Long-Term CareLast November, after a bad fall, 85-year old Elizabeth Cannon was taken to a hospital near Philadelphia for seven days of observation, followed by nearly five months in a nursing home for rehabilitation and skilled nursing care. The cost: more than $40,000.  

The hospital insisted that Elizabeth had never been formally admitted there as an inpatient, so under federal rules, Medicare would not pay for her nursing home stay. The money would have to come from her pocket.

The experience of Elizabeth and thousands like her inspired a new Medicare law — in force as of Saturday, August 6, 2016 — that requires hospitals to notify patients they may incur huge out-of-pocket costs if they stay more than 24 hours in the hospital without being formally admitted. Because of the Notice Act, passed by Congress last year [2015] with broad bipartisan support, patients can expect to start receiving the notice in January [2017].

“It was extremely distressful to my mother, who was frugal her whole life,” said Cynthia Morgan, Elizabeth’s daughter. Elizabeth had questioned why Medicare would not pay for her care after she paid into Medicare for so many years. Elizabeth died in April 2016.

Hospitals have been keeping patients like Elizabeth in limbo due to fear of being penalized by Medicare for inappropriate admissions. While under observation, patients can be liable for substantial hospital bills, and Medicare will not pay for subsequent nursing home care unless a person has spent three consecutive days in the hospital as an inpatient.

Time spent under observation does not count toward the three days, even though the patient may spend five or six nights in a hospital bed and receive extensive hospital services, including tests, treatment and medications ordered by a doctor.

Under the new law, the notice must be provided to “each individual who receives observation services as an outpatient” at a hospital for more than 24 hours. Medicare officials estimate that hospitals will have to issue 1.4 million notices a year.

“The financial consequences of observation stays can be devastating for seniors,” said Senator Susan Collins, Republican of Maine and the chairwoman of the Senate Special Committee on Aging.

Senator Benjamin Cardin, Democrat of Maryland, the chief sponsor of the Senate version of the legislation, said it would “save seniors from the sticker shock that comes after they are discharged from the hospital and realize that Medicare will not cover the cost of care in a skilled nursing facility.”

The median cost for a private room in a nursing home is roughly $92,000 a year, according to a survey by Genworth Financial. Medicare covers up to 100 days of skilled nursing home care at a time.

The text of the standard “Medicare outpatient observation notice” is subject to approval by the White House Office of Management and Budget. In its current form, the notice to beneficiaries says: “You are a hospital outpatient receiving observation services. You are not an inpatient.” And it explains that Medicare will cover care in a skilled nursing home only if the beneficiary has had an inpatient hospital stay of at least three days.

Patients can then consult their doctors and may ask to be reclassified as inpatients.

Hospitals have found themselves in a dilemma. They increased their use of “observation status” in response to close scrutiny of their billing practices by Medicare auditors — private companies hired by the government to review claims. In many cases, these companies challenged decisions by doctors to admit patients to a hospital, saying the services should have been provided on an outpatient basis. The auditors then tried to recover what they described as improper payments.

Doctors and hospitals said the auditors were like bounty hunters because they were allowed to keep a percentage of the funds they recovered.

But patients will now, at least, be better informed. The Senate Finance Committee explained the reason for the law this way:

“The number of Medicare beneficiaries receiving outpatient observation care over the last several years has been steadily increasing. Some beneficiaries are surprised to learn that although having received treatment overnight in a hospital bed, the beneficiary was never formally admitted as an inpatient but was instead a hospital outpatient.”

Federal officials acknowledged that Medicare beneficiaries sometimes had to pay more as outpatients under observation than they would have paid if they had been formally admitted to the hospital and received the same services as inpatients.

The administration issued rules to carry out the new law. The purpose, it said, is “to inform beneficiaries of costs they might not otherwise be aware.”

“Even if staying in a hospital overnight, the status might still be considered outpatient,” the administration said in a publication for beneficiaries.

Consumer advocates and nursing homes support the new requirement.

“Medicare beneficiaries are spending more and more time in the hospital without being formally admitted,” said Joyce Rogers, a senior vice president of AARP, the lobby for older Americans, adding that this “can expose beneficiaries to unexpectedly high out-of-pocket costs amounting to thousands of dollars.”

Mark Parkinson, the president and chief executive of the American Health Care Association, a trade group for nursing homes, said, “Patients often have no idea what their status is in a hospital and observation stays impose a significant financial burden on seniors increasing the likelihood of turning to Medicaid.”  

“The new law is an important first step, but Congress and the administration need to do more to protect beneficiaries,” said Judith Stein, the executive director of the nonprofit Center for Medicare Advocacy.

Under the law, hospitals can still keep Medicare patients in observation status, and some of the patients will be responsible for nursing home costs. Twenty-four senators and more than 120 House members are supporting bipartisan legislation to address that concern. Under that bill, time in a hospital under observation would count toward the three-day inpatient stay required for Medicare coverage of nursing home care.