Two of the greatest sources of frustration for Medicare recipients and their families are observation status and the government’s incredibly complex appeals process. On Monday, a federal judge in Hartford CT, certified a class action lawsuit aimed at addressing both. The judge’s eventual decision in the case (Alexander v. Price) could have far-reaching effects on both the burgeoning use of observation status in hospitals and the rights of people getting Medicare to dispute decisions about their care.

Observation status is intermediate hospital-based care between the emergency department and admission. For example, it may be used for someone who comes to the ED with chest pain but is not suffering heart attack. Doctors may want to keep an eye on the patient for a day or two but determine that she does not require a formal admission. Care is usually provided in a special observation unit, sometimes called a clinical decision unit or CDU.

Observation care is not new. It has been around since the 1970s and it serves an important clinical purpose. But over the past several years, it has become increasingly common. Observation cases doubled from 2006 to 2014, to 1.6 million, according to Medicare.

What happened?  Medicare auditors have been pressuring hospitals to use observation rather than admissions as a cost-saving measure. Medicare payments for observation patients vary by condition but are roughly two-thirds of its payment for an admission. Worse for a hospital, if Medicare auditors determine that a patient should have been placed in observation rather than being admitted, the hospital must refund its full payment from Medicare, not just the difference between the two rates. Thus, risk-averse hospitals encourage doctors (who make the final call) to use observation.

The growth of observation has created confusion and significant financial issues for some patients.

There are two big ones. The first is that Medicare patients in observation are covered as outpatients under the rules of Medicare Part B rather than inpatients under Part A. In other words, they must pay the same copayments as if they were visiting a doctor’s office. On the other hand, they are not required to pay the Part B hospital deductible.  Confused? You should be.

The second issue affects those patients who are discharged to a skilled nursing facility (SNF) for rehabilitation or post-acute care.  Medicare will pay for up to 100 days of skilled nursing care, but only if a patient has first been hospitalized for three days. The problem: Observation does not count toward this three-day rule. Thus, someone who spends three days or more in observation may not receive any Medicare post-acute benefits while someone who is admitted to the hospital would.

As a result, the observation patient would have to pay for that often-costly care out of pocket. At the same time, it also happens that Medicare pays hundreds of millions of dollars in SNF care that should be billed to patients.

For several years, a bill to count observation time against the three day rule has been pending in Congress, but it has gone nowhere.

This three-day rule problem affects only a limited number of Medicare patients. A 2014 study found that only about 10 percent of patients were discharged from hospital to a skilled nursing facility, and less than one percent were at risk for higher out-of-pocket costs. However, that study used 2009 data and, given the growth of observation since, it is likely that more are at risk now.  Those who are caught up in the rule may spend thousands of dollars.

Worse, patients and their families may not understand their status in the hospital or the financial consequences of observation. That brings us to appeals.

Normally, Medicare has an appeals process, though it is cumbersome and often hard to understand. When it comes to observation, it is even more challenging for patients. There is no expedited appeals process at all, thus patients must pay SNF costs out of pocket and then try to sort it out with the facility and Medicare later. Worse, according to the complaint in the new court case, Medicare often does not respond to these appeals, leaving patients and their families in legal limbo—not denied but not approved either.

On July 31, US District Judge Michael Shea OK’d a class action lawsuit by many (though not all) of the patients caught up in the observation mess.  Justice in Aging, which represents some of the plaintiffs, says that “class members are likely to number in the hundreds of thousands.”  The Department of Health and Human Services strongly opposed certification of the class and could appeal.

(Full disclosure: I am the unpaid chair of the board of a community hospital).