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As an insurance agent specializing in Medicare products, you confidently inform your client that buying a Plan F or G is the “Cadillac” of policies. After a small annual deductible on Plan G, the insurance plan will pay for EVERYTHING in a hospital.

“If you are admitted to a hospital, you won’t pay a penny for any labs, x-rays or tests. Your medications while admitted are covered. If you need surgery or therapy you won’t pay a thing.” While we have all uttered these words to our clients we now must go back and warn them that when President Obama signed the Affordable Care Act into law, an unintended consequence made us appear to have mislead our clients.

The key to the above scenario is “admitted to a hospital” and that seems easy enough. If you are in the hospital for a week, you would assume you had been admitted. If you have surgery with complications and spend 14 days in the hospital’s ICU, you would assume you had been admitted.

But in reality, there is no requirement that any patient ever be admitted?—?and hospitals have a great disincentive to admit.

The Hospital Readmission Reduction Program penalizes almost all hospitals (not the VA, critical care, children’s or psychiatric hospitals) for patients who are REadmitted within 30 days of discharge. Last year hospitals paid nearly $500 million in penalties.

Here is the fuzzy math. Yes, REadmissions are down since this law took effect, but that is mostly due to hospitals gaming the systems. They just don’t admit patients, they keep them “Under Observation.”

If you are not admitted, you can’t be REadmitted and subject to loss of revenue.

You may have heard about the 2 Midnight Rule. Back in 2013 CMS thought they had a fix for this issue. They said that doctors SHOULD (my emphasis) only admit a patient if the doctor reasonably suspects the person will need to spend 2 midnights in the hospital.

Hospitals are also penalized for inappropriate admissions, not just readmissions. So you can see why as a nation, hospitals have increasingly just stopped admitting Medicare members.

Almost 3,000 hospitals were penalized last year.

The number continues to grow each year and you may want to blame the hospitals for the pain this inflicts on your clients. Really, it is more complicated than that.

Medicare has a worthy goal of reducing readmissions but we know that one of the major factors determining if a patient is readmitted is their socioeconomic situation. CMS knows that hospitals can’t control this and that hospitals that treat poorer populations have higher readmissions. Poor people can’t afford to hire a nurse to come in while they recuperate, or a nutritionist, or someone to cook their meals. These are all things wealthier people can afford and help them to avoid readmissions.

This year CMS decided to grade hospitals on a peer system. Instead of judging suburban hospitals against inner city hospitals, they will compare similar hospitals.

In 2016 we got the MOON Rule, which requires hospitals to notify patients if they are being held Under Observation. But the notice isn’t appealable: one of the only Medicare notices that cannot be appealed!

If you are not admitted, you have no right to demand to be admitted. But now, at least they have to tell you.

If you are not admitted, you are in the hospital as an OUTPATIENT, under Medicare Part B. This means that even if you spend 3 overnights in the hospital, you will still not be eligible for Medicare to pay for your first 20 days in a skilled nursing facility. Oh no! You told your clients that their Medicare Supplement would cover up to 20 days IF THEY spent at least 3 nights in a hospital–when what you should have told them was if they were ADMITTED for at least 3 nights.

Just because you are in the hospital wearing an ID bracelet, the blue hospital gown and eating hospital food for days on end–doesn’t mean you are an admitted inpatient.

Drugs are another problem. As an outpatient your drugs are covered under Part D. And you are out of network, because all hospital pharmacies are out of network. You have to pay the bill, then seek reimbursement from your Part D plan. Many people don’t have the money to pay up front and then wait to get reimbursed!

The Government Accounting Office states that the average Medicare beneficiary kept in Under Observation status, spends $207 extra! Ouch. And you are that much closer to the donut hole now.

But wait, it is not all bad. The majority of people, and there were more than 1.5 million people Under Observation last year, are NOT HARMED by this coding game. Yep, it might even save them money, depending on the type of insurance plan they have.

Medicare Advantage could be a win, lose, or draw depending on the plan. You can compare and contrast the co-pays for an inpatient stay (maybe as low as $300 per day) vs. an outpatient stay (maybe as high as 20%). At least with a MAPD plan, your client still is able to go to a nursing home and have insurance coverage, regardless of the coding.

Those that are hurt though, end up spending many thousands of dollars. Now these people can sue the federal government. Alexander v. Price is a class action lawsuit that people who have been harmed by being held Under Observation can join.

There are 6 criteria that hospitals are judged on. If a patient is readmitted for one of these conditions, the penalty (up to 3%) can be assessed:

  1. Acute Myocardial Infarction (AMI)
  2. Chronic Obstructive Pulmonary Disease (COPD)
  3. Elective Primary Total Hip &/or Knee Arthroplasty (THA/TKA)
  4. Heart Failure (HF)
  5. Pneumonia
  6. Coronary Artery Bypass Graft (CABG)

Tell me how this makes sense:

An 86-year-old woman was held under observation for 5 days for a broken shoulder and sacrum. Her family tried to get her admitted arguing that even if she was readmitted, she didn’t have a condition that would get the hospital penalized. The hospital wouldn’t change her status and she had to pay $4,000 dollars to the nursing home while she recuperated.

What can you do? Nothing. You can’t demand to be admitted. The obvious solution is to change Medicare Supplement plans to allow all 3-night hospital stays to count toward the nursing home benefit, but no one is standing up to make this change happen.

The government says that this is saving the taxpayers money, since Medicare isn’t having to pay for nursing home stays–and that helps extend the Medicare Trust Fund. Yes, this is true but it is on the backs of Medicare beneficiaries that truly deserve this benefit that they paid for and should be qualifying for.

Sylvia Gordon recently was a speaker on this topic at the Society of Certified Senior Advisors in Dallas, where she brought up more questions than she answered. There is no solution in sight for this problem. As agents, we can educate our clients about this risk, but there is no strategy to avoid it.