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From Health Law Daily, January 23, 2015

Observation status placement, medical judgment or Medicare criteria?

By Anthony H. Nguyen, J.D.

Medicare beneficiaries sued HHS in a putative class action because they were placed into “observation status” by their hospitals rather than being admitted as inpatients. Inpatients are covered by Medicare Part A, while patients in observation status are covered by Medicare Part B; the Medicare beneficiaries alleged that the placement into observation status allegedly caused these beneficiaries to pay more in copays and in post-hospitalization medical care than they would have had they formally been admitted as inpatients to their hospitals. The Second Circuit affirmed the dismissal of the Medicare Act claims, but vacated the dismissal of the Due Process Clause claims, remanding the case for limited discovery as to whether the Medicare beneficiaries had a property interest in their hospital admission status (Barrows v. Burwell, January 22, 2015, Cabranes, J., Walker, J., Winter, R.).

Background. The Medicare beneficiaries’ initial complaint contained nine causes of action including violations of the Medicare Act, the Administrative Procedure Act, the Freedom of Information Act, and the Due Process Clause. The beneficiaries sought a permanent injunction: (1) prohibiting HHS from allowing Medicare beneficiaries to be placed on observation status; (2) directing HHS to provide written notification to any Medicare beneficiary who is placed on observation status of the nature of the action and the consequences for coverage and the right to review the action; and (3) directing HHS to establish a procedure for administrative review of a decision to place a beneficiary on observation status.

The district court dismissed the complaint in its entirety. The Medicare beneficiaries appealed on two of the claims, namely, whether HHS’ failure to provide expedited written notice and administrative review of Medicare beneficiaries' placement into observation status violated the Medicare Act and the Due Process Clause.

Medicare Act. In affirming the lower court’s dismissal of the Medicare Act claims, the Second Circuit held that (1) the Medicare beneficiaries lacked standing to challenge the adequacy of the notice they received; and (2) nothing in the Medicare Act entitled the Medicare beneficiaries to the process changes sought, i.e., expedited notice of their placement into observation status, and an expedited hearing to challenge this placement.

The Medicare Act only requires that beneficiaries receive written notice of the receipt of a claim for benefits, which must state whether the beneficiary is entitled to Medicare coverage, and whether such coverage will be provided under Medicare Part A or Part B.

The Second Circuit noted that the Medicare beneficiaries’ sole argument on the merits was that 42 U.S.C. § 1395ff(b)(1)(F) entitled a beneficiary who was placed on observation status to expedited notice or administrative review. The provision, however, as found by the Second Circuit, only applied when a hospital sought “to terminate services” or “to discharge the individual from the provider of services.” The court held that it was clear from both the statute and the circuit’s precedent that a beneficiary who is in observation status cannot be considered to be formally admitted to a hospital. Consequently, a beneficiary would not have experienced a termination of services or a discharge and would not be entitled to an expedited notice or administrative review as described in 42 U.S.C. § 1395ff(b)(1)(F).

Due Process claim. The Second Circuit held the district court erroneously relied on the HHS’ assertion that the decision to place a patient into “observation” or “inpatient” status as a complex medical judgment best left to the discretion of the doctor, rather than accepting Plaintiffs' assertion that, in practice, the decision is based on fixed Medicare criteria, and not left to the discretion of doctors.

The Second Circuit noted that the lower court’s acceptance of HHS’ assertion led to the lower court’s conclusion that the “property interest” prong of Due Process was not met and was the sole ground for dismissing the Due Process claim. The Second Circuit remanded the case for limited discovery on the issue of whether the Medicare beneficiaries possessed a property interest in being admitted to their hospitals as “inpatient.” The property interest relies upon a factual determination, specifically, whether the decision to admit the Medicare beneficiaries to hospitals was a “complex medical judgment” left to the treating physicians’ discretion, or whether, in practice, the decision was made by applying fixed criteria set by the federal government.

The case is No. 13-4179-cv.

Attorneys: Alice Bers (Center for Medicare Advocacy, Inc.) for Lee Barrows. Adam C. Jed, U.S. Department of Justice, for Sylvia Mathews Burwell.

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