Some Hospitals Are Admitting Patients as “Outpatients” to Game the Medicare System, Putting Consumers at Big Financial Risk

If you suffer a broken hip, heart attack, stroke, or other serious health problem, you may need rehabilitation services in a skilled nursing facility (SNF) after your hospital treatment. Original Medicare will pay the full price of your first 20 days in an SNF, which should cover the several-thousand-dollar cost of a typical qualifying two-week SNF stay—but only if you were first treated as a hospital “inpatient” for at least three consecutive midnights.

Unfortunately, hospitals are treating more and more such patients as “outpatients under observation” and thus do not meet the inpatient requirement—so Medicare doesn’t cover rehabilitative care in an SNF in those cases. Medigap insurance doesn’t kick in, either, if Medicare doesn’t cover the service to begin with.

This is a common pitfall: More than 630,000 Medicare beneficiaries spent more than three days in a hospital under outpatient observation status in 2014, according to the Inspector General of the U.S. Department of Health and Human Services.

Absurdly, you can be an outpatient inside a hospital for a week or more, getting all the same treatment from doctors and nurses, meds, hospital bed, wristband, and bland food as an inpatient. But you may never realize the repercussions of being an outpatient-inpatient, or even care about that, until it’s too late. That makes this “a surprise medical bill on steroids,” says Congressman Joe Courtney (D, Conn.).

Such ignorance is not bliss. One senior who suffered several broken bones from a fall in her Butterfield, Minn., home spent four days in a hospital under observation status, was discharged to an SNF, and then got a bill from the SNF for $10,551, according to Toby Edelman, a senior policy attorney at the nonprofit Center for Medicare Advocacy (CMA).

Hospitals are under the gun from Medicare: If an elderly inpatient is discharged prematurely and has to come back within 30 days, Medicare won’t pay for that second visit because the need to return suggests substandard care. But if you’re not classified as an “inpatient” in the first place, the hospital can’t get dinged for the readmission and will get paid for that second round of care because—wink, wink, nudge, nudge—you were never officially admitted, so you were never really discharged and the return trip wasn’t really a readmission. Thus, the hospital gets its money and no penalty applies.

The American Hospital Association says Medicare policy now says stays of more than two midnights are appropriate for inpatient status. But Edelman counters, “You are not automatically inpatient after two midnights.”

Medicare regulations now require that patients in observation for more than 24 hours receive written and oral notice of their outpatient status and their right to ask questions. But the notice is essentially useless because it gives you no right to challenge or do anything about your status, says Edelman, whose group is pressing a class action lawsuit to win that right for patients. A ruling is expected sometime this year.

Meanwhile, CMA and more than 30 other consumer and healthcare groups are pushing Congress to change the law and pressing Medicare and Medicaid to fix the problem. In the meantime, McKenzie says a patient advocate might be able to help—but a family member must call one in—ideally—while the victim is still in the emergency room or in a hospital bed under observation.

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