By: Rebecca Herzberg
Volume IX – Issue II – Spring 2024
I. Introduction
i. History of Medicare
In 1965, President Lyndon B. Johnson signed the Medicare program into law. Before its creation, almost half of elderly Americans had no insurance. Its passage, along with Medicaid, substantially increased the national insurance rate and relatedly reduced the poverty rate among older adults. In its original form, Medicare offered Part A (Hospital Insurance) and Part B (Medical Insurance). [1] At Medicare’s inception, employers providing health insurance provided coverage for hospital stays since this care was the most costly and unexpected of medical costs. So, the creators of Medicare factored this status quo into the structure of Part A, in which beneficiaries automatically enroll at no additional charge. However, additional physician and medical services were generally less costly and predictable, so fewer resources fund this coverage in Medicare, now known as Part B. [2] However, over time, the expenses falling under Part B categorization have become increasingly more expensive and frequently utilized. So, the original rationale behind Parts A and B may not be as relevant and accurate today. Later, in 2003, President George W. Bush signed the Medicare Modernization Act into law, which added Part C (Medicare Advantage - private insurance plans) and Part D (Prescription Drug Coverage). Every American over 65 years is now eligible for Medicare, as well as certain individuals with disabilities who have Social Security disability insurance for two years
Additionally, beginning in 1972, end-stage renal disease patients on kidney dialysis are covered under Medicare. [3] Since its inception, millions of people have become eligible for Medicare as the elderly population has grown. Initially, its creators believed Medicare was a stepping stone towards universal health care in the United States, but this has not been the case. Even so, Medicare has remained a solid pillar in the country over time. Americans have become accustomed to this governmental benefit they pay into throughout their working life through taxes. [4]
ii. Paying for Medical Care
Despite the extensive medical infrastructure and health insurance programs in the United States, understanding medical bills can be nearly impossible. The categorization of Medicare into Parts A, B, C, and D is more complex than it may initially appear, so it is essential to examine the intricacies and overlap that exist among these parts, which can lead to much confusion and hardship. In an ideal healthcare system, with the guiding value that healthcare is a right, individuals would not need to constantly consider the costs of the different, sometimes lifesaving, services they need. Unfortunately, that is not true in the United States, even with public health insurance programs. Until 2022, Medicare beneficiaries faced impossible situations regarding their medical care. In some scenarios, beneficiaries were admitted into hospitals, categorized as inpatients, and treated as inpatients. To their knowledge, they were considered inpatient. Some of these patients then moved to rehabilitation centers and skilled nursing facilities since they no longer required critical care in a hospital but still needed comprehensive support. However, when they eventually received their medical bills, they were shocked to see thousands of dollars in out-of-pocket costs, some ranging from $7,000 [5] to $10,000. [6] While hospital costs for patients are expensive, the post-hospital care described above can be the most financially disastrous. Rehabilitative care is generally covered by insurance because it is expected that this service will be one of the most costly services an individual faces. Additionally, over time it has become the expectation that rehabilitative care will be covered by insurance companies, not directly from the pockets of individuals, which contributes to the final cost. Rehabilitative services are aware that large corporations (insurance companies), not individual payers, fund their services. Patients are often unaware of the classification under which they have been admitted to the hospital. From the patient’s perspective, the treatment one undergoes may not be obviously “inpatient” or “outpatient,” which can be misleading. For many patients, the first time they learn of their status is when they receive these extremely costly bills and face the risk of medical debt. [7]
II. Background
i. Medicare Structure and Financing
Medicare is divided into four parts: A, B, C, and D. Original/traditional Medicare refers to parts A and B, which have existed since 1965. Over time, the addition of parts C and D supplement the program. Part A generally covers hospital insurance and beneficiaries are automatically enrolled in this plan. This automatic enrollment is given that an individual paid Medicare taxes for a minimum of 10 years. [8] The services included in this plan are inpatient care, skilled nursing facility, hospice, and home health care. [9] It is financed through the Medicare payroll tax in a “pay-as-you-go” system. Workers pay a portion of their earnings to Medicare, and retirees receive these funds. Then, when these current workers retire, the future workers of America will pay for them. All employers and employees share the cost of a 2.9% tax, with higher-income workers paying an additional 0.9%. [10] These taxes contribute to a “Trust Fund,” which collects and stores the funds for Part A. American workers pay into this trust fund throughout their working career, so they understandably expect to reap the benefits once they reach retirement age. As a result, the recent controversies in Medicare coverage of medical bills have not only upset Americans financially but also left them with a sense of betrayal. [11] The system into which they paid their whole lives with the understanding that they, too, would one day be taken care of is failing them. One patient remarked that the lack of coverage of her rehabilitative services “didn't seem fair … after paying for Medicare all these years.” [12]
