case of two plaintiffs — or forgo treatment. It also classifies them as outpatients while they're in the hospital. Therefore, their Medicare coverage comes not under Part A (hospital insurance) but Part B (which normally covers doctors' services and outpatient care). For some patients, this can also mean paying more out of pocket — especially if they need prescription drugs that, in this situation, would be covered under Part B and not under Part A or even the Medicare Part D drug benefit.



The practice "doesn't make any sense" because people only go into the hospital when they're sick, Stein says. "They [go] either on orders of a doctor or because, having arrived at the emergency department, they were told they should stay." And yet, she adds, "those who ended up in the nursing home with no payment were not aware — and neither were their families — that they were in observation status until they were discharged from the hospital. And then they were informed."

The lawsuit calls for observation status to be abolished — or at least for patients to be notified in a timely fashion of their status and given the opportunity to make a swift appeal against the decision. Some of the center's clients reported stays of up to 14 days in observation, Stein says.

What determines whether a patient is classified as an inpatient or placed under observation? Usually the call is made by the hospital, which, in many cases, may overrule the patient's own physician. But Medicare's guidelines are not clear, and many experts suggest that hospitals are placing more and more patients under observation to protect themselves against new policies that penalize hospitals for unnecessary admissions and frequent readmissions of the same patient.

Unintended consequences?

In an effort to rein in spiraling costs, Medicare is now taking a tougher line with hospitals, sending auditors to investigate not only fraud but also cases in which the agency thinks that "medically unnecessary" hospitalizations have occurred. Also, to improve the quality of care, Medicare will soon start penalizing hospitals that readmit patients in less than 30 days — raising the question of whether hospitals might label people as observation patients so that they cannot be counted as readmissions if they happen to return. Cost-control measures are "perfectly understandable," says Zhanlian Feng, the Brown University study's lead author. "On the other hand, those policies may have unintended consequences" that affect patients adversely.

The American Hospital Association says that hospitals are placed in an untenable position. On the one hand, they risk penalties if they admit patients for short stays. Yet they anger patients who are put under observation. "Hospitals cannot win no matter how they handle the situation," the group argued in a friend-of-the-court brief (PDF).

The American Medical Association says the observation policy has caused confusion for physicians, as well. "The AMA supports rescinding the three-day stay policy, as well as counting observation care toward the [stay] … for as long as this requirement remains in place," it said in a letter to the Medicare agency.

Meanwhile, under the status quo, hospitals are allowed to place patients in observation at any time during their hospital stay — even retroactively. Hospital staff only are required to inform patients of their status before they leave the hospital.