Medicare Inpatient versus Outpatient Status: A Due Process Right!

Court rules that the U.S. Secretary of Health and Human Services (HHS) violated the due process rights of a certified nationwide class of Medicare patients who were reclassified from “inpatient” to “observation.”

On Jan. 25, the U.S. Court of Appeals for the Second Circuit issued an important opinion in Barrows v. Becerra that will have a significant impact on hospitals, skilled nursing facilities (SNFs), and potentially, other Medicare providers. The Second Circuit affirmed a ruling from the United States District Court for the District of Connecticut that the U.S. Secretary of Health and Human Services (HHS) violated the due process rights of a certified nationwide class of Medicare patients who were reclassified from “inpatient” to “observation” status by a hospital’s utilization review committee (URC) without being provided an administrative review process to challenge that determination. Although hospitals (and other Medicare providers and suppliers) are not typically considered to be governmental actors, the Second Circuit affirmed the District Court’s conclusion that the Centers for Medicare & Medicaid Services (CMS) requirements surrounding hospital URCs made those determinations “state actions,” and thus subject to due process requirements under the Fifth Amendment of the U.S. Constitution.

The classification going from inpatient to observation can have significant financial repercussions to the Medicare beneficiary. Hospital inpatient services are generally covered under Medicare Part A. Outpatient or observation services are generally covered under Medicare Part B. Medicare beneficiaries pay monthly premiums for Part B coverage and also are subject to copayment obligations under Part B that may be higher than the inpatient deductible under Part A.

The Second Circuit’s opinion has huge ramifications on providers, especially hospitals. This opinion says that a hospital stands in the shoes of the government when deciding to charge a person’s hospital stay under Part B. But what if the hospital itself argues that Part A should pay, and it disagrees with the patient being deemed an outpatient? Well, this ruling gives hospitals a lot more leeway in its finances. A hospital can sue on behalf of its consumer or itself in getting higher reimbursements.

The threshold question presented in Barrows was whether CMS’s oversight and control over hospital URCs’ reclassification determinations transform those URCs’ actions into state actions, thus making them subject to constitutional due process. The Second Circuit affirmed the District Court’s decision, which also included a permanent injunction, requiring the HHS Secretary to create some sort of due process if a Medicare beneficiary disagrees with a hospital URC’s reclassification determination.

This decision may also favorably impact SNFs. Generally, a Medicare beneficiary must have a three-day inpatient stay at a hospital in order for Medicare to pay for a subsequent stay in an SNF. This three-day requirement is currently waived during the COVID-19 public health emergency (PHE). Once the three-day-stay requirement returns, this decision may positively impact SNFs by discouraging hospitals from reclassifying patients from inpatient to observation.

Although the District Court decision was issued in 2020, the Second Circuit had granted a temporary stay to allow the HHS Secretary to appeal.

At this stage, HHS has not signaled what due process hospital URCs will have to provide a Medicare beneficiary who disagrees with a reclassification determination. There are also open questions about how to handle potential claims for beneficiaries who have been hospitalized at any point since Jan. 1, 2009, had their status changed from inpatient to hospital, received a notice from the hospital or Medicare, and either have Part A-coverage only or had Part A and B coverage and were (or still could be) admitted to an SNF within 30 days of hospital discharge.

The HHS Secretary has until late April 2022 to file a petition for writ of certiorari in the U.S. Supreme Court. At the time of this publication, HHS has not indicated whether it intends to appeal.

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