According to the statute, Medicare provides coverage for care
that is "reasonable and necessary."1 The real-world
application of this standard, however, can become complicated. This
article highlights two areas where Medicare's purpose has been
thwarted by policies that inappropriately deny coverage to
beneficiaries. One of the policies -- dubbed the "improvement
standard " by advocates -- has been deeply ingrained in the medical
system for decades, whereas the other -- "observation status" in
hospitals -- has come to the fore more recently.
Many people who work with elders or people with disabilities have
had the experience of a skilled nursing facility or home health
agency informing them that a person's Medicare coverage will be
terminating because the patient has "plateaued" or is "chronic and
stable," "maintenance only" or simply not improving. It can happen,
for example, to a patient in a physical therapy setting who is
re-learning to walk, or to a patient in a home health care setting
who requires ongoing wound care.
These coverage terminations are often devastating to the patient
and his or her family, who have been relying on services to slow
the course of a disease or maintain functioning. Some people cannot
even access coverage in the first place because an agency will not
accept a patient who is "chronic" or not able to improve. Many of
those affected have degenerative conditions, such as multiple
sclerosis, Alzheimer's disease, Parkinson's disease or
Yet the improvement standard at the root of these coverage denials
is not supported by law.3 To receive coverage, patients
in a nursing home or receiving home health care must require
skilled services of some kind, but they are not required to improve
to receive coverage. The Medicare regulations explicitly state:
The restoration potential of a patient is not the
deciding factor in determining whether skilled services are needed.
Even if full recovery or medical improvement is not possible, a
patient may need skilled services to prevent further deterioration
or preserve current capabilities.4
Further, the regulations regarding skilled services specifically
recognize that there are cases in which maintenance
therapy must be provided by skilled personnel.5 Medicare
recently clarified its home health regulations to emphasize that
skilled care can include services to maintain a person's condition,
and that no informal rules, including those that require
restoration potential, should be used to deny care.6 But
despite these directives, denials for patients who "plateau" or are
"chronic" remain commonplace.
The improvement standard imposes a rule of thumb that operates as
an illegal condition for coverage. Many patients do not appeal
coverage terminations because, based on what medical personnel have
told them about the improvement standard, they think they cannot
succeed. And it is often the practice of Medicare contractors that
conduct coverage determinations and lower-level administrative
appeals to apply the improvement standard and deny coverage.
While beneficiaries who appeal up to the administrative law judge
(ALJ) level have a better chance of success, such lengthy appeals
are difficult to pursue, especially without representation, and
beneficiaries generally must incur liability for the cost of
services provided while their appeal is pending. Providers continue
to apply the improvement standard because that is how they have
been trained and how they see Medicare handling submitted
There has been some litigation on the improvement standard
resulting in decisions favorable to beneficiaries. Fox v.
Bowen7 prohibited the use of arbitrary rules of
thumb and mandated that each patient's unique medical condition be
assessed to determine whether skilled physical therapy services are
required. More recently, courts in Pennsylvania and Vermont held
that Medicare had inappropriately applied an improvement or
stability standard to individual beneficiaries.8 The
Department of Health and Human Services did not appeal these
decisions, so they are not binding outside the states in which they
However, in January 2011, the Center for Medicare Advocacy and
Vermont Legal Aid filed a national class action lawsuit against the
secretary of Health and Human Services to end the improvement
standard nationwide. Jimmo et al. v. Sebelius9
was filed in the District of Vermont on behalf of several
individual plaintiffs and organizational plaintiffs, including the
National Multiple Sclerosis Society, the Alzheimer's Association
and Paralyzed Veterans of America.
The plaintiffs challenge the secretary's continued use of the
improvement standard as a policy that results in the illegal
termination, reduction or denial of coverage for thousands of
Medicare beneficiaries. In October 2011, the court largely denied
the government's motion to dismiss.10 The motion for
class certification is pending. As the case proceeds, the goal is
to eliminate this unlawful rule of thumb and ensure that each
Medicare beneficiary receives coverage based on his or her unique
condition and individual needs as required by law.
Another more recent barrier to Medicare coverage in hospitals and
skilled nursing facilities is use of observation status during
hospitalization. For Medicare to cover a stay in a skilled nursing
facility, the beneficiary is required, among other things, to have
been hospitalized for at least three consecutive days as an
inpatient prior to admission to the facility.11
An increasing number of Medicare beneficiaries have been finding
that although they thought they had been a hospital inpatient for
at least three days, they were formally classified as being on
observation status or receiving "observation services," which are
not covered by Part A (which generally covers inpatient services),
but by Part B (which generally covers outpatient claims).
