Q.  My wife was recently in the hospital for two days, and was then transferred to a rehab facility for a three week recovery. Medicare later refused to pay the hospital and rehab bills, claiming that she spent those two days only in “observation”, and was therefore not covered. Any idea what’s going on? Can we fight this?

A. Yes. A little known fact about Medicare is that it generally will not cover hospital bills unless a patient is formally admitted to the hospital as an inpatient. Increasingly, patients are kept in “observation status”, sometimes even for days. This increasing use of observation status is apparently the result of pressure from Medicare auditors. If they determine that a patient should not have been formally admitted, they may deny a hospital’s claim for reimbursement and/or reverse payments previously made. So, hospitals are caught in this squeeze between patient care and the Medicare auditors.

Unfortunately, if your wife were held in observation status, then neither her hospital expenses, nor her rehab expenses, would be covered by Medicare.  That is probably where the problem lies. While she can appeal the Medicare decision, it is probably an uphill fight at this point.

For similar reasons, her stay in the rehab facility is not covered. In order for her to have Medicare coverage in a rehab or nursing facility, she must have been previously admitted into a hospital as an inpatient for at least three (3) consecutive days before transfer to the rehab or nursing facility. This often comes as a big surprise to seniors who expect their follow up nursing or rehab care to be covered by Medicare, at least for the first few weeks.

Most patients seeking care in a hospital have no idea that they may have been coded as an outpatient during their entire hospital stay, and certainly no idea about the lack of Medicare coverage as a result. For this reason, last year Congress passed the “Notice of Observation Treatment and Implication for Care Eligibility Act” (“NOTICE Act”), requiring that hospitals give Medicare patients, who have been  held more than 24 hours in observation status, formal Notice of their status and the corresponding Medicare lack of coverage implications. The Act, and its corresponding requirement of Notice, is expected to take effect in the Fall of this year.

Meanwhile, the California legislature has just overwhelmingly approved a similar Bill (SB 1076; Hernandez).  As of this writing it awaits the Governor’s approval, which is expected. If Governor Brown signs the Bill, it will become law in 2017 and will then apply to all persons receiving hospital treatment, not just those on Medicare, and will require notice of observation status “as soon as practicable”.

Meanwhile, if the situation should reoccur for your wife, I suggest seeking her doctors’ help while in the hospital by asking that she be formally admitted as an inpatient, on the ground that her care in the hospital is “medically necessary” and requires an “inpatient hospital level of care”. It may be helpful to explain to her doctors the Medicare coverage implications of remaining in observation status.

Update:  On September 27, 2016, Governor Brown signed the bill into law.

References:  Federal Notice Act; California SB 1076; In depth comments by Center for Medicare Advocacy on “Outpatient Observation Status”; CMS Delays Implementation of Notice Act to Fall 2016.