Part B covers outpatient services, described as medical insurance. Beneficiaries must opt into this plan and pay a premium. Services included under this plan include doctors’ and healthcare providers’ services, home health, durable medical equipment (e.g., hospital beds), and preventive services. [13] This portion of Medicare is primarily funded through general federal tax revenue. Unlike Part A, there is no specific tax designated to fund Part B. However, the remaining portion is paid for through premiums paid by beneficiaries who choose to enroll in this plan, adjusted based on income. These two parts, A and B, are the focal points of this article and the described medical bills. Additionally, but will not be further mentioned in this review, there are Parts C and D. Part D is the drug coverage portion of Medicare, which beneficiaries may opt into if they are interested. Part C, known as Medicare Advantage, is a group of private insurance plans overseen and approved by the Centers for Medicare and Medicaid (CMS). The plans under Part C must include equivalent coverage of the services covered in Parts A, B, and, generally, D.
ii. Observation Status: Outpatient versus Inpatient
The central aspect of the debate surrounding medical billing categorization between Part A and Part B comes down to the question of whether a hospital marks a patient as inpatient or outpatient. The inpatient designation comes from the “Two-Midnight Rule” – a guideline created by CMS to help healthcare providers identify their patients. It includes the following requirements: the patient is expected to stay in the hospital for a minimum of two nights, the specific services provided come from the list of “inpatient only” services as specified by Medicare, and the physician expects inpatient services to be utilized (regardless of expected length of stay). [14] Any care falling within the described outlines falls under Part A coverage. However, if care falls outside of these parameters, it becomes outpatient as it is “observational” care and is now under Part B. Notably, Part B does not include coverage of rehabilitation centers often required post certain hospital stays and conditions. However, both of these labels, “inpatient” and “outpatient,” can be changed depending on the particular patient and situation.
iii. Utilization Review Staff
Every hospital participating in Medicare must have a Utilization Review Staff: a team that reviews all patient categorization (inpatient/outpatient) decisions made by physicians. This team compares each decision made by physicians to a mandated, nationwide set of standards created by CMS. In the later lawsuits drawing controversy surrounding the change of a patient's status from inpatient to outpatient while they were still in the hospital, the decision maker for this change was the utilization review conducted by the hospitals. Patients initially marked as inpatients by the physician later had their status changed by utilization review after being admitted. Many hospitals explain this shift due to fear that CMS will “financially penaliz[e] them for admitting too many patients.” [15] This reality places them in a difficult position regarding reporting and classifying their patients. Therefore, it is the regulating body, CMS, which Americans must look to for reform regarding this issue, not hospitals. Currently, hospitals are operating out of fear from CMS. Hospitals should be responsible for their spending and not take advantage of the government funding provided through Medicare. However, doctors should not treat patients differently or penalize them financially as a result of cautious medical spending. If a doctor initially believed a patient should be treated as an inpatient, this decision should not be overturned by a review board attempting to minimize expenses. While CMS is a knowledgeable government entity, it is impossible for it to personally know and understand the unique health situations of each of its beneficiaries. Therefore, it should be hospitals and their physicians that ultimately decide the classification of patients without the indirect pressure of CMS through Utilization Review Staff. However, hospitals must not abuse the limited funds of Medicare through unnecessary spending or inefficient treatment plans.
iv. Due Process Clauses
The due process clause states, “[no one shall be] deprived of life, liberty, or property without due process of law.” [16] The government must assure citizens that it will serve them by protecting their rights and interests. Relatedly, the government itself must follow the laws it creates for the public. This clause ensures that citizens receive judgments carried out fairly. Within this concept, there are two aspects: substance and procedural. If a person’s life, liberty, or property are at risk of impact, the “person must be given notice, the opportunity to be heard, and a decision by a neutral decision maker.” [17] Additionally, the government must be able to prove it has grounds for its actions and processes. Due process is essentially a “balancing test” [18] of private and public (government) interests. To reduce confusion surrounding this clause and its application, Judge Henry Friendly in 1975 created a set of 10 points defining due process. Two of these points to note are “A notice of the government's intended action and the asserted grounds for it” and “The opportunity for the individual to present the reason why the government should not move forward with the intended action.” [19] Medicare and participating hospital systems failed to comply with these two elements when they did not provide beneficiaries with the ability to content their inpatient vs outpatient status.