These beneficiaries often come to the hospital after a fall or
some other acute event. They are often moved from the emergency
room to a regular hospital floor where they are treated just as any
other inpatient would be. They are staying overnight in a hospital
bed, wearing a wristband, served hospital food, given medication,
tested, monitored, etc. They are too sick to go home and must
remain hospitalized for several days. Patients often become
deconditioned, meaning they have lost some functional ability, and,
when they are well enough to leave the hospital, they need
rehabilitation services in a skilled nursing facility.
However, upon discharge to the facility, they learn that Medicare
will not provide coverage because they did not have a qualifying
three-day inpatient stay. Beneficiaries must choose
between paying out of pocket for the nursing facility (which in
Massachusetts can cost around $10,000 per month) or forgoing the
skilled care they need. For those who are eligible, Medicaid may
cover their nursing facility stay, thereby shifting the cost of
care to the state.
The terms "observation status" or "observation services" are
nowhere to be found in the Medicare statute or regulations.
"Observation services" appears only in sub-regulatory Medicare
policy manuals, where it is circularly defined as:
a well-defined set of specific, clinically appropriate
services, which include ongoing short term treatment, assessment,
and reassessment, before a decision can be made regarding whether
patients will require further treatment as hospital inpatients or
if they are able to be discharged from the
Yet the "well-defined" set of services is not found in Medicare
policy. What hospitals tend to use to decide whether a patient is
classified as an inpatient or outpatient are commercial criteria,
such as the "InterQual" criteria published by McKesson Corp. These
criteria are proprietary and not available to the general public.
The criteria assess the severity of the patient's illness and
intensity of services, but result in a paperwork decision that does
not involve an in-person examination by a doctor or an
individualized determination that takes the patient's unique
situation into account.
Even if a doctor initially orders that a beneficiary be admitted
as an inpatient, Medicare has authorized hospital utilization
review committees to retroactively change a patient's status to
observation status in certain circumstances. Medicare policy states
that observation care is generally not supposed to last for more
than 24 hours, occasionally up to 48 hours, but only in "rare and
exceptional cases" should it last beyond 48 hours.13
However, the incidence and length of observation status stays is
increasing,14 and advocates have seen examples of
beneficiaries being on observation status for as long as 14
Compounding the problem is that Medicare does not require patients
who are initially placed in observation status to receive notice.
Only if the hospital retroactively changes a patient's status from
inpatient to outpatient does Medicare policy require a notice, but
in actual practice, it seems that few beneficiaries are given such
notice, and those notices that are provided contain no language
about appeal rights.
Indeed, it is not clear that patients have any appeal rights with
regard to observation status. While they will eventually receive a
Medicare Summary Notice in the mail listing the hospital services
as outpatient claims, beneficiaries attempting to appeal those
claims will often find themselves in a morass of communications
from Medicare. They may be told that only denied services
can be appealed, whereas these services were covered by
Part B, and thus there is no basis for appeal, or that only a
doctor can decide whether a patient is an inpatient or
Beneficiaries who manage to appeal up to an ALJ may find their
claim dismissed for lack of jurisdiction. Beneficiaries who go to a
nursing facility after their hospital stay may receive a notice
that their stay cannot be covered for lack of a qualifying
three-day hospital stay, but use of such notices is discretionary
for the facility. On top of this confusing process, beneficiaries
and their families are often still dealing with the serious
condition that brought them to the hospital in the first
Why are hospitals placing more patients on observation status? The
reason heard most often is Medicare's Recovery Audit Contractor
(RAC) program, which was put into place to address fraud, waste and
abuse. The program began as a three-year demonstration and was made
permanent by the Tax Relief and Health Care Act of 2006.
The RAC reviews hospitalizations of Medicare beneficiaries, and if
it finds what it believes to be improper payments to hospitals
under Part A, it recoups the payment from the hospital, which
cannot re-bill under Part B. It has apparently become a safer bet
for hospitals to bill claims for some patients as Part B outpatient
services rather than Part A inpatient services. Advocates have
heard from many doctors and other hospital personnel that they are
frustrated with observation status as well; they have seen how it
can harm their patients.
Advocates and legislators are working to address the observation
status problem. Legislation that would require time spent in
observation status to count toward the three-day stay requirement
has been introduced in both the House of Representatives and the
Senate.17 A congressional briefing sponsored by the
Center for Medicare Advocacy, AARP, the Alzheimer's Association and
the American Medical Association, among others, was held in October
In November 2011, the Center for Medicare Advocacy and the
National Senior Citizens Law Center filed a national class action
lawsuit against the Secretary of Health and Human Services that
seeks to end Medicare's practice of depriving beneficiaries of Part
A, inpatient coverage of their hospital stays by allowing (and, in
fact, implicitly encouraging) them to be placed on observation
status. Bagnall et al. v. Sebelius,18 filed in
the District of Connecticut, also addresses beneficiaries' lack of
notice and appeal rights. The government has filed a motion to
dismiss, which will probably be decided in the next few
Dealing with Medicare denials caused by either the improvement
standard or observation status can be very difficult. While there
are no quick fixes at the moment, beneficiaries are advised to seek
help from advocates. They can attempt to appeal denials, ideally
with the support of a treating physician. The website of the Center
for Medicare Advocacy contains self-help packets for
142 U.S.C. § 1395y(a)(1)(A) (2011).
2While this article discusses the improvement
standard in the traditional Medicare program, the problem also
arises for beneficiaries enrolled in the Medicare Advantage program
who receive their coverage through private companies.
