The Center for Medicare Advocacy has produced this Self-Help Packet to help you understand Observation Status and options for beneficiaries who are placed on Observation Status.
Medicare is the national health insurance program to which many disabled individuals and most older people are entitled under the Social Security Act. All too often, Medicare claims are erroneously denied. It is your right to appeal an unfair denial; we urge you to do so.
However, the situation for Observation Status appeals is unique. Medicare currently has no official method to appeal Observation Status. This may be illegal. As of August 2017, the Center is pursuing a class action lawsuit on behalf of Medicare beneficiaries to establish a way to appeal Observation Status. Sign up for the Center’s Alerts and follow us on social media for important updates to the case. In the meantime, if you are placed on Observation Status, use this Packet to understand and review your options.
If you have any questions, contact the Center for Medicare Advocacy at (860) 456-7790.
We’ve organized this packet so that it provides you with the information needed to understand observation status and to attempt to rectify the problems created by it.
You are a Medicare beneficiary hospitalized for three or more days. At the hospital, you signed paperwork, slept in a hospital bed, underwent many tests, and saw various physician specialists. At some point during the hospitalization, you were told that you were not admitted as an inpatient but were, instead, an outpatient receiving “observation services.” (“Observation services” is the term Medicare uses for “observation status.”) You should have received the Medicare Outpatient Observation Notice(MOON) discussed below and it should have been explained to you. The MOON informs you that Medicare will not pay for care in a skilled nursing facility (nursing home) if you need that type of care after you are discharged from the hospital.
Observation status is not new. However, its use by hospitals to avoid losing money, financial penalties, and accusations of Medicare fraud is growing. Observation status seriously affects Medicare beneficiaries’ access to care and finances. Attempts have been made to remedy the problem legislatively. For instance, bills have been introduced in Congress to eliminate the problem. In addition, the Center for Medicare Advocacy (Center) filed a nationwide class action lawsuit, now known as Alexander v. Price (formerly Barrows v. Burwell and Bagnall v. Sebelius), that is currently pending and seeks to establish a right for Medicare patients to appeal placement on observation status. While we wait for action on the legislation and the lawsuit, individual beneficiaries continue to be negatively affected by observation status.
This Packet includes information about observation status and outlines steps you might take if you are considered a hospital outpatient in observation status. For more information about observation status, visit the Center’s webpage at: www.medicareadvocacy.org. The process of challenging observation status is complicated and confusing. If you have questions, call the Center for Medicare Advocacy at (860) 456-7790.
- Inpatient Admission
Medicare Part A pays for hospital inpatient care.In traditional Medicare, there is an initial deductible and, if you are hospitalized for more than 60 days, there are daily copayments.While you are hospitalized as an inpatient, Medicare Part B pays for the care provided by physicians, usually covering 80% of the Medicare-approved cost.Medigap policies or other supplemental insurance usually pays for the hospital deductible, copayments, and Part B cost-sharing.
Medicare Part A will pay for hospital care only if a physician orders inpatient care. To assist physicians with determining whether a patient/beneficiary should be admitted to the hospital as an inpatient, the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers Medicare, published the following guidance in its policy manuals:
The physician or other practitioner responsible for a patient’s care at the hospital is also responsible for deciding whether the patient should be admitted as an inpatient. Physicians should use the expectation of the patient to require hospital care that spans at least two midnights period as a benchmark, i.e., they should order admission for patients who are expected to require a hospital stay that crosses two midnights and the medical record supports that reasonable expectation. However, the decision to admit a patient is a complex medical judgment which can be made only after the physician has considered a number of factors, including the patient’s medical history and current medical needs, the types of facilities available to inpatients and to outpatients, the hospital’s by-laws and admissions policies, and the relative appropriateness of treatment in each setting.
This language reflects new regulations that created a “two-midnight rule” – the direction to physicians to order inpatient admission for patients whom they expect will be hospitalized for at least two midnights. Note that the two-midnight rule did not change the requirement that patients be hospitalized as an inpatient for three days, not including the day of discharge, in order for Medicare to cover post-hospital skilled nursing facility care.
