Observation Status: Hospitals May Begin Rebilling Medicare Patients Who Were Hospitalized After October 1, 2013
Medicare patients need to be aware that if they were hospitalized after October 1, 2013, hospitals may be contacting them about their bills.
Final rules that were published in August 2013 and became effective October 1, 2013 created a new regulatory provision, 42 C.F.R. 414.5, "Hospital services paid under Medicare Part B when a Part A hospital inpatient claim is denied because the inpatient admission was not reasonable and necessary, but hospital outpatient services would have been reasonable and necessary in treating the beneficiary."  Section 414.5(a) authorizes a hospital to rebill Part B if a claim under Part A is denied or, on its own initiative, if the hospital determines after the patient is discharged that the patient's hospital stay should have been billed as outpatient rather than as inpatient. 
Under the new rebilling option, CMS gives a hospital only one year after providing services to a patient to change its decision about the patient's inpatient status and to submit a bill to Medicare under Part B instead of Part A. The one-year deadline is approaching for services provided on or after October 1, 2013, the effective date of the regulations.
If a hospital rebills Medicare under Part B, it must refund the Part A deductible to the patient (or supplemental insurer) and it may bill the patient both for copayments for services provided under Part B and for medications. 
If a hospital exercises its rebilling option, patients may want to submit the medication bill to their Part D plan and request that the plan pay the pharmacy bill as an out-of-network pharmacy, since the hospital pharmacy is unlikely to be in the patients' pharmacy network. 
Part A-Covered SNF Stay Is Protected Even When the Hospital Rebills Medicare Part B
If a hospital exercises its rebilling option and submits a Part B claim for a patient following the patient's discharge from the hospital, the patient retains inpatient status for purposes of Medicare Part A coverage of the subsequent SNF stay. CMS explicitly provides in the preamble to the final rules:
The status of the beneficiaries themselves does not change from inpatient to outpatient under the Part B inpatient billing policy. Therefore, even if the admission itself is determined to be not medically necessary under this policy, the beneficiary would still be considered a hospital inpatient for the duration of the stay – which, if it occurs for the appropriate duration, would comprise a "qualifying" stay for SNF benefit purposes so long as the care provided during the stay meets the broad definition of medical necessity above [referring to the Medicare Benefit Policy Manual, Chapter 8, §20.1].
CMS reiterates this point later in the preamble:
[W]hen the inpatient hospital stay is paid under Part B, the hospital stay remains inpatient from the time of admission and may continue to count towards qualification for skilled nursing facility coverage, and the beneficiary is liable for the Part B inpatient charges.
CMS Notice to Medicare Patients
CMS rejects commenters' suggestions that patients be provided with an additional standardized notice or a Frequently Asked Questions sheet, or that information be added to the Important Message from Medicare (IM) form to alert patients at the time of their inpatient admission to an acute care hospital that their status at the hospital might be changed during, or after, their hospital stay. CMS describes such notices as "likely [to] create undue confusion and concern for beneficiaries"  and says it will engage in an educational campaign for beneficiaries.
CMS writes that it will provide information in its publication "Are You a Hospital Inpatient or Outpatient? If You Have Medicare – Ask!"
but the May 2014 revision does not explain that the hospital may change a patient's status after discharge.  CMS also writes that it will add new messages in the Medicare Summary Notice, but the Center for Medicare Advocacy did not find a new code in the updated list of MSN codes released on July 24, 2014.  CMS's Medicare & You briefly discusses observation status. 
CMS Offers Hospitals Settlement of Short Inpatient Claims Before October 1, 2013
Hospitals have been appealing denials of inpatient claims. On August 29, 2014, CMS offered "an administrative agreement to any hospital willing to withdraw their pending appeals in exchange for timely partial payment (68% of the net allowable amount)."  CMS defines eligible claims under the settlement offer as:
currently pending appeals of inpatient-status claim denials by Medicare contractors on the basis that services may have been reasonable and necessary, but treatment on an inpatient basis was not, with dates of admission prior to October 1, 2013, and where the patient was not a Part C [managed care] enrollee.
Hospitals may not accept the settlement for some inpatient claims while continuing to pursue other claims through the administrative process.
Hospitals choosing to settle pending appeals with CMS may "not seek additional payment from any Medicare beneficiary or collect any deductible or coinsurance amount regarding any claim resolved through this Agreement that is not subject to a repayment plan existing as of the effective date of this Agreement," but they "may retain any Medicare beneficiary deductible or coinsurance amounts already paid as of the effective date of this Agreement." 
Medicare patients will not hear from hospitals that settle with CMS on the terms offered. The hospitals will retain the inpatient deductibles that patients paid.
October 1, 2013 is an important date for Medicare patients' hospitalizations.
Medicare beneficiaries may receive letters from hospitals about their hospitalizations after October 1, 2013 if hospitals decide to withdraw their Part A charges and, instead, bill Medicare Part B and bill the patients for Part B copayments and medications. Patients' entitlement to Part A coverage of their skilled nursing facility care is not affected.
Medicare beneficiaries who were hospitalized before October 1, 2013 may hear nothing from their hospitals, though the hospitals may either accept the settlement terms offered by CMS or continue to pursue their administrative appeals. These patients' SNF coverage is also unaffected.
T. Edelman, 9/4/2014
 78 Fed. Reg. 50495 (Aug. 19, 2013). See Center for Medicare Advocacy, "Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries" (CMA Alert. Aug. 29, 2013), http://www.medicareadvocacy.org/observation-status-new-final-rules-from-cms-do-not-help-medicare-beneficiaries/.
 The rebilling option was one of two changes to federal regulations that the Centers for Medicare & Medicaid Services (CMS) made in 2013, in part to address the issue of Observation Status. Observation Status is the classification of hospitalized patients as outpatients, not inpatients, even though the care they receive in the hospital may be identical. If patients are outpatients or are said to be in Observation Status, Medicare Part A will not pay for their post-acute care in a skilled nursing facility (SNF). The other change created in 2013 was the two-midnight rule. Under this time-based analysis, physicians admit patients to inpatient status if they believe the patients will be in the hospital for two or more midnights.
 78 Fed. Reg. 50918, 50930-50931 (coordination of benefits with supplemental insurers).
 78 Fed. Reg. 50921. The Medicare Benefit Policy Manual, Ch. 8, §20.1, states that medical necessity for a hospital stay will be presumed and that, “The intermediary will rule the stay unnecessary only when hospitalization for 3 days represents a substantial departure from normal medical practice.” http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c08.pdf. Scroll down to page 8 for §20.1. http://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/Downloads/R2877CP.pdf