Health Law Daily Medicare inpatients switched to observation status were deprived of due process
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Thursday, March 26, 2020

Medicare inpatients switched to observation status were deprived of due process

By Jeffrey H. Brochin, J.D.

Hospital utilization review staff changes based on mandatory CMS standards, without there being a mechanism to challenge such decisions, constituted a deprivation of a property interest in Medicare Part A coverage without due process.

A federal district court in Connecticut has entered a split decision in resolution of a nine-year long class action lawsuit brought by Medicare Part A beneficiaries whose hospitalization statuses were changed to observation after being admitted as inpatients by their doctors. The change in status left them without coverage for either the hospital stay or any subsequent post-hospitalization facility admissions. However, those patients whose physicians initially placed them on observation status and who were never admitted as inpatients, did not prove their due process claims, because the physicians’ decisions generally did not constitute state action (Alexander v. Azar, March 24, 2020, Shea, M.).

Deciding hospitalization status. Upon arriving at a hospital, a Medicare Part A beneficiary will typically be examined by a physician who will decide whether to admit the patient formally as a hospital inpatient or to place the patient on observation status. The decision is a critical one for the Part A patient, because formal admission to a hospital as an inpatient is a pre-condition for Medicare Part A payment for both the hospital services and for post-hospital skilled nursing services.

However, if the patient is placed on observation status instead of being admitted as an inpatient, the patient will have to pay for hospital services and the post-hospital skilled nursing services out of pocket, unless the patient has Medicare Part B coverage or other insurance. Under current Medicare regulations, the patient has no right to a say in the doctor’s decision about whether to admit him or her as an inpatient, and no means to challenge it. Furthermore, it is possible for the physician to admit the patient as an inpatient, only to have that decision reversed by a hospital’s utilization review staff. If so reversed, the patient is left without coverage as noted above.

Two classes of plaintiffs. The plaintiffs in the instant case consisted of a nationwide class of Medicare beneficiaries who were placed on observation status after entering the hospital. However, some were placed on observation status at the outset, while others were put on observation at the behest of the hospital’s utilization review staff after a physician had initially designated them as inpatients. Many of the patients remained in the hospital on observation status for days, and many suffered serious financial or other consequences as a result of these decisions. Some were responsible for paying for the hospital services themselves, because they lacked Medicare Part B or private coverage. Others ended up paying the costs of a post-hospital skilled nursing facility themselves, because they went to the facility after an extended hospital stay in which they were not designated as inpatients.

All of the patients sought a procedure to challenge the coverage-altering decision to classify them as observation patients and argued that HHS deprived them of their property interest in Medicare benefits without due process by failing to afford them such a procedure.

State action denied due process. At the conclusion of the nine-years long litigation, the trial judge entered a split decision, deciding that those who were initially admitted as inpatients by a physician but whose status during their stay was changed to observation demonstrated that HHS violated their due process rights, because such action denied them their property rights in Part A coverage. The changes were invariably caused by utilization review staff applying mandatory, nationwide standards set by CMS in response to significant pressure from the Secretary of HHS, and therefore, there was enough involvement by the government to constitute a ‘state action’ in the course of deprivation of those property rights.

Physicians’ decisions not state action. However, the court entered an opposite ruling as to those patients whose physicians initially placed them on observation status and who were never admitted as inpatients; they failed to prove their due process claims, because the physicians’ decisions generally did not constitute state action. Those class members also failed to prove a separate property interest in inpatient admission because a physician’s admission decision is not governed by the sort of mandatory standards that can create a property interest under the law.

Based on the foregoing, the court ordered the Secretary of HHS to establish a procedure that will allow a modified class of Medicare Part A beneficiaries to challenge decisions by hospitals to place them on observation status.

The case is No.: 3:11-cv-01703-MPS.

Attorneys: David J. Berger (Wilson Sonsini Goodrich & Rosati) for Christina Alexander and Mary Smith. Carolyn Aiko Ikari, U.S. Attorney's Office, for Alex M. Azar II and Kathleen Sebelius.

MainStory: TopStory IPPSNews CMSNews GCNNews PartANews SNFNews ConnecticutNews

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