III. Litigation and Related Rulings
i. Alexander v. Azar (2020)
Christina Alexander was one of the many plaintiffs who brought a class action suit against the former Secretary of Health and Human Services, Alexander Azar II. These plaintiffs all “were placed on observation status after entering the hospital,” which resulted in “serious financial or other consequences” for the plaintiffs. [20] The primary question of this case was whether the Secretary of the Department of Health and Human Services violated the Due Process Clauses of the Constitution by failing to provide a process for Medicare beneficiaries to appeal their inpatient/outpatient status due to its impacts on Medicare coverage. [21] It was a class action lawsuit including all Medicare beneficiaries nationwide. The decision of this case had two parts. First, the court upheld the inability of patients initially admitted under observation status to appeal their decision. This category failed to provide their due process claim. Second, the court found that patients initially admitted as inpatients and then switched to observation status were entitled and in need of a process to appeal their decision. The lack of such a process was a deprivation of property and attributable to the Secretary since the utilization review staff, the entity making this decision based on CMS standards, is essentially an extension of him. This ruling outlined four parameters under which patients were eligible for an appeal process within Medicare. [22] The government appealed this decision only for the U.S. Court of Appeals 2nd Circuit in 2022 to affirm the original district court ruling. This decision gave power back to private citizens by empowering them to fight for their rights and fair treatment. Medical care is a highly personal subject area in which private citizens should have autonomy and, at the bare minimum, the ability to advocate for themselves. This case established this notion.
ii. Bagnall v. Becerra (2022)
Richard Bagnall and multiple additional plaintiffs brought this case against the present Secretary of Health and Human Services, Xavier Becerra. The hospitals of these patients reclassified their status during their admission without consulting plaintiffs. [23] This court case builds off of the previous case, Alexander v. Azar, by focusing on categorizing inpatient status through the two-midnight rule and Medicare’s expectation of doctors to make this decision quickly. The American Medical Association (AMA) strongly opposes the idea that physicians must estimate the length of a patient's stay immediately upon their admission to the hospital. [24] This requirement solely exists because Medicare requires, placing economic and governmental interests above those of private citizens. Utilization review staff apply CMS standards to physicians’ decisions supposedly for “purely medical” [25] reasons, yet they only serve the interests of Medicare and billing purposes. Additionally, according to the AMA, CMS places significant pressure and scrutiny on patients marked as inpatients. The result of this current structure is beneficiaries find their medical costs not covered by Part A, and they can receive follow-up rehabilitative care.
IV. Present and Future Implications
i. Centers for Medicare & Medicaid Proposed Rule
Following the Alexander v. Azar ruling, CMS created a proposed rule titled “Medicare Appeal Rights for Certain Changes in Patient Status (CMS-4204) - updated on December 21, 2023. It outlines three types of appeals: expedited, standard, and retrospective. These three appeals apply to patients described in section IIIA who qualify for the appeals process. In expedited appeals, Beneficiary & Family Centered Care - Quality Improvement Organization (BFCC-QIO) is expected to produce a decision within one day of receiving case materials. This appeal is for beneficiaries still in the hospital. In standard appeals, the same material filing process occurs with BFCC-QIO, except that the time frame is longer. It may occur after Part B processing and denial of coverage for rehabilitation centers has already happened. In retrospective appeals, cases must have occurred on or after January 1, 2009.
ii. Centers for Medicare & Medicaid Website
The CMS website now contains a section that explicitly outlines the development and present status of the appeals process under the page title “Original Medicare Appeals.” [26] It includes updates to the proposed rules described above, details about different appeals, and directions for different scenarios. It is relatively accessible and provides the most up-to-date information on the appeals process at the top of the page. However, including older decisions, which are not necessarily up to date, can be confusing to read and differentiate from the present-day information.