If a hospital participates in the Medicare program, all of its physician inpatient admission orders must be reviewed by the hospital’s Utilization Review Committee (URC). The URC has the power to overturn any admitting physician’s admission order and to reassign patients to observation status, with the physician’s consent.
- Observation Status
Observation status is defined by CMS in its policy manuals as:
…a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. Observation status is commonly assigned to patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge. Observation services are covered only when provided by the order of a physician or other individual authorized by State licensure law and hospital staff bylaws to admit patients to the hospital or to order outpatient tests. In the majority of cases, the decision whether to discharge a patient from the hospital following resolution of the reason for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours. In only rare and exceptional cases do reasonable and necessary outpatient observation services span more than 48 hours.
However, despite this language, there are actually no services that are specifically observation services. CMS in fact tells physicians that they can order whatever care and services their patients need, whether they are inpatients or outpatients. In the Center for Medicare Advocacy’s view, observation status is actually a Medicare billing issue (the question is whether a hospital will bill Medicare Part A or Medicare Part B for a patient’s care), not a question of medical necessity or appropriateness of care.
When a Medicare patient is placed on observation status, despite the fact that the patient may be physically in the hospital for many days, for Medicare billing purposes the stay is considered outpatient care. The hospital bills Medicare Part B for each service provided (such as lab tests, intravenous medications, MRIs, EKGs).
If you are put on observation status, you will be responsible for the hospital Part B copayments and for the cost of any self-administered (prescription or over-the-counter) medications you receive while hospitalized. On the other hand, you will not be responsible for the Part A inpatient deductible. If you do not have Part B, the hospital services will not be covered.
- The Heart of the Problem
When Medicare beneficiaries are put on observation status, Medicare Part B generally covers most of their care. The Part B cost-sharing is usually paid for by a Medigap policy or some other form of supplemental health insurance. However, if the beneficiary has opted out of Medicare Part B entirely, the hospitalization under observation could be very expensive because nothing will be covered by Medicare.
As a general rule, most beneficiaries are not burdened with the financial cost of the hospital stay, except for medications, but by the care they receive after the hospitalization in a nursing home.
Medicare Part A will pay for care in a skilled nursing facility (nursing home) only if the care follows a Medicare Part A covered three day inpatient stay in a hospital. For purposes of measuring days, the Medicare program uses calendar days, not 24-hour periods. For example, if a person is admitted to the hospital at 11:50 p.m., Medicare will count that day as the first day of admission, even though the person was “admitted” for only ten minutes. Also, the day of discharge is not counted toward the three-day period. The shorthand way of describing the three-day qualifying hospital stay requirement is “three midnights.”
Any “midnight” on observation status does not count towards the three day qualifying hospital stay. Thus, if the patient requires care in a nursing home after a hospital stay on observation status, even if that stay was for three or more days, Medicare will not pay for it. Of course nursing home care is very expensive.
What You Can Do
Step One: Find Out Your Admission Status
Understandably, patients think that if they are kept in the hospital and spend the night in a hospital room, they are inpatients. Now that hospitals are increasingly using observation status, however, you cannot make this assumption. So when you are hospitalized, find out whether you have been admitted as an inpatient or on observation status.
Since March 8, 2017, hospitals have been required to give patients the Medicare Outpatient Observation Notice (MOON) within 36 hours if the patients are in observation status for 24 hours. Hospitals must also orally explain observation status and its financial consequences for patients. The MOON cannot be appealed to Medicare.
Step Two: Try to Get Your Status Changed
If you find out that you are on observation status and are concerned about Part B cost-sharing, the cost of self-administered medications, and/or Medicare payment for care in a skilled nursing facility after you leave the hospital, try to get the status changed while you are at the hospital. This will be difficult to do. Your best chance of success is having your community physician (regular doctor) talk to your treating physician at the hospital. Ask your community doctor to intervene on your behalf. He or she knows your medical history and speaks the same medical jargon as the hospital physician. Your community doctor might be able to convince the hospital physician that your status at the hospital should be changed from observation to inpatient.
