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Hospital Observation Stays Sock People on Medicare

Bills can soar when you're not officially admitted. Here's how to fight back.

By Bob Rosenblatt

(This article previously appeared on

Some patients 65 or older are astonished and upset when they get big hospital bills they thought were covered by Medicare. This happens because they are classified by the hospital as a patient “under observation,” rather than full admission.

They might have spent several days and nights in the hospital and received treatments and medications, yet they’re still considered to be under observation.

The number of people under observation in the Medicare program has been increasing dramatically, rising to 1.6 million in 2011, a 69 percent jump in just five years.

Hospitals are increasing “observation” status because they are coming under closer attention from auditors, as federal rules tighten to reduce unnecessary admissions and lower payments to the hospitals.

(MORE: You Got a $10,000 Hospital Bill. Now What?)

Consequently, the hospitals are fighting back by being tougher in how they classify patients. The result can be enormous, unexpected bills for you if you find yourself in observation status.

There are two observation status scenarios in which patients are hurt financially:

When You Must Pay Big Under Medicare Part B

Let’s say Joan goes to the hospital with severe chest pains, headaches and dizziness. At the ER, she is tested and evaluated; the doctors use an MRI and do an extensive set of blood tests. It’s not clear what is wrong with her, so Joan stays two nights in the hospital until the doctors figure out the problem and discharge her.

If she had been officially admitted, all her costs would have been covered by the $1,184 annual deductible for the first day of a hospital stay under Medicare.

But because she is on observation status, her treatments are considered Medicare Part B, which carries a 20 percent co-payment. That means Joan must pay 20 percent of the costs of the MRI, the blood tests and anything else the doctors have done. What’s more, her medications also have a 20 percent co-payment.

Put it all together and Joan could face a bill of several thousand dollars.

(MORE: 4 Mistakes to Avoid When Enrolling in Medicare)

When You Must Pay Big for Rehab Care

Under scenario two, George has a severe knee injury — an increasingly common medical condition for older people these days. His knee is surgically repaired, but George will need to go to a skilled nursing facility for full recovery after the operation in the hospital.

Medicare rules say you must spend three days in the hospital (officially admitted) in order to qualify for its skilled nursing facility (SNF) coverage, though. That coverage extends up to 100 days; the first 20 days are free.

George’s doctors decide, however, that the nature of his injury calls for him to be considered a patient under observation. It doesn’t matter that he spent three days and nights in a hospital bed and got treatments, meals and tests.

When he gets discharged to the rehab facility, nobody has told him about his “observation” classification. After a couple of weeks in rehab, he is discharged and slapped with a bill for many thousands of dollars.


How to Avoid This Problem

There are a few things you can do to try to prevent the hospital from putting you under observation:

  • Have an advocate go with you to the hospital who is available to talk with the doctors.
  • Ask your physician to tell you when you’re in the hospital on observation status or if you’ve been admitted. If you’re in under observation, but your doctor doesn’t think that status is justified, AARP recommends you ask him or her to call the hospital and explain the medical reasons why you should be admitted as an inpatient.
  • When you’re being discharged from the hospital, doublecheck with the billing department. That division could wind up changing your status. If you find yourself in the hospital under observation, AARP recommends you ask the hospital doctor to reconsider your case or refer it to the hospital committee that decides patient status.
  • If, after discharge, you need rehab or other kinds of continuing care but learn that Medicare won’t cover your stay in a skilled nursing facility, AARP says: Ask your doctor whether you’d qualify for similar care at home through Medicare’s home health care benefit or for Medicare-covered care in a rehabilitation hospital.

How You Can Appeal

If you find that you were considered under observation, try to file an appeal. The Center for Medicare Advocacy has produced an excellent packet to help you understand the observation problem and file an appeal. You can also call The Center to speak with someone about appealing at 860-456-7790.

If you must go to a skilled nursing facility and have to pay for it yourself because you were in the hospital under observation, you can try formally appealing Medicare’s decision, too. Here’s how:

AARP says, when you receive your quarterly Medicare Summary Notice, make a copy, highlight the facility’s charge and send it to the address provided on the notice. Include a letter saying you want to appeal Medicare’s decision of non-coverage on the basis that you should have been classified as an inpatient during your hospital stay and not placed under observation.

If this appeal is denied, you can try going to the next level up, following the instructions in your denial letter.

A Push to Reverse This Policy

AARP is trying to persuade the government to change its policy about observation status and Medicare.

“Beneficiaries should not suddenly and unexpectedly become liable for expenses resulting from inappropriate hospital billing or over-aggressive Medicare contractor activity,” AARP said in a letter to Marilyn Tavenner, the head of the Center for Medicare and Medicaid Services.

AARP is also urging the government to count time spent in a hospital toward the three-day prior stay requirement for skilled nursing facility coverage, even if the services are billed under Part B. And it wants to ensure that Medicare beneficiaries are quickly notified if there is a change in their hospital billing status.

Bob Rosenblatt is a writer and editor specializing in aging issues. His blog, Help With Aging, focuses on the finances of aging. He was a Washington correspondent for The Los Angeles Times for 26 years. Read More
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