3The only provision in the Medicare statute that
requires improvement is specifically for improving the functioning
of a "malformed body member." 42 U.S.C. § 1395y(a)(1)(A) (2011).
The intent of this provision was to distinguish between cosmetic
and functional services so that coverage is allowed only for
functional purposes. See Jimmo, et al vs. Sebelius: Center for
Medicare Advocacy Files Class Action to Block Illegal Medicare
Denials for Patients with Chronic Conditions, CENTER NEWS
(Ctr. for Medicare Advocacy, Willimantic, Conn.), Winter/Spring
2011, at 2.
442 C.F.R. § 409.32(c) (2010).
542 C.F.R. § 409.33(c)(5) (2010).
642 C.F.R. § 409.44(c)(2)(iii) (2010).
7656 F. Supp. 1236 (D. Conn. 1987).
8Papciak v. Sebelius, 742 F. Supp.2d 765
(W.D. Pa. 2010) (holding Medicare Appeals Council erred in failing
to address whether plaintiff required skilled care to maintain her
level of functioning); Anderson v. Sebelius, No. 5:09-cv-16, 2010
WL 4273238 (D. Vt. Oct. 25, 2010) (holding ALJ impermissibly
applied a retrospective "stability standard" in concluding that
skilled care was not required).
9Jimmo et al. v. Sebelius, No. 5:11-cv-17
2011 WL 5104355 (D. Vt. Oct. 25, 2011).
10Id., at *1.
1142 C.F.R. § 409.30(a)(1) (2010). Some Medicare
Advantage plans do not require a three-day stay as a prerequisite
to skilled nursing facility coverage.
12Medicare Benefit Policy Manual, CMS Pub. No.
100-02, Ch. 6, §20.6.A, available at www.cms.gov/manuals/Downloads/bp102c06.pdf;
same language appears in Medicare Claims Processing Manual, CMS
Pub. No. 100-04, Ch. 4, §290.1 available at www.cms.gov/manuals/downloads/clm104c04.pdf.
13Medicare Benefit Policy Manual § 20.6.A.
14In a September 2010 presentation, the Medicare
Payment Advisory Commission (MedPAC), which advises Congress on
Medicare matters, stated that from 2006 to 2008, the number of
observation claims increased by 22.4 percent, the average period of
observation status increased from 26 to 28 hours, and the claims
for periods of 48 hours or longer increased by 70.3 percent, which
accounted for 8 percent of all claims in 2006 and 12 percent of all
claims in 2008. Zach Gaumer & Dan Zabinski, MedPAC, Recent
Growth in Hospital Observation Care (Sept. 13, 2010) available
15See When is a Hospital Stay Not a Hospital
Stay? When the Patient is on 'Observation Status,' CENTER NEWS
(Ctr. for Medicare Advocacy, Willimantic, Conn.), Summer/Fall 2010,
at 1. Hospitalizations of the individual plaintiffs in Bagnall et
al. v. Sebelius, No. 3:11-CV-1703 (D. Conn. filed Nov. 3, 2011)
ranged from three to seven days.
16For a good description of one family's observation
status experience, see: Tamar Lasky, Caregiver Perspective:
"Observation Days" in a Kafkaesque Hospital Setting, 1 INT'L
J. OF USER-DRIVEN HEALTHCARE 66 (2011).
17Improving Access to Medicare Coverage Act of 2011,
H.R. 1543, 112th Cong. (2011) (introduced by Rep. Joe Courtney,
D-CT, now 13 co-sponsors); S. 818, 112th Cong. (2011) (introduced
by Sen. John Kerry, D-MA, now four cosponsors).
18No. 3:11-CV-1703 (D. Conn. filed Nov. 3, 2011).
19Medicare Coverage and Appeals, CENTER FOR MEDICARE
(last visited Feb. 11, 2012).
Alice Bers practices elder law at Benjamin & Bers in
East Longmeadow and is a consulting attorney for the Center for
Medicare Advocacy, a national nonprofit education and advocacy
organization. Before entering private practice and joining the
center, Bers represented Medicare beneficiaries at Western
Massachusetts Legal Services (now Community Legal