Court Case Changing the Calculus for Providers Switching Patient Status

There are sure to be appeals or rule changes, so stay tuned.

The case I’m about to write about may ultimately become irrelevant, but it’s nonetheless quite noteworthy. Let me start with a brief history. Richard Bagnall was the original plaintiff, over a decade ago. He felt that he was unjustly denied Part A benefits. So, he did what anyone would, he sued the Secretary of U.S. Department of Health and Human Services (HHS).

The case bounced between the District Court and the Second Circuit a few times, with successive changes in named litigants. And finally, after a bench trial, the District Court handed down a decision. As expected, the Secretary appealed. In January, the Second Circuit affirmed the District Court’s decision.

The essential elements of the decision include the following:

  • Medicare beneficiaries who are initially admitted as inpatients, then changed to outpatients with observation services through the action of a hospital utilization review (UR) committee, hold a property interest in the inpatient Part A benefit.
  • The Secretary violated patients’ due process rights by failing to provide an appeal process.
  • Third, and most surprising, the District Court declared that the hospital’s UR committee’s actions when changing the patient’s status was a state action. This was because of, in the court’s words, “significant encouragement” from the Centers for Medicare & Medicaid Services (CMS).
  • Finally, the District Court order gives appeal rights to essentially all beneficiaries since January 2009 who were admitted as inpatients and subsequently changed to outpatients with observation services.

It’s important to note that the decision only addresses deprivation of the rights of beneficiaries. It’s a complete unknown how the Secretary or a subsequent court will treat self-imposed losses by providers.

At this point, two things are certain. These are the following:

  • First, such patients have appeal rights. The decision did not provide a defined process, so beneficiaries will likely have to prosecute their cases though the court system. It’s not clear what remedies might be available for such plaintiffs. It’s also not clear to what extent the UR committees might share liability. This appeal process will likely be a significant burden on beneficiaries.
  • Second, the Secretary will either…
  • Do as ordered and promulgate rules to address the deprivation of beneficiaries’ due process rights; or 
    • Appeal to the U.S. Supreme Court.

As usual, I’d like to offer guidance for providers:

  • First: the ruling does not address impact on providers. Dr. Ronald Hirsch has previously raised a range of potential impacts, and the genuinely ironic twists of the UR committee qua government contractor.  
  • Second: It’s important to understand that the decision only addresses patients who received inpatient hospital services, but were improperly classified as outpatients. The Secretary could address the adverse financial impact of long observation stays, such as extensive co-pays, self-administered medications, and even patients without Part B coverage.
  • Third: I suspect that neither the courts nor the Secretary will add protections for providers that have improperly reclassified these patients.
  • Fourth: until the case is appealed, or the Secretary promulgates rules, providers should review UR processes to ensure that patients are not improperly reclassified as outpatients. There should be very clear reasons why the status of an inpatient hospitalized beyond two midnights is changed.
  • Finally, providers should consider steps to prevent physicians from entering observation orders on their own initiative.

Here are links to the relevant court filings in the case:

Alexander v Azar:

Barrows v Becerra:


John K. Hall, MD, JD, MBA, FCLM, FRCPC

John K. Hall, MD, JD, MBA, FCLM, FRCPC is a licensed physician in several jurisdictions and is admitted to the California bar. He is also the founder of The Aegis Firm, a healthcare consulting firm providing consultative and litigation support on a wide variety of criminal and civil matters related to healthcare. He lectures frequently on black-letter health law, mediation, medical staff relations, and medical ethics, as well as patient and physician rights. Dr. Hall hopes to help explain complex problems at the intersection of medicine and law and prepare providers to manage those problems.

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