In October, a 90-year-old man was taken to El Camino Hospital in an ambulance with back pain so severe that it prevented him from getting out of bed.

The man, who was suffering from dementia, kidney failure and a compression fracture, was reportedly screaming in pain and throwing up, and spent five days in the hospital, undergoing an MRI scan, dialysis and a back procedure called a kyphoplasty.

When he was finally released, his family was shocked to find that the hospital stay and procedures landed them with a $13,000 bill, despite the man's Medicare coverage. The reason? Throughout his five-day stay at the hospital, El Camino never admitted him as an inpatient.

In a grievance letter to El Camino dated Nov. 1, the family of the patient argued that the hospital dropped the ball, expressing frustration that their father could have gone through so many procedures and days in the hospital without ever being formally admitted as an inpatient. The letter acknowledges that kyphoplasty is a minor, non-invasive procedure for a healthy person, but states that wasn't the case here, given the circumstances.

"For a 90-year-old man with dementia, who is on dialysis three days a week and is unable to walk without assistance from back pain, I believe it would be necessary to admit him into your hospital," the letter states.

The family's situation isn't unique. Millions of Americans on Medicare are admitted into hospitals each year, and in each individual case, physicians have to figure out whether to admit patients as inpatients or keep them in what's called "observation" outpatient status. The distinction has huge implications on how much the patient has to pay for care, and whether Medicare will pick up the bill if a stay at skilled nursing facilities is required.

El Camino Hospital officials say that aggressive cost-saving efforts by the Centers for Medicare and Medicaid (CMS) discourage hospitals from accepting Medicare recipients as inpatients -- or risk facing audits and rejected reimbursement claims. This creates more situations where the elderly, sick and injured are getting slapped with a big hospital bill.

A standoff with the feds

Hospital patients who are granted inpatient status are covered under what's called Medicare Part A, which pays for hospital services including drugs, scans and medical procedures. Patients who remain in outpatient "observation," on the other hand, receive coverage under Medicare Part B, which leaves patients on the hook for a percentage of the hospital bill and the cost of any subsequent nursing care.

If a Medicare patient is discharged from the hospital after three days of inpatient care, they are entitled to 20 days of covered, no-cost care at a skilled nursing facility, and heavily reduced costs for 100 days after that. No such provision exists for patients kept in "observation."

For the federal government, there's a financial reason to bring down inpatient hospital claims. CMS data from 2014 shows that Medicare had to pay out $13,200 on average for an inpatient visit for a coronary stent insertion, compared to $8,300 for the same procedure in an outpatient setting. The same is true for patient visits for fainting, digestive disorders and chest pain, according to one report.

There's a long-standing dispute, with CMS on one side and patients and hospitals on the other, about when inpatient status is appropriate for Medicare patients, according to Dr. Daniel Shin, medical director of quality and patient safety at El Camino Hospital. CMS has sought for years to reduce the cost of Medicare by bringing down the number of short hospital visits that are "inappropriately" billed as inpatient visits, hiring outside companies to audit hospital medical records.

The result was an adversarial situation where Medicare claims would be regularly denied and hospitals like El Camino would have to return the money. Worst of all, Shin said, it created a situation where hospitals had every reason to avoid audits entirely by keeping patients on outpatient observation status.

"The company would deny your claim, you would have to send the money back to Medicare, the (auditing) company would get a percentage of the claim denied as their commission," he said. "It was not a collaborative process."

Shin reviewed the medical records related to the November grievance letter, and concluded that the 90-year-old patient should have been given inpatient status during his stay at the hospital. He conceded that it was likely an oversight on the hospital's part, partly fueled by hazy rules about when a patient's visit to the hospital should switch to inpatient status, as well as an overly conservative approach from "care coordination" staff at El Camino Hospital, who for years were trained to avoid audits.

The hospital's grievance committee reviewed the letter together at a Nov. 7 meeting, and ultimately decided to waive the full cost of the bill to the elderly man's family.

"I thought he was sick enough and had enough acute medical needs that after review I said this probably should have been an inpatient admission," said Shin, who serves an advisory role on the committee.

Frustration over outpatient observation status, and the sluggish and complicated appeals process for requesting Medicare Part A coverage, are the drivers behind a major court battle that could shift the balance in favor of the patients. A Connecticut federal court judge certified a class-action lawsuit that includes all Medicare beneficiaries who received hospital services under observation status -- dating all the way back to 2009 -- who face major roadblocks in appealing hospital and nursing care bills.

One of the big players in the suit, The Center for Medicare Advocacy, reports that hospitals are still waiting on a tremendous backlog of appeals -- as many as 400,000 -- related to inpatient claims. The center paints CMS's Recovery Auditor Contractor (RAC) program as a punitive measure that pushes hospitals away from inpatient care even when it makes sense.

"If an (audit) determines that a patient should have been treated on an outpatient basis instead of inpatient, the hospital must return the Medicare Part A reimbursement it received for the patient's care and the hospital gets essentially no reimbursement for the patient's stay," according to the group.

Shin said that the care patients receive doesn't change, and that Medicare patients are entitled to the same level of services regardless of their status. But it can have huge consequences on older and disabled patients when they get the bill.

"When the patients are here under observation or inpatient, I don't treat them differently," he said. "I provide the same service I normally would, the same tests, the same CAT scans. We don't change anything we do.

"What it affects is the patients' pocketbook and their ability to go to a nursing home if they need it," he said.

Unclear guidelines

In an effort to provide much-needed clarity for hospitals, CMS introduced a new regulatory guideline known as the "two-midnight rule" in 2013, which advised hospitals to grant inpatient status to any Medicare patient who is likely to stay at least two days in the hospital.

The rule has been criticized by advocacy groups and hospitals since it took effect. The time measurement is disconnected from the diagnosis, medical procedures and judgment of physicians, and automatically switching people to inpatient status after the second night doesn't exempt the Medicare claim from future audits.

In the first year of the rule's implementation, outpatient Medicare visits increased by nearly 260,000 -- over 8 percent -- while inpatient visits decreased by about the same amount.

The federal Office of Inspector General (OIG), tasked with reducing waste and fraud in federal agencies including Medicare, released a report in Dec. 2016 essentially arguing both sides. It found that hospitals -- and by extension patients -- are still reaping the benefits of $2.9 billion in annual inpatient visits that are "potentially inappropriate." Yet the report also cites troubling data showing more Medicare patients are getting stuck with outpatient bills and limited access to nursing facilities.

Shin said that El Camino technically follows the two-midnight rule, but not by way of a rigid 48-hour clock that requires reassessment right after two days. Based on the November grievance letter, he said the hospital is considering changing that practice.

"The conversation in the (grievance) committee is, 'Should we do what other institutions do,' which is call the physician at 48 hours and ask if that patient is going home that day," he said.

Shin said he doesn't cast any blame on the hospital staff for incorrectly classifying the patient visit in October. He said El Camino, like other hospitals, has been forced to focus heavily on audits and claim denials so the hospital wouldn't get in trouble, and the two-midnight rule didn't do much to clarify the situation.

"There's still that feeling that a recovery audit review could occur, but then we're also supposed to use this two-midnight rule as well," Shin said. "I hardly blame the staff -- it's very confusing."