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A Nationwide Class of Plaintiffs Wins Right to Appeal Hospital Observation Status Classifications

Observation Status classifications lead to financially devastating bills when a patient later needs skilled nursing facility care.  

In a decision issued Tuesday, a federal appeals court ruled that a class of Medicare patients is entitled to an appeal process at Centers for Medicare and Medicaid Services (CMS) when their hospital stay classifications are changed from “inpatient” to “observation status.” Being classified under “observation status” can lead to devastating financial consequences if a person later needs skilled nursing care, because Medicare will not cover such care unless a person was first admitted as an inpatient for at least three days.  

Martha Leyanna of Delaware, discussed in the court’s decision, spent more than three days in the hospital, receiving identical care to that received by patients classified as inpatients, but because her care had been designated as “outpatient” observation services, Ms. Leyanna, who has since passed away, spent her entire savings of $10,000 for nursing home care.  

Such classifications can force patients who cannot afford to pay for nursing home care to forgo required health care altogether because they cannot afford it without Medicare coverage. Prior to this decision, beneficiaries whose status was changed from inpatient to observation had no opportunity to appeal to Medicare. The Court of Appeals for the Second Circuit upheld the trial court decision that had found that this lack of appeals procedures violates the Due Process Clause of the constitution. The class is represented by the Center for Medicare Advocacy, Justice in Aging, and pro bono firm Wilson Sonsini Goodrich and Rosati.  

Alice Bers, Litigation Director of the Center for Medicare Advocacy, said, “The court recognized that this case is about fundamental fairness. Many older adults and people with disabilities will now have the opportunity to appeal to Medicare for inpatient coverage of their hospital and nursing home services – coverage that can make the difference between getting critical health care and going without.”  

The Appellate Court noted in its decision that Medicare strictly regulates those patient status determinations and places strong pressure on hospitals to follow its rules. Noting that “the decision to reclassify a hospital patient from an inpatient to one receiving observation services may have significant and detrimental impacts on [the patient’s] financial, psychological, and physical well-being,”  

Carol Wong, Senior Staff Attorney with Justice in Aging said, “In addition to the substantial financial costs borne by patients, the appellate court recognized the emotional and psychological costs that an outright denial of inpatient coverage without recourse has. Now, patients will no longer be forced to forgo medically necessary care simply because of a classification error.”  

Luke Liss, Senior Litigation Counsel and Pro Bono Counsel of Wilson Sonsini said, “We are thankful to the district court and the court of appeals for their time and careful attention in this matter. We are grateful for the opportunity to advocate in this case alongside our co-counsel for patients across the nation in need of critical care. Given the stakes for often very vulnerable patients who do not have time on their side, we hope that the government will accept this ruling and that a right to appeal for inpatient coverage will be implemented as soon as possible. In any event, our hearts remain with those patients who have been deprived of such opportunity, as well as the doctors and staff that have courageously advocated for them for many years. Fundamentally, this case is about fairness and care for older adults nationwide. We will continue to advocate until the right to an appeal for Medicare coverage is implemented.”   

The class is estimated to contain hundreds of thousands of beneficiaries with claims dating as far back as 2009.

For more information please read the Center for Medicare Advocacy’s frequently asked questions about the case.

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