As of October 11, 2024, important changes were implemented to create appeals processes for certain Medicare beneficiaries who were admitted to the hospital as inpatients but later reclassified as outpatients receiving observation services during their stay and who meet other eligibility requirements. Below is a clear summary of what these changes mean and how they may affect Medicare coverage for post-acute skilled nursing care.
What is observation status?
Observation status is a hospital classification used for patients who require monitoring and treatment but do not meet the criteria for formal inpatient admission. Common reasons for observation include symptoms that need short-term assessment—such as chest or abdominal pain, severe headache with neurologic signs, a mental health crisis, or monitoring after certain procedures. Patients on observation typically remain in a hospital bed while staff monitor vital signs, symptoms, and responses to treatment.
Observation stays are generally intended to be short—often fewer than 24 hours but sometimes longer depending on clinical needs. It is important to recognize that being designated as an observation outpatient can affect Medicare coverage after discharge, including eligibility for Medicare-covered skilled nursing facility (SNF) care.
Background of the observation vs. inpatient conundrum
Historically, Medicare required beneficiaries to be admitted as inpatients for at least three consecutive days (commonly called a “two-midnight” stay) in order for Medicare Part A to cover subsequent SNF care. Problems arose when physicians initially admitted patients as inpatients but hospital utilization review staff later reclassified those patients as outpatients under observation. Because utilization review teams are required at Medicare-participating hospitals, their reclassification decisions could retroactively change a patient’s coverage eligibility.
When a hospital reclassifies an inpatient to observation, Medicare Part A coverage for that hospital stay can be denied. That denial may also disqualify the patient from Part A coverage of post-hospital skilled nursing services, leaving many beneficiaries with unexpected out-of-pocket costs or forcing them to forgo recommended post-acute care.
Taking it to the courts
In March 2020, a group of Medicare beneficiaries and their families filed a class-action lawsuit challenging how reclassification to observation status affected coverage. The plaintiffs argued that some patients were placed on observation—either from the outset or after inpatient admission—and remained in the hospital for days under that status, suffering financial harm and losing access to Medicare-covered SNF care.
The complaint described multiple harms: patients paying for hospital services without coverage, paying out of pocket for post-hospital SNF care, or choosing to decline recommended SNF care because Medicare would not cover it after an observation designation. The plaintiffs sought a mