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Outpatient “Observation” Battle Continues

On January 22, 2015, in the case of Barrows v. Burwell, No. 3:11-cv-1703, 2015 WL 264727 (2nd Cir., January 22, 2015), the United States Court of Appeals for the Second Circuit ruled that Medicare beneficiaries be granted the opportunity to demonstrate a Constitutionally-protected property interest to challenge their patient status designations as hospital outpatients rather than inpatients.

The Barrows case is a class action lawsuit, brought on behalf of Medicare beneficiaries placed into “outpatient observation” by hospitals instead of being formally admitted to the hospitals as inpatients. Inpatient claims are covered by Medicare Part A, and outpatient claims are covered by Medicare Part B. In many cases, patients’ out-of-pocket financial obligations are greater under Medicare Part B than Part A. Therefore, the classification of beneficiaries as hospital outpatients receiving “observation” services oftentimes results in a significantly greater financial responsibility than they would have if classified as inpatients. See Barrows at p. 2. The plaintiffs argued that the Secretary is (at least) indirectly responsible for these financial harms due to its billing rules and the aggressive auditing activity of Recovery Auditors. Id. at pp. 11-12. Of note, the Barrows case involves claims for services rendered prior to the effective date of CMS’ 2-midnight Rule.

In their complaint to the District Court, the plaintiff Medicare beneficiaries argued that the failure of the hospitals to provide expedited notice of the decisions to place them into “outpatient observation,” as well as the failure to grant an expedited opportunity to challenge such a status designation, resulted in violations of the Medicare Act and federal Due Process Clause. The United States District Court for the District of Connecticut wholly dismissed the beneficiaries’ complaint. Upon appeal the Second Circuit vacated the dismissal of the plaintiffs’ Due Process claims. The Second Circuit specifically found that:

“The District Court erred in concluding that plaintiffs lacked a property interest in being treated as “inpatients,” because, in so concluding, the District Court accepted as true the Secretary’s assertion that a hospital’s decision to formally admit a patient is “a complex medical judgment” left to the doctor’s discretion. That conclusion, however, constituted an impermissible finding of fact, which in any event is inconsistent with the complaint’s allegations that the decision to admit is, in practice, guided by fixed and objective criteria set forth in “commercial screening guides” issued by the Centers for Medicare & Medicaid Services (“CMS”).”

See Barrows at pp. 2-3.

The Second Circuit remanded the case back to the District Court to allow a limited period of discovery for the plaintiffs to demonstrate whether they possessed a property interest in being admitted to the hospitals as “inpatients.” Id. at p. 3.

In order to establish a property interest under the Due Process Clause of the Constitution, the plaintiffs must show a “legitimate claim of entitlement” to a benefit. Id. at p. 19. A “legitimate claim of entitlement” may be shown where benefits “meaningfully channel[] official discretion by mandating a defined administrative outcome.” Id. The question will turn on whether there are fixed and objective criteria to determine entitlement to the benefit. Id.

The District Court determined that the plaintiff beneficiaries lacked a property interest in being admitted to a hospital as “inpatients,” because the District Court accepted the Secretary’s argument (which cites the Medicare Benefit Policy Manual, Chapter 1, Section 10), that “The physician or other practitioner responsible for a patient’s care at the hospital is also responsible for deciding whether the patient should be admitted as an inpatient. Physicians should use a 24-hour period as a benchmark… However, the decision to admit a patient is a complex medical judgment which can be made only after the physician has considered a number of factors…” Id. at pp. 20-21.

On the other hand, the Plaintiffs argued that, in practice, inpatient hospital admissions are based on “‘commercially available screening tools’ as directed by the centers for Medicare and Medicaid Services (‘CMS’), which substitutes for the medical judgment of treating physicians.” Id. at p. 21.

The Second Circuit decision, in essence, can be distilled to the following issue:

“Therefore, the dispositive issue – whether plaintiffs possess a property interest sufficient to state a Due Process claim – turns on facts that are, at this stage, contested. If plaintiffs are able to prove their allegation that CMS “meaningfully channels” the discretion of doctors by providing fixed or objective criteria for when patients should be admitted, then they could arguably show that qualifying Medicare beneficiaries have a protected property interest in being treated as “inpatients.” However, if the Secretary is correct and, in fact, admission decisions are vested in the medical judgment of treating physicians, then Medicare beneficiaries would lack any such property interest. At this stage, it is simply unknown how, in practice the relevant admissions decisions are made.”

Id. at p. 22-23.

Although the Second Circuit decision allows the plaintiffs to remain in the appeals process (for now), ultimately, it may prove difficult for the plaintiffs to establish a protected property interest in being treated as “inpatients.” Significantly, CMS has not adopted any one commercially available screening tool (such as InterQual criteria or Millimen Care Guidelines) as its own. The guidelines for inpatient hospital admissions published by CMS (in effect during the dates of service at issue in the Barrows case) are those guidelines set forth in the Medicare Benefit Policy Manual Chapter 1, Section 10 (cited above). Although hospitals use screening tools to assist the physicians, in using their clinical judgment, to make inpatient hospital admission decisions, in many cases, if extenuating factors exist to support an inpatient admission even though the screening tool guidelines are not satisfied, the admitting physician will order inpatient admission. Upon discovery, it should not be difficult for the Secretary to find numerous instances of inpatient hospital admissions that are not based on criteria set forth within commercially available screening tools.

The plaintiffs may have more success proving a protected property interest for claims billed under the requirements of the 2-Midnight Rule, as there is a presumption of coverage tied to claims crossing 2 midnights (where there is no “presumption” of coverage tied to claims crossing 24 hours under the previous inpatient hospital admission criteria). This guideline arguably provides more clear-cut guidance to physicians rendering inpatient admission decisions.

The plaintiffs in the Barrows case were represented by the Center for Medicare Advocacy and the National Senior Citizens Law Center. More information regarding this case, including updates as they are available, can be found on the Center for Medicare Advocacy’s webpage.

For more information, please contact Jessica L. Gustafson, Esq. or Abby Pendleton, Esq. at (248) 996-8510.

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