You can try to use Medicare’s “two-midnight rule” to show the doctor or hospital that inpatient admission is appropriate. The two-midnight rule is supposed to be a way for doctors and hospitals to decide whether a patient should be admitted as an inpatient or not. Medicare states that if the doctor reasonably expects that a patient requires hospital care that will cross two midnights, she can admit the patient as an inpatient and Medicare should pay the claim under Part A. The documentation in the medical record should support the expectation of the physician. Remember that any inpatient stay is only counted from the time of the inpatient order. Time already spent in observation is not counted toward the inpatient stay even if inpatient admission is eventually ordered. So it’s important to address this question early in the hospitalization. Also remember that there is no prohibition against changing a patient’s status from observation to inpatient if, for example, his medical condition worsens.
Step Three: Prepare For Discharge
In the event that you are not successful with changing your hospital observation status, but need follow up medical care, you have some decisions to make. If you can safely return home, ask your hospital or community physician to order home health care.As long as you are “homebound,” (leaving home requires considerable effort (“taxing” effort, in the language of Medicare) and occurs infrequently) and you require skilled care (skilled nursing or physical or speech therapy), Medicare should pay for this care.Have this care set up for you by the hospital before you leave.You can find out more about home health care on the Center’s website at www.medicareadvocacy.org.
If you need more medical care and therapy than you can get at home, ask your physician about going to an inpatient rehabilitation hospital (IRH, also known as an inpatient rehabilitation facility, IRF).This type of hospital does not require a three-day inpatient hospital stay.Unfortunately, not every community has an IRH and the more rigorous therapy provided by an IRH may be more intense that you can handle.But if you can participate in the level of therapy that an IRH offers, you will not need to worry about observation status and, a bonus, you may get better more quickly (and go home) than if you go to a SNF.
Step Four: Understand that Medicare Will Not Pay for Nursing Home Care After a Hospitalization on Observation Status
If you cannot safely return home, you can’t go to an IRH, and the hospital physician has ordered care for you in a nursing home, check to see if the nursing home participates in the Medicare program, as most do.However, since you were not admitted to the hospital as an inpatient, Medicare will most likely not pay for this necessary care without a significant effort on your part. Even with significant effort it is very difficult to get Medicare coverage in these circumstances.
There is currently no official way to appeal observation status. Medicare claims that “only the doctor” at the hospital can decide whether you should have been admitted as an inpatient or placed on observation status and that a beneficiary cannot appeal this issue to Medicare. However, we outline some steps below that you can try. Once in a while, people succeed, though it’s important to understand that is very rare.
You might be able to appeal the denial of coverage for your nursing home care as long as you spent at least three midnights in the hospital (not in the emergency room).Unfortunately, this appeal process can take a year or longer to resolve and, if you can manage to get a case into the appeal system, winning the case is difficult. Also, filing an appeal does not prevent the nursing home from requiring you to pay for your care pending the outcome of the appeal. Remember that an appeal is worth trying only if you receive the level of care that Medicare covers in the skilled nursing facility – five days a week of therapy or seven days a week of skilled nursing or a combination of therapy and nursing equaling seven days a week. If you are not in a Part A stay, the nursing home can bill Medicare Part B for your therapy services.
Patients who receive five days of therapy per week in the nursing home have a better chance of winning their appeals than patients who are relying on claims of skilled nursing care, since most care is provided by unlicensed aides.
Step Five: Start the Nursing Home Appeal
If you decide to get care in a nursing home and it will be provided on a daily basis (five days a week of therapy or seven days a week of skilled nursing), let the nursing home know that you are going to appeal the denial of Medicare coverage. Medicare will only pay for a nursing home stay if it includes daily skilled care. Skilled care is care that is so inherently complex that it must be done by a skilled professional. The skilled nursing and/or therapy can be to improve or maintain your condition. Medicare will not pay for care in a nursing home when it is only custodial. Examples of custodial care include the administration of oral medications or assisting a patient with bathing or toileting. For more information about Medicare coverage of skilled nursing facility care, and how to appeal a denial visit our website at www.medicareadvoacy.org.
To start the appeal, ask the nursing home to submit a “demand bill” to Medicare for your entire stay. You can make this request after you leave the nursing home. However, note that nursing homes must bill Medicare within one year of the time the care began, so do not wait too long to make this request. In response to the nursing home’s demand bill, CMS will issue a denial of payment from which you can appeal. You can also ask the nursing home to give you a Notice of Exclusion from Medicare Benefits – Skilled Nursing Facility (NEMB-SNF), which is a form for so-called “technical denials” of coverage.