V. Conclusion
Medicare is intended to increase health insurance coverage and improve the health and economic situations of America’s elderly population. While this goal has remained true, certain aspects of the program strayed away from the intention. When Medicare beneficiaries faced financially crushing costs due to their coverage being unwilling to change the categorization of their treatment for billing purposes, the U.S. government failed the American elderly population. The U.S. government must ensure that Medicare sufficiently and equitably serves its intended audience. Despite the intricacies of medical billing and the high cost of care in the U.S., beneficiaries’ rights and treatment should not be sacrificed. Instead, it must be bolstered and strengthened.
Endnotes
[1] Centers for Medicare & Medicaid Services. 2023. “History | CMS.” Www.cms.gov. September 6, 2023. https://www.cms.gov/about-cms/who-we-are/history.
[2] “The History of Medicare.” n.d. National Academy of Social Insurance. https://www.nasi.org/learn/medicare/the-history-of-medicare/.
[3] Centers for Medicare & Medicaid Services. 2023. “History | CMS.” Www.cms.gov. September 6, 2023. https://www.cms.gov/about-cms/who-we-are/history.
[4] “The History of Medicare.” n.d. National Academy of Social Insurance. https://www.nasi.org/learn/medicare/the-history-of-medicare/.
[5] Bunis, Dena. n.d. “Medicare Patients and the ‘Observation Status’ Rule.” AARP. https://www.aarp.org/health/medicare-insurance/info-2021/appealing-observation-status.html.
[6] “Court Upholds Right to Appeal for Certain Medicare Patients on ‘Observation Status.’” 2022. Center for Medicare Advocacy. January 26, 2022. https://medicareadvocacy.org/observation-appeal-rights-upheld/.
[7] Bunis, Dena. n.d. “Medicare Patients and the ‘Observation Status’ Rule.” AARP. https://www.aarp.org/health/medicare-insurance/info-2021/appealing-observation-status.html.
[8] Social Security Administration. n.d. “Parts of Medicare | SSA.” Www.ssa.gov. https://www.ssa.gov/medicare/plan/medicare-parts.
[9] Medicare. 2020. “Parts of Medicare.” Www.medicare.gov. 2020. https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/parts-of-medicare.
[10] Nicholson, Sean. 2023. “Medicare” PUBPOL 2350: The U.S. Health Care System. Fall, Cornell University. Class lecture.
[11] Bunis, Dena. n.d. “Medicare Patients and the ‘Observation Status’ Rule.” AARP. https://www.aarp.org/health/medicare-insurance/info-2021/appealing-observation-status.html.
[12] Ibid.
[13] Medicare. 2020. “Parts of Medicare.” Www.medicare.gov. 2020. https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/parts-of-medicare.
[14] Dadana, Sriharsha, and Seref M. Bornovali. 2023. “HCQM Two-Midnight Rule.” PubMed. Treasure Island (FL): StatPearls Publishing. 2023. https://www.ncbi.nlm.nih.gov/books/NBK594265/.
[15] Bunis, Dena. n.d. “Medicare Patients and the ‘Observation Status’ Rule.” AARP. https://www.aarp.org/health/medicare-insurance/info-2021/appealing-observation-status.html
[16] Strauss, Peter. 2017. “Due Process.” Legal Information Institute. Cornell Law School. June 26, 2017. https://www.law.cornell.edu/wex/due_process.
[17] Ibid.
[18] Ibid.
[19] Ibid.
[20] Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020)
[21] Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020)
[22] Ibid.
[23] American Medical Association. 2021. “Bagnall v. Becerra, 2022 WL 211089 (2d Cir.).” Ama-Assn.org. 2021. https://searchlf.ama-assn.org/case/documentDownload?uri=%2Funstructured%2Fbinary%2Fcase%2FBagnall_v__Becerra.pdf.
[24] American Medical Association. 2021. “Bagnall v. Becerra, 2022 WL 211089 (2d Cir.).” Ama-Assn.org. 2021. https://searchlf.ama-assn.org/case/documentDownload?uri=%2Funstructured%2Fbinary%2Fcase%2FBagnall_v__Becerra.pdf.
[25] Ibid.
[26] “Original Medicare (Fee-For-Service) Appeals | CMS.” n.d. Www.cms.gov. https://www.cms.gov/medicare/appeals-grievances/fee-for-service.