As of October 11, 2024, significant changes have been made to establish appeals processes for certain Medicare beneficiaries who are initially admitted as hospital inpatients but are subsequently reclassified as outpatients receiving observation services during their hospital stay and who meet other eligibility criteria. Here’s what you need to know about how this might impact Medicare beneficiaries’ post-acute skilled nursing care coverage.

What is observation status?

Observation status is a classification used by hospitals to monitor patients who require care but who do not currently meet the criteria for inpatient admission into the hospital. Perhaps they are experiencing symptoms that require monitoring to determine the cause or severity of their condition. A few examples might include chest or abdominal pain, a severe headache with vision changes or numbness, a mental health crisis, or post-surgery.

Patients under observation typically receive the care they need in a hospital bed, but are only there for a limited time — usually not more than 24 hours. During that time, the hospital’s healthcare professionals closely monitor the patient’s vital signs like heart rate, blood pressure, and respiratory rate. 

It is critical for people to understand that this observation status can affect subsequent Medicare coverage, including if the patient needs additional medical care when they leave the hospital.

Background of the observation vs. inpatient conundrum 

Medicare requires beneficiaries to be hospitalized as inpatients for three consecutive days (a “two-midnight stay”) before the program would cover the patient’s post-acute transfer and stay in a skilled nursing facility (SNF, also called a nursing home). 

Medicare coverage issues may arise, however, when a physician or other qualified practice provider admitted a patient to a hospital as an inpatient, but during the course of their stay, the patient’s status was reclassified to outpatient or observation by the hospital’s “utilization review staff” — a case review team that is required to be on staff at all Medicare-participating hospitals. 

Patients who find themselves in this reclassification situation can be denied Medicare Part A coverage for their hospital stay. What’s more, this change in status can also impact the availability of Medicare Part A skilled nursing care coverage for the patient’s post-hospital extended care services provided in an SNF.

>> Related: Long Term Care: How Much Does Medicare Actually Cover?

Taking it to the courts

In March 2020, several Medicare beneficiaries and their families who were impacted by this reclassification issue filed a class-action lawsuit against the Department of Health and Human Services (HHS), which oversees the Centers for Medicare & Medicaid Services. 

This excerpt from the 2020 class-action complaint, Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020) (PDF), summarizes the plaintiffs’ case:

“The plaintiffs in this case are a nationwide class of Medicare beneficiaries who were placed on observation status after entering the hospital. Some were placed on observation status at the outset, while others were put on observation at the behest of the hospital’s utilization review staff after a physician had initially designated them as inpatients. Many of the plaintiffs remained in the hospital on observation status for days. And many suffered serious financial or other consequences as a result of these decisions. Some were responsible for paying for the hospital services themselves, because they lacked Medicare Part B or private coverage. Others ended up paying the costs of a post-hospital skilled nursing facility themselves, because they went to the facility after an extended hospital stay in which they were not designated as inpatients. Still others, despite a recommendation by their physicians, chose to forgo care at a post-hospital skilled nursing facility, realizing that Medicare would not pay the associated costs because their physician or the hospital had designated their hospital stay as “observation” rather than inpatient. All of these plaintiffs seek a procedure to challenge the coverage-altering decision to classify them as “observation,” and argue that the Secretary is depriving them of their property interest in Medicare benefits without due process by failing to afford them such a procedure.” 

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Establishing a more fair Medicare appeals process

As a result of the lawsuit, HHS was ordered to “establish appeals processes for certain Medicare beneficiaries who are initially admitted as hospital inpatients but are subsequently reclassified as outpatients receiving observation services during their hospital stay and meet other eligibility criteria,” per the notice (PDF) put out by HHS on Oct. 15, 2024. 

The court imposed additional conditions on the right to appeal as described in detail in this same HHS notification document. In short, the revised regulations create two new appeal processes for Medicare beneficiaries:

  • Retrospective appeals can be filed for those lawsuit class members who were denied the right to appeal a denial of coverage in the past. 
  • Expedited (Prospective) appeals will be available on an ongoing basis for eligible Medicare beneficiaries who are still in the hospital and will need post-acute care when they are released

>> View Frequently Asked Questions about this Medicare class action lawsuit, including information for people who think they may be members of the class.

Key Medicare rule changes to know about

Coverage after observation status

As we’ve discussed, Medicare historically required hospital patients to be formally admitted as inpatients for at least three consecutive days (“two midnights”) to qualify for coverage of subsequent skilled nursing care. As a result, many patients placed under observation status found themselves ineligible for this critical support, which led to significant out-of-pocket costs in some cases.

Under these new October 2024 rules, Medicare will now cover skilled nursing care for patients who have spent at least 24 hours in observation status, provided they also meet certain medical criteria. This change is a substantial shift in Medicare coverage policy, as it expands access for those who need it most to essential post-hospital care in a nursing home environment.

Medical necessity criteria

While the new rule broadens eligibility for hospital and nursing home care, coverage is still contingent on meeting medical necessity criteria. Medicare will evaluate whether skilled nursing care is necessary based on the patient’s health condition and the services the patient requires. This evaluation will be essential to ensure that beneficiaries receive appropriate care in the appropriate setting.

Improved communication requirements

To support patients and families in navigating these changes, hospitals are now required to improve communication about observation status. This includes clear documentation and notification to patients/their loved ones about the patient’s classification, the implications for care, and available care options post-discharge. Enhanced communication aims to empower patients and their loved ones to make informed decisions regarding care.

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Implications for Medicare beneficiaries

These new Medicare coverage appeals rules are expected to significantly reduce the financial burden on patients who are in need of additional care following their time in hospital observation. However, Medicare beneficiaries should be aware of a few important considerations:

  • Understanding the terms of your specific Medicare coverage: Medicare beneficiaries should familiarize themselves with the specific requirements for skilled nursing care coverage under their specific plan as well as under these new rules, including the medical necessity evaluation.
  • Care coordination: During a hospital stay, effective communication between the patient/their loved ones and healthcare providers can help clarify the patient’s admission status and allow the patient/their loved ones to prepare for necessary post-acute care when they leave the hospital.
  • Financial planning: Although the new rules provide expanded coverage, beneficiaries should still review their Medicare plan(s) and consider supplemental insurance options to cover any potential out-of-pocket costs.

Improvements to Medicare’s skilled nursing care coverage

The October 2024 changes to Medicare’s appeals rules regarding coverage of skilled nursing care following hospital observation status mark a significant step toward improving patient access to necessary post-acute care services. 

Indeed, prior to this shift, many older adults who needed skilled nursing care upon leaving the hospital couldn’t receive it because the three-day inpatient hospital stay — required by Medicare in order for the program to cover the cost of post-acute care at a SNF — was classified as “observation” instead of “inpatient,” sometimes unbeknownst to the patient or their family until after discharge. 

By understanding these new guidelines, Medicare beneficiaries can better navigate their healthcare options and ensure they receive the care they need without undue financial stress on them and their loved ones. Additionally, this change also will have implications for continuing care retirement communities (CCRCs, or life plan communities) that currently have or are considering dropping their skilled nursing services.

As always, it’s important for older adults and their families to stay informed and engage actively with their healthcare providers to make the best decisions for their health. It is also essential for Medicare beneficiaries to educate themselves on the terms of their plan(s). Visit https://www.medicare.gov/ for the latest details on how the program and its various plans work.

This post was edited on 10/29/2024 to clarify that this is a change to the appeals process and not to Medicare’s definitions. 

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