Medicare beneficiaries who received “observation services as an outpatient” may be eligible to take part in a class-action lawsuit

Researcher & Writer
November 10, 2017

A U.S. district court has certified a class in the lawsuit Alexander vs. Price, brought by Medicare beneficiaries who were placed in observation status versus inpatient status while they were hospitalized and are seeking the right to have an administrative review of that decision.  A review and possible change of that status for each patient could have significant financial consequences due to how Medicare covers beneficiaries

This clears the way to proceed with a class action lawsuit against the Department of Health and Human Services (HHS) and Centers for Medicare & Medicaid Services (CMS).  Class members will probably been in the hundreds of thousands, according to the Center for Medicare Advocacy, which has spearheaded the litigation.

Because patients who are not admitted are not eligible for Medicare Part A or for coverage of any post-hospitalization stay at a nursing home, the lawsuit claims that being put into observation status cost the beneficiaries thousands of dollars.  This is because observation services are billed as outpatient services under Medicare Part B, with copays and separate fees for each service, including prescription drugs.

Hospital services, which would cover the “inpatient” status, are covered more comprehensively under Medicare Part A.   As a result, a few days of care designated as observation services can add up to a bill that may be unaffordable for a patient or their family.  Faced with that decision, it may have an impact whereby patients refuse to seek medical care altogether, jeopardizing their health to a greater degree and possibly putting their lives in danger.

How “observation services” works in hospitals

On the surface, being admitted to a hospital as an inpatient versus being admitted for observation does not seem all that significant.  But defining that hospital stay can make a huge difference in who pays the bill.

If someone with Medicare coverage has an medical issue and seeks treatment at a hospital emergency room, after they are treated for those acute symptoms, a doctor may choose to want to monitor the patient closely for a couple of days.  Not wanting to alarm the patient, they may choose to let the patient know that the stay is strictly “for observation purposes.”

That may calm the patient, but staying in a regular hospital bed for a day or two, followed by another stay in a special unit for observation services could mean that when a patient is ready to check out, they will discover that Medicare Part A will not cover the stay because they were never formally admitted to the hospital.  All ser­vices received will be billed separately un­der Part B, as if they had been delivered in a doctor’s office. Prescription drugs wouldn’t be covered and the hospital wouldn’t let the person bring in prescription medications from home. The hospital bill could run to several hundred dollars or more.

The scenario can get even worse if a person does not go directly home from the hospital, but is instead transferred to a skilled nursing facility for more monitoring and recovery.  Because the patient was never an admitted hospital patient, they would not beet the separate three-day hospital stay that is required for Medicare coverage of skilled nursing facilities.  That could easily hike up the patient’s bill by thousands of dollars.

The outcome of the Federal Court ruling

The issue in Alexander vs. Price was whether “Medicare beneficiaries have a right to administrative review of the decision to treat their hospital stays as ‘observation’ rather than ‘inpatient’ …” the judge overseeing the case ruled that a class-action law­suit to resolve that issue could proceed.

The class certified under the Federal Rule of Civil Procedure includes “[a]ll Medicare beneficiaries who, on or after January 1, 2009: (1) have received or will have received ‘observation services’ as an outpatient during a hospitalization; and (2) have received or will have received an initial determination that the observation services are covered (or subject to cover­age) under Medicare Part B.” Excluded from the class are Medicare beneficiaries who meet these requirements, but who pursued an administrative appeal and received a final decision from the HHS Secretary before September 4, 2011.

For the full text of this decision, go to:

It should be noted that since 2016, hospitals have been required to notify patients when services are considered “observation” and that there may be financial consequences. This is a fed­eral requirement under the NOTICE Act (Notice of Observation Treatment and Implication for Care Eligibility) and the Medicare Outpatient Observation Notice (MOON) form that implements it. Some state laws also require that a patient must be notified as well.

What happens next?

The Federal judge overseeing the case appointed the Center for Medicare Advocacy, Inc., Justice in Aging and the law firm of Wilson Sonsini Goodrich & Rosati to act as class counsel. Potential class mem­bers are being asked to share their observation stories on the CMA website and to sign up for alerts about applying for mem­bership in the class.

Content on this site has not been reviewed or endorsed by the Centers for Medicare & Medicaid Services, the United States Government, any state Medicare agency, or any private insurance agency (collectively "Medicare System Providers"). is a DBA of Clear Link Technologies, LLC and is not affiliated with any Medicare System Providers.

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