James Sullivan
James Sullivan

Ignorance of Medicare Rules Can Cost Your Clients

Your familiarity with Medicare rules can save your clients money.

March 8, 2010
by James Sullivan CPA, PFS

Failure to understand the Medicare rules can cost your clients hundreds if not thousands of dollars. A CPA, PFS advisor can provide value to clients by understanding the basic rules of Medicare and warning clients about traps that may require them to pay for medical care out of pocket — costs that they assumed Medicare would pay. Let’s look at an example that has received increasing attention.

When a Hospital Stay Is Not a Hospital Stay

Increasingly, hospitals are admitting Medicare patients for observation rather than admitting them as an inpatient. Often both the patient and their family misunderstand the distinction when the care is received. But the distinction is important when it comes time to pay the bill or if the patient is admitted to a skilled nursing facility.

Medicare Part A (Hospital Insurance) pays for a hospital stay when the patient is formally admitted to a hospital with a doctor’s order. Medicare pays for the patient’s subsequent hospital stay in a skilled nursing facility or SNF if it lasts three days or more, provided the stay is ordered by the doctor. The patient pays nothing for the first 20 days; for days 21 through 100 the patient must make a co-payment in 2010 of $137.50 per day.

If the patient enters the hospital for observation, rather than as an inpatient, it will impact how the stay is paid for and whether the patient qualifies for a Medicare paid stay at a SNF following hospitalization.

First, when admitted for observation status, Part A will pay nothing toward the cost of the stay. The costs will be paid for by Part B. Part B (Medical Insurance) covers doctors’ services, outpatient care, home health and a variety of other medical service costs. While Part B will pay for many of the services received while the patient is in observation status, it does not pay for oral medications taken during this time (if it were a covered Part A stay, medications would be paid for). The patient will have to apply through his or her Part D prescription drug plan. More than likely, the hospital pharmacy will not be considered an in-network provider under the plan and reimbursement for the medications will be less.

Medicare Supplement (or Medigap) plans are offered by private insurance companies. These plans pay for covered healthcare expenses not paid for by Medicare such as any deductibles or co-payments. For patients without a Medicare Supplement plan the difference between the hospital stay being paid for by Part B rather than Part A has another potential cost due to the differences in the deductible and co-payments between the two plans.

Under Part A the deductible for a hospital stay is $1,100 in 2010. After the deductible is paid, Medicare picks up the rest of the cost of the stay for up to 60 days. For days 61 through 90 the patient must make a co-payment of $275 per day. Under Part B the annual deductible is $155 but the Medicare participant must pay 20 percent of almost all the covered expenses. The cost of a hospital stay — even an observation stay — may mean the patient is out of pocket more due to the co-payment if Part B is paying the cost rather payment being made under Part A.

For Medicare reimbursement purposes, admittance to a hospital for observation — even if it lasts three or more days — does not qualify the patient for Medicare coverage at an SNF following hospitalization. He or she will have to pay the cost of the SNF themselves. Some facilities can cost $400 or more a day — the cost of which will be the responsibility of the patient from the first day of admittance. Some Medicare Supplement (Medigap) plans do pay the SNF daily co-payment. If, however, a stay is not covered by Medicare due to failure to meet the three day hospital stay rule, it will not pay for any part of the stay.

What Is an Observation Stay?

An observation stay is defined in chapter 12 of the Medicare Claims Processing Manual. In only rare circumstances is it to last more than 48 hours. During that time appropriate services “…include…assessment and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients of if they are able to be discharged from the hospital.” In general, a decision “… can be made in less than 48 hours, usually in less than 24 hours.”

Unfortunately, even if the patient is admitted as an inpatient, a utilization review committee can reverse the decision at a later date. This can change his or her status to that of observation status. While Medicare expects such actions to be taken only rarely, reversals have been occurring more frequently.

A Growing Trend

Over the past several years, hospitals have increased the use of observational stays. In part this is due to the increased scrutiny by Medicare of hospital admissions. Incorrectly admitting a patient can result in a hospital being charged with fraud. If a doctor is uncertain that a patient meets the Medicare criteria to be admitted as an inpatient, admitting the patient for observation is the safer course.

Due to the increasing scrutiny, The Center for Medicare and Medicaid Services (CMS) issued its first guidance on the topic.Product No. 11435: Are You a Hospital Inpatient of Outpatient? If You Have Medicare — Ask! (PDF) was issued in December 2009.

What Should a Client Do?

Clients should be aware of the difference between an inpatient stay and an observation stay before a hospitalization occurs. The hospital is not obligated to explain the difference to them. When being admitted the patient or a family member or friend must ask about the circumstances of the admittance. This is part of the education you can provide to clients as part of your regular meetings. And don’t be surprised if one of your clients brings the subject up with you. As more of these incidents occur the news spreads rapidly among seniors. Your clients may look to you for additional information.

As with other decisions regarding Medicare payment, appeal is possible. Recent decisions by Administrative Law Judges have reversed decisions classifying a hospital stay as for observation rather than inpatient. View more information on the appeals here.


According to a recent survey of near-retirees by the TIAA-CREF Institute 71 percent of respondents were very or somewhat concerned about their ability to afford healthcare in retirement. Further, 97 percent of the participants believe the topic is very or somewhat important — yet only 17 percent of those have discussed the issue with a financial advisor. Similar results were found in the 2009 Retirement Confidence Survey issued by the Employee Benefit Research Institute. Among Americans still working, only 13 percent feel “very confident” that they will be able to afford healthcare in retirement.

There is an opportunity for CPA, PFS advisors to educate their clients regarding healthcare in retirement and help them plan for what may be some retirees’ single largest expense in retirement — healthcare. Advisors with an ability to discuss these issues will have an advantage attracting and retaining clients.

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James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force. PFP Section members, including PFS credential holders will benefit from additional Medicare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp.  Non-members can click here to join the section.