Medicare patients, whose hospital stays would normally be covered under the program, are being hit with surprise bills once they return home, bills that can reach into the tens of thousands of dollars. The loophole stems from the manner in which the patients are being classified during their hospital stays.

If a patient is formally admitted to the hospital, the hospital submits the bill to Medicare for reimbursement. However, if a patient is given the “observation” classification, used in cases lacking an immediate diagnosis, the patient may be billed for services without even realizing that his or her care is not covered. Under Medicare rules, patients under observation face a 20 percent copayment. Furthermore, the burden of paying for rehabilitation following an observational hospital stay would fall entirely on the patient.

Patient advocates complain that, on occasion, hospitals extend the period during which a patient is under observation in order to avoid a challenge by Medicare auditors, especially in cases where it is unclear that a patient should be admitted. Medicare audits patient admissions more carefully because they are costly. If the admission of a patient is deemed inappropriate, Medicare can deny the claim and the hospital will not receive reimbursement.

According to Marilyn Tavenner, acting administrator of the Centers for Medicare and Medicaid Services, the observation classification is intended for the first 24 to 48 hours of care. Beyond that period, the hospital should make a decision regarding whether to admit a patient. Complaints about this practice have prompted Medicare to investigate.