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Federal Judge Throws Out Lawsuit Over Hospital Observation Care

By Susan Jaffe

September 23rd, 2013, 3:53 PM

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.

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. 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.

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.

Contact Susan Jaffe at

This article was produced by Kaiser Health News with support from The SCAN Foundation.

14 Responses to “Federal Judge Throws Out Lawsuit Over Hospital Observation Care”

  1. Tom says:

    Observation care is a money making scam!

  2. Howard says:

    The empty suits at CMS couldn’t care less about lawsuits.

    Has any affected patient thought of filing a lawsuit against the hospital and/or the physician(s) who kept the patient in ‘observation care’ beyond the hospital’s own definition of when observation care ended and admission as an inpatient began?

    Hospitals and medical residents do not like lawsuits, believe me. A twenty-something medical resident with a six-figure medical school debt in front of him or her, and not even a real job lined up yet, especially does not like to begin their career with lawyers’ letters and subpoenas clogging their mailbox. Been there, done that.

  3. Mlou says:

    The decision of a patient to be obervation care in hospital is dictated by CMS not by physicians. Believe me the physicians disagree with it most of the time, they are not making money on it strict regulations are in place to say which patients are inpatient and which are observation. Howard please look up facts before encouraging frivilous lawsuits.

  4. Barbara says:

    All observation does not take place on hospital IP floors. Nearly 40% of hospitals have dedicated observaton units managed by emergency physicians or hospitalists. These units have strict clinical protocols and average length of time for patients is 15 hours before a decision is made to admit or discharge. For example, an elderly patient with chest pain will be tested over a course of several hours to determine if it’s safe to be sidhcarged. Over 70% of these observation patients are ultimately discharged safely.

  5. Joel says:

    The issue is not with appropriate use of observation stays of 15 hours it is with longer stays that are not counted toward the required 3 day stay for a snf covered stay. Nursing homes seldom see the 15 hour patient unless they went to the hospital from the nursing home.

  6. jdc says:

    This completely misses the point! We ALL KNOW that the determinations associated with “observation” v. “Inpatient” has huge ramifications across the, financial, board!! It’s one of the latest ways that CMS effectively ‘games’ hospitals and physicians. IT MATTERS financially to the hospitals which designation is chosen! Now, we see how these same arbitrary designations impact the elderly financially.
    It’s insulting for CMS to assert that the designations should be left to physicians and hospitals. CMS rules made sure that we crossed that bridge long ago. We routinely get calls asking us to change the designation to one, or the other, to help our hospitals. Will we ever return to physicians evaluating and directing the care the patient needs rather than non-physician bureaucrats and administrators playing a game about money?

  7. DJS says:

    Milou- Does Medicare require pre-approval for inpatient stays? It does not for outpatient visits.Based on the number of up-coded bills a number of my doctors have submitted to Medicare, CMS is not exactly carefully monitoring claims.A computer program should
    be able to red-flag a diagnostic code that can not be used more than twice a year
    for any one patient, yet I have doctors who have used those codes for multiple visits
    per year, none of which met the criteria for that billing code..
    Hospitals are fleecing CMS by gobbling up individual physicians practices,then being
    reimbursed at a far higher rate for outpatient visits that are then billed as hospital visits.
    I was stunned at the recent reimbursement for blood work I had recently, until I realized
    that I had seen the Dr. at the hospital, and used their lab.

  8. DJS says:

    Clarification to prior comment: l. I saw the Dr. as an outpatient in his office which is located on hospital grounds.His private practice , like many others,has been purchased by a hospital. The , identical services performed by the same doctors are billable to CMS
    at far higher rates, once their practices are bought by hospitals, which is a growing trend for this reason.

  9. This is disappointing to deny needed Nursing care (&needed Healthcare) to our Seniors at this stage of their life when we should be taking care of them. Our Seniors worked their lives and have not only contributed toward our society but also towards paying for their Medicare Benefits.

    The dismissal of this lawsuit is a departure from our American values. The dismissal of this lawsuit is a departure from our commitment towards our Seniors.
    We urge our fellow citizens to stand for our Seniors in this difficult time.

    Physicians For Fairness

    More on Selective Regulation of Healthcare and Healthcare Professionals;

  10. ec says:

    What would motivate CMS to permit this ?

  11. Carol Eblen says:

    Apparently, the reason(s) for the punishing three-day rule in the first place have never been explored and revealed to the public and to Medicare patients who have no idea how administrative reimbursement laws/rules and protocols are impacting their rights and the actual treatments they are entitled to get under Medicare law. .

    Medicare started out as a social program to be paid for by taxes with contribution by the Medicare patient but was invaded by Big Insurance (who told the Congress they could do it cheaper) and by Big Medicine and Medicare patients appear to be merely product to be managed to ensure profit for Big Insurance and Big Medicine .

    My understanding from reading public statements is that the 3-day Rule was primarily about preventing the for-profit Nursing Homes from gaming the Medicare system for profit —but was it? . That is, Nursing Homes would send elderly and sick patients to the hospital from their RESIDENTIAL private-pay or state Medicaid- paid rooms and when they returned from the Hospital, these patients would go into the approved Medicare-approved Skilled Nursing part of the Nursing Home and the for-private Nursing Home could THEN bill Medicare for the skilled nursing home care, and also the private-pay patients for holding their private residential rooms within the nursing home until these patients were released from Medicare Skilled Nursing Care Services. .

    In other words, Medicare and HHS believed that there was a strong financial incentive for the for-profit and not-for-profit Nursing Homes to send nursing- home -residential patients into the hospitals for expensive hospital treatment that, perhaps, could be treated successfully at much less expense to Medicare in an outpatient setting within the for-profit Nursing Home by the physician under cont5ract to the Nursing Home.

    Obviously, “observation status” that has been implemented these past many years covertly and for which The Center for Medicare tried unsuccessfully to sue Health and Human Services is just a further cost-saving rule that saves money for Medicare and unfairly transfers the burden of the medical care of elderly Medicare/Medicaid patients to the patients, themselves.

    Apparently, the three-day rule and the misuse of “observation status” to keep elderly Medicare/Medi8caid patients out of expensive Hospital care wasn’t enough to save “enough” for Medicare and their private for-profit partners, big insurance and punishing government Medicare reimbursement protocols started to threaten the hospitals. .

    Was it then that unilateral covert and overt (default) DO NOT RESUSCITATE status became a means for the hospitals to keep Medicare/patients out of the hospitals entirely and definitely out of of ICUs and CCUs when they KNOW that there will be NO further reimbursement for elderly/disabled Medicare/Medicaid patients who have exceeded DRG Caps or who are the victims of mistakes, errors, and the complications thereof?

    What a mess! Who is watching the store for the old people? Why haven’t the specialist physicians who earn such great profits and who often indulge in over treatment of the elderly for profits been asked to do their share?

    Why hasn’t the Executive or The Congress insisted that ALL treating physicians in the OUTPATIENT and the inpatient setting SEEK informed consent for one or the other of the two legal standards of care reimbursed out of the Medicare purse?


  12. Carol Eblen says:

    P.S. FALLS of patients within hospitals are NOW treated as medical ERROR by Medicare CMS and its private partners and there is no reimbursement or reduced reimbursement to the hospital for the medical error by CMS and its private partners, Big Insurance. . .

    THINK about how this impacts elderly patients on Medicare when they become charity patients for the hospital and, don’t even know it. THINK of how this is incentive to falsify the hospital charts —-over which the elderly patient has NO Control and into which DNR Code Status can be slipped into the chart without the knowledge or consent of the patient or the legal surrogate!

  13. Ozzie says:


  14. Monique G. says:

    I think these patients should get their money back from the hospitals that sent them to the SNF and from the SNF that accepted them. As an RN Case Manager working in a hospital WE ALL should know that patient’s cannot go to SNF from Observation status. Maybe the SNF was short on Medicare patients and accepted the patients knowing full well that they did not have the appropriate stay, but hoping not to get caught. The discharge planners should have ensured that these patients who would need SNF upon d/c were in the appropriate status. When I have patients who don’t meet inpatient criteria, I send them to EHR (Executive Health Resources) for their recommendation. And yes, maybe the physicians are to blame as well. I have countless observation patients who stay for 3 and 4 days getting NOTHING done. Many are in beds and they are only taking their home medications. Physicians play a major role in this. On October 1, 2013 the new 2 midnight rule will kick in. I think it’s sad that CMS has to enforce physicians documenting medical necessity…they should have already been doing this. Why is the patient here, what’s wrong, what do you plan to do about it, what are their comorbidities that could lead to negative outcomes if the patients are not hospitalized??? It’s like a plumber working at your home while you are at work. When you get home there is a huge bill, but you can’t see any work that has been done….Same thing with these bills.