Medicare Must Provide Appeal Process for Hospitalized Beneficiaries Reclassified from Inpatient to Observation Status

A U.S. appeals court rules that Medicare beneficiaries have a property right in coverage under Medicare Part A and that the federal government deprives them of due process when they reclassify inpatient hospital stays to observation status without providing an appeal process. Barrows v. Becerra (2nd Cir., No. 20-1642-cv, Jan. 25, 2022).

Hospital utilization review committees (URC) review admission decisions and decide whether to reclassify inpatient admissions to observation status. A group of Medicare beneficiaries who were formally admitted to hospitals as inpatients before being reclassified as observation status filed a class action lawsuit against the Secretary of Health and Human Services. The Medicare beneficiaries argued that patients should be able to challenge their reclassification by the URC. Because patients who are not admitted are not eligible for Medicare Part A coverage or for coverage of any post-hospitalization stay at a nursing home, the lawsuit claimed that being put into observation status cost the beneficiaries thousands of dollars.

The federal district court ruled that the Secretary violated the due process clause by failing to provide an appeals process for Medicare beneficiaries whose inpatient admission is changed to observation status by a hospital’s URC. The Secretary appealed.

The U.S. Court of Appeals, Second Circuit, affirms, holding that the Secretary violated the due process clause, holding that the plaintiffs have a property right in coverage under Medicare Part A and that there is “a serious risk that Medicare beneficiaries are erroneously deprived of Part A coverage to which they are entitled by URC reclassification decisions that they are unable to challenge.” According to the court, “the decision to reclassify a hospital patient from an inpatient to one receiving observation services may have significant and detrimental impacts on plaintiffs’ financial, psychological, and physical well-being” and that “although the Secretary would have to expend financial resources to create an appeals process for this plaintiff class, the burden on the Secretary is lessened somewhat by the existence of similar Medicare appeal procedures.”

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