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How Medicare's hospital 'observation' rules can cost you

CBS News logo CBS News 11/13/2017 Walecia Konrad

a young man lying on a bed© Getty Images/iStockphoto There's no stopping Mary Higgins. The 95-year-old Wilmington, Delaware, resident lived in her own apartment and, with the help of her dear friend of 50 years, Regina Titus, mostly took care of herself. A nasty fall last July, however, landed Higgins in the hospital with two broken legs and a broken foot. 

She was treated for her injuries in a nearby hospital and then moved to a skilled nursing facility in the area for physical therapy and other rehabilitation services. In the following months, Higgins has slowly been healing and gaining mobility. She recently graduated from a wheelchair to a walker. 

However, Higgins' remarkable recovery comes with a big price tag. Because of a common and often misunderstood Medicare billing policy, she must pay the weekly nursing facility bill of $2,340 out of her own pocket, according to Titus, who has power of attorney for Higgins. "She is up to about $50,000 now," said Titus. "I'm getting so worried about Mary's funds."

What's going on? Although Medicare doesn't cover general custodial nursing home care -- such as help with daily living, administering medicine, etc. -- it does pay for prescribed follow-up treatment in a skilled nursing facility with specialized care. To qualify for this benefit, though, Medicare patients must have previously stayed in a hospital for three days, not counting the day of discharge. 

Because Higgins had been in the hospital five days, she and Titus figured everything was all set.  

Except for one big problem: Higgins was admitted to the hospital under "observation" status. For Medicare billing purposes, that means she was considered an outpatient. As a result, she didn't have three inpatient days in the hospital and thus didn't qualify for follow-up care in a skilled nursing facility. 

That's despite the fact that she received the same tests, treatments medications and food that she would have gotten if she had been an inpatient. "The main thing is this word observation," said Titus. "It doesn't mean what you think it means."

Higgins' case is far from unusual. Between 2013 and 2014, outpatient stays increased by 8.1 percent, according to a report by the Office of Inspector General. And research from the AARP Public Policy Institute found that two-thirds of hospitalized patients who needed skilled nursing follow-up care paid a significant portion of those costs themselves because they didn't meet the three-day inpatient requirement.

"We get calls on this every day," said Toby Edelman, senior policy attorney with the Center for Medicare Advocacy. "In one of our cases, the person was there for 39 days. How can you be an outpatient for 39 days?" She explained that hospitals often classify patients with the observation or outpatient status to avoid aggressive Medicare audits and high readmission penalties.

Getting caught in this billing trap aren't just patients who need skilled nursing care. People who are discharged back to their homes can also pay more.

Most hospital stays are covered by Medicare Part A, which, after a deductible, covers all costs. But this applies only to inpatients. Outpatient (or observation status) care is covered by Medicare Part B, which doesn't have a deductible but does charge a 20 percent co-pay for hospital costs. 

Part B also doesn't cover medicines administered at the hospital. For outpatients with extensive hospital stays and treatment, the co-pays and medicine costs can add up quickly -- and those bills can often come a surprise.

What you can do

Pay attention to the vocabulary. In the language of Medicare billing, common terms can have a very different meaning. Most seniors figure observation means the hospital staff is running some tests and keeping an eye on them. Outpatient, they figure, means people who don't stay overnight.

When it comes to Medicare billing, however, be clear that observation and outpatient are designations the hospital admissions staff assigns to you and often have nothing to do with the treatment you receive or the length of your hospital stay.

Ask about your status while you're in the hospital. A new rule passed in March requires hospitals to notify patients that they are on observation within 36 hours of being admitted. But that's too long to wait to find out you're not an inpatient if you're going to need follow-up care. Make sure you or whoever is assisting you in the hospital finds out what your admission status is. If it's observation, ask if it can be changed. 

This isn't easy to do. You may need to enlist the help of your general practitioner or family doctor. He or she knows your medical background and can help convince the hospital doctors that you need inpatient coverage because you may require follow-up care.

Keep an eye on the current class action. Unfortunately, Medicare has no appeals process for inpatient and outpatient status. It's almost impossible to get the designation changed after you leave the hospital. So the Center for Medicare Advocacy and other groups have been pursuing a nationwide class action that would establish a way to appeal.

Last July a federal judge in Connecticut certified the class in the lawsuit as all Medicare recipients who have been hospitalized and received observation services as outpatients since Jan. 1, 2009. This may eventually open the door for patients like Mary Higgins to file an appeal. "For now, I just hope she continues to improve and gets better before her money runs out," said Titus. "We just don't know what the future holds."  

For more information on observation status and what to do if you've been affected by it, check out the Center for Medicare Advocacy's self-help packet

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