United States Court of Appeals for the Second Circuit upholds right of Medicare patients to administrative review of their medical reclassification The case of Barrows v. Becerra, No. 20-1642 (2d Cir. 2022) provides a fascinating insight into the world of medical billing. In Barrows, the plaintiff-appellee class members were Medicare beneficiaries who were formally admitted to a hospital as inpatients before subsequently being reclassified as “outpatients receiving observation services.” The plaintiffs brought a class-action lawsuit alleging that their due process rights were violated by declining to provide them with an administrative review process for the reclassification decision. At trial, the Court ruled in favor of the plaintiff class and entered an injunction that ordered the creation of an administrative review process. On appeal, the defendant challenged the finding that the plaintiff class had standing, the certification of the plaintiff class, and the conclusion that the plaintiffs’ due process rights were violated by the current administrative procedures available to Medicare beneficiaries. Background Whether a hospital classifies a Medicare beneficiary as an inpatient or an outpatient has major consequences in terms of the coverage provided by Medicare. In general, inpatient hospital and post-hospital extended care are eligible for coverage under Medicare Part A, while that of an “outpatient” or someone receiving “observation services” is not. Accordingly, a hospital’s decision to reclassify a Medicare beneficiary from an “inpatient” to an “outpatient” can have a significant impact on the amount that the patient is required to pay out-of-pocket for their care.Why don’t hospitals just classify everyone as inpatients so that their medical services are covered? If a hospital classifies a patient as an “inpatient” when Medicare believes that they should have been an “outpatient,” Medicare will not reimburse the hospital for services provided (at 6). Medicare requires hospitals to implement a utilization review plan, whereby a hospital’s utilization review committee (“URC”) internally reviews admissions for medical necessity to ensure they meet Medicare’s criteria for reimbursement (at 9).Prior to this case, a patient had no way to challenge their reclassification from an “inpatient” to “outpatient”/“receiving observation services” and their subsequent loss of Medicare coverage for services provided (at 10-11). Appeal Decision The Court affirmed that that class had standing and the certification was proper (at 17-22).With respect to whether the lack of procedure violated due process rights, the Court noted that in order for the plaintiffs to establish a due process violation they must show that state action deprived them of a protected interest in liberty or property without due process of law (at 26).State ActionTo succeed on a Due Process Clause claim, plaintiffs must first demonstrate that the challenged activity leading to their constitutional deprivation is “fairly attributable” to the state. Actions of a private entity are attributable to the State if there is a sufficiently close nexus between the State and the challenged action of the entity so that the action of the latter may be fairly treated as that of the State itself (at 26-27).The Court held that the evidence showed that Medicare exerts pressure on URCs to submit claims only for inpatient admissions that Medicare would characterize as inpatient admissions and to apply Medicare’s rules to classify inpatient versus outpatient status. Therefore, when a URC determines that a patient does not meet the inpatient criteria and reclassifies the patient, it may be fairly treated as a reclassification by the State itself (at 33-34).Property InterestThe Court noted that in order to have a property interest in a benefit, a person must have a legitimate claim of entitlement to it. The Court held that the Medicare benefits regime creates a legitimate claim of entitlement and that the plaintiffs had a property interest in coverage under Medicare that is cognizable under the Due Process Clause (at 34-36).Due Process To determine whether a deprivation has been made without the process required, the court applied the test from Mathews v. Eldridge. The test requires balancing: (1) the private interest at stake; (2) the risk of an erroneous deprivation of that interest through the procedures used and the probable value (if any) of alternative procedures; and (3) the government’s interest, including the possible burdens of alternative procedures (at 36-37).The Court held that there was a substantial private interest at stake in this case due to the “astronomical nature of medical costs” (at 37). The Court also concluded that there was a serious risk that Medicare beneficiaries were erroneously deprived of coverage to which they are entitled by URC reclassification decisions that they were unable to challenge (at 38). The burden on the State to institute an appeal process was mitigated by the existence of similar appeal procedures (at 41). Summary In sum, the Court ruled that the plaintiffs demonstrated that their due process rights were violated when URCs reclassified them from inpatients to those receiving observation services without providing a mechanism to appeal that decision and affirmed the district court’s decision to grant injunctive relief (at 41).