A Costly Medicare Surprise Awaits Retirees

It's bad enough spending three or more days in a hospital -- undergoing a barrage of medical tests and procedures. Brace yourself for even more pain at discharge if the hospital tells you that you were actually never admitted but were on Medicare "observation status." That designation could cost you big time.

Hospitalized Medicare beneficiaries who are under observation are considered outpatients, even if they spend many days in the hospital. If you find yourself in this boat, there's a chance you'll pay more for services than if you had been formally admitted. Observation patients are also ineligible for certain extended-care benefits.

In 2012, the number of hospital patients under observation status rose to 1.8 million, up 88% from 2006, according to federal data. During the same period, hospital admissions dropped. Federal investigators have found, though, that observation patients show similar symptoms as those admitted to the hospital. "It just doesn't make sense," says Toby Edelman, senior policy attorney at the Center for Medicare Advocacy.

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When it comes to how Medicare covers your hospital stay, your designation makes all the difference. For someone admitted as an inpatient, Part A picks up the tab after the $1,260 deductible in 2015. After three days in the hospital, Part A also will pay part or all of the costs for up to 100 days in a skilled-nursing facility if a patient needs follow-up care after being discharged.

But you have to look to Part B when it comes to outpatient care, including patients under hospital observation. Part B does not pay for post-hospitalization nursing care, even if a doctor recommends it. After a $147 deductible for 2015, patients pay 20% of the Medicare-approved cost of each hospital service and procedure, with no limit on the amount they owe. And many Part D prescription-drug plans will not cover the cost of drugs prescribed by hospitals.

The costs can mount. According to a study released in April by the AARP Public Policy Institute, 10% of observation patients (about 167,000) spent more for hospital services than if they had been admitted as inpatients -- meaning their costs exceeded the Part A deductible. "For each CAT scan, each EKG, each cardiac catheterization, you're paying co-insurance, and that can add up to more than the inpatient deductible," says Keith Lind, senior strategic policy adviser of the AARP institute and co-author of the study.

Only 7.4% of those placed under observation were referred to a skilled-nursing facility. Of those 159,960 patients, 22,520 had spent three or more days in the hospital but were not eligible for Medicare-paid skilled-nursing care, according to the study, which was based on 2009 data.

Medicare mistakenly paid the nursing-home bills for many observation patients. But those who did not get coverage paid an average of $12,970 for follow-up care, AARP found. "It's a small number of patients, but they have extremely high out-of-pocket liability if their claims are not covered by Medicare," Lind says.

Jim Tadych, a retired police officer in Oshkosh, Wis., was one of the unlucky ones. Three years ago, at age 85, he developed shingles. When the pain wouldn't subside, he went to a Milwaukee hospital for a spinal cord stimulator implant. Complications, including paralysis from the chest down, forced Tadych to stay in the hospital for eight nights. "He had deteriorated rapidly," according to his daughter, Debbie Sorensen.

His doctors recommended that he go for rehabilitation at a skilled-nursing facility. But at his hospital discharge meeting, the social worker told him that Medicare would not pay for his nursing care.

Sorensen was stunned. She went to the hospital's patient advocate, who told her she could not help because her father was not an inpatient. "I asked why he was not an inpatient -- he became paralyzed," she says. "I was told the doctors had decided that his condition was not serious enough to be an inpatient." He spent two weeks in a nursing home, shelling out between $4,000 and $5,000 for skilled-nursing care.

Medicare requires hospitals to decide within 24 to 48 hours whether to admit or discharge a patient under observation. But several studies have shown that hospitals often flout this rule. Consumer advocates and hospital officials say that hospitals are under pressure to keep patients in outpatient status rather than admitting them. If Medicare auditors later decide that a patient should have been treated as an outpatient rather than being admitted, the hospital must return all Part A reimbursements to the government. "Hospitals would rather take lower Part B reimbursements by keeping a person as an outpatient" than take the chance of having to pay back the Part A money later, Edelman says.

Bipartisan support is growing in Congress for legislation that would count observation days toward the three-day inpatient requirement for Medicare-paid skilled-nursing care. For now, the Center for Medicare Advocacy suggests some steps you can take to protect yourself in its "Self Help Packet for Medicare 'Observation Status' " at www.medicareadvocacy.org.

Ask: Am I an Inpatient or Outpatient?

When you are hospitalized, ask whether you have been officially admitted. If you are under observation, try to get your status changed -- especially if the doctor thinks you are in for extensive tests and may need some nursing care. "The best thing you can do is to get your own doctor to go to bat for you," Edelman says.

Assuming this doesn't work and you need post-hospital care, you can ask your physician if you are well enough to return home with a few hours a day of home health care, Edelman says. If you're homebound, Medicare is likely to pay for a certain amount of skilled-nursing care or physical therapy.

If you need skilled care in a nursing home, you can try to appeal Medicare's denial of nursing-home benefits. The Medicare Summary Notice that you receive in the mail will likely deny coverage because you did not have a three-day hospital stay. Write that you are appealing because you did receive three days of hospital inpatient care. Send your hospital discharge papers as evidence of your three-day stay.

The appeal could take a year or more, and Edelman warns that winning is difficult. In the meantime, you will have to pay for the nursing care out of pocket.

If you racked up drug costs during your hospital stay, ask your Part D drug plan for an out-of-network pharmacy claim form. If the drugs you received were not part of the plan's formulary, ask for an exception.