A technical denial means that you need the care the nursing home provides but that you do not qualify for Medicare coverage for technical reasons, such as not having a three-day inpatient hospital stay (the first box) or having used all 100 days in a benefit period. Check Option 1 so that the nursing home will submit the claim to Medicare for a decision about coverage.
Step Six: Request a Redetermination for the Nursing Home Denial
You will receive a Medicare Summary Notice (MSN) in the mail which will reflect the nursing home’s bill to Medicare. The MSN will indicate that Medicare has denied payment for your care in the nursing home because you did not have a three day qualifying hospital stay. Read the last page of the MSN. It will tell you that you have 120 days to appeal the denial of coverage. Follow the instructions on how to and file an appeal. Circle the denial of payment for your nursing home care. Write that you are appealing because you did receive three days of hospital inpatient care. If you have a copy of your hospital discharge summary reflecting that you were hospitalized for three days, send a copy of it with your MSN requesting an appeal.
If you have submitted the NEMB-SNF, you will receive a response that will tell you how to appeal the decision.
Step Seven: Gather Hospital Records
Write to the hospital and ask for a copy of your medical record. Ask that it send you the following documents: emergency room records; admission records; physician orders; consultation reports; lab reports; diagnostic imaging; medical records; nursing narratives; discharge summary; and social service documentation. The hospital may charge you for copying and sending the documents, although charges for records in support of Medicare claims are not allowed in some states, including Connecticut and Massachusetts. When you get the records, give a copy of them to your community physician. Ask your physician to review the records and to write a statement explaining that the care you received while hospitalized was inpatient hospital care.
Check the records carefully for any inpatient orders. If you were actually admitted as an inpatient for a period of time that crossed three midnights, that is the strongest type of appeal you can make. Without such an order, it will be exceedingly difficult to win your appeal. You can try to argue that the care you received was inpatient hospital care, but Medicare’s position is that without an inpatient order, there can be no inpatient coverage under Part A.
Step Eight: Gather Nursing Home Records
Write to the nursing home and ask for a copy of your medical record. Ask for the following documents: MDS forms; physician orders; physician progress notes; medication records; therapy records (physical, occupational, and speech), nursing narrative notes; and physician certifications. As with the hospital medical records, the nursing home may charge you for copying and sending these documents. Also write to the nursing home physician and ask that he or she write a letter for you explaining that while you were a patient at the nursing home, you required and received a skilled nursing facility level of care.
Step Nine: Request a Reconsideration for the Nursing Home Denial
You should receive a “Redetermination” decision in the mail for your nursing home care. It will be “unfavorable.” You will have 180 days to appeal. Follow the directions on the form for requesting a “Reconsideration.” On the nursing home appeal request, write that you are appealing because you were hospitalized and received an inpatient level of care for three consecutive days prior to receiving care at the skilled nursing facility. If you have letters from physicians in support of your case, send copies with your request.
Step Ten: Request an ALJ Hearing
You should receive a “Reconsideration” decision in the mail for your nursing home care. Again this will be a denial. You will have 60 days to appeal. Follow the directions on the form for requesting an administrative law judge (ALJ) hearing. ALJ appeals are often successful.
Step Eleven: Respond to the Notice of Hearing
You will receive a written notice of hearing in the mail. Respond to the notice as directed. Note: Unrepresented beneficiaries have a right to hearing by video teleconference, which is generally a more effective method for making a case than a telephone hearing. Make sure that the notice states that a video teleconference is scheduled. If it does not, contact the ALJ and request that the hearing be rescheduled as a video teleconference. In addition, ask the judge to send you a copy of the exhibit list and hearing file.
Step Twelve: Prepare for the Hearing
When you receive the hearing file, make sure that it includes all the medical records that you have obtained from the hospital and the skilled nursing facility. If it does not, send the missing records to the ALJ. Be sure and send a copy of the letters of support you received from your physicians. Contact the nursing home and ask if a therapist or nurse will testify at the hearing on your behalf.
Step Thirteen: Argue your Case
Attend the hearing. Make sure the judge has the additional records that you sent in. If you can, have someone from the nursing home testify that the care you received while there was skilled care and that it was performed on a daily basis. Explain to the judge that your care at the skilled nursing facility was not covered by Medicare because the hospital erroneously billed your inpatient hospital level of care to Medicare Part B rather than Part A. Ask the judge to find that your hospital care was an inpatient level of care and that you’ve met the three day qualifying hospital stay requirement for skilled nursing facility care. Then ask the judge to find that your skilled nursing facility care was medically reasonable and necessary and coverable by Medicare Part A.
Step Fourteen: If You Lose the Appeal
You will receive the Administrative Law Judge’s decision in the mail. If it is favorable, send a copy to the nursing home and ask that it reimburse you if you previously paid for any care or ask that it stop any collection efforts started against you. If it is unfavorable, follow the directions on the hearing decision for filing a Medicare Appeals Council request.
Trying to fix placement on observation status is very difficult and, in the rare cases where people succeed, it generally takes a long time. Should you have questions during the process, you can call the Center for Medicare Advocacy at (860) 456-7790. You can also report your difficulties with observation status to your Senators and Representative in Congress, as it’s important that they understand the hardships people are facing. Finally, please continue to monitor our website www.medicareadvocacy.org for updates on proposed changes to the law and on our lawsuit.
 Medicare Benefit Policy Manual, Publ. 100-2, Ch. 1, § 10, which can be found at: http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Internet-Only-Manuals-IOMs.html.
 42 C.F.R. §412,3(d)(1).
 Medicare Benefits Policy Manual, Pub. 100-02, Chapter 6, § 20.6, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Internet-Only-Manuals-IOMs.html.
 The Office of the Inspector General (OIG) of the Department of Health and Human Services has stated that hospitals can discount or waive charges for an outpatient’s self-administered drugs. Patients who are charged for such drugs should point the hospital to this statement. https://oig.hhs.gov/compliance/alerts/guidance/policy-10302015.pdf Also, patients who have a Part D plan may request that the plan pay for the drugs as an out-of-network pharmacy provider. See Center, “Submitting Claims to Part D for Prescription Drugs Administered in the Hospital During an Observation Status Stay” (CMA Alert, May 1, 2014), https://www.medicareadvocacy.org/submitting-claims-to-part-d-for-prescription-drugs-administered-in-the-hospital-during-an-observation-status-stay/
 CMS-10611, available at https://www.cms.gov/Regulations-and-Guidance/Legislation/PaperworkReductionActof1995/PRA-Listing-Items/CMS-10611.html. The Notice of Observation Treatment and Implications for Care Eligibility (NOTICE) Act requires hospitals to inform patients, orally and in writing, that they are in observation status, not inpatients, and the consequences of that status. Pub. L. 114-42, U.S.C. §1395cc(a)(1)(Y).
 A summary of the two-midnight rule put out by Medicare can be found at: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-07-01-2.html
 Even patients who are expected to require less than two midnights of hospital care can be admitted as inpatients on a case-by-case basis.
 As noted in the Introduction, this may be illegal and the Center is currently pursuing a class action case to establish a method of appeal.
 CMS Form 20014, https://www.cms.gov/Medicare/Medicare-General-Information/BNI/Downloads/CMS20014.pdf.
Medicare Coverage of Skilled Nursing Facility Care
42 CFR 409.30 – 409.36
All the links below can be found at:
Pertinent Federal Regulations for Medicare Appeals
42 CFR §§ 405.900 – 405.1140
All the links below can be found at:
Initial Determinations (§§ 405.920 – 405.928)
Redeterminations (§§ 405.940 – 405.958)
Reconsideration (§§ 405.960 – 405.978)
Reopenings (§§ 405.980 – 405.986)
Expedited Access to Judicial Review (§ 405.990)
ALJ Hearings (§§ 405.1000 – 405.1058)
Applicability of Medicare Coverage Policies (§§ 405.1060 – 405.1063)
Medicare Appeals Council Review (§§ 405.1100 – 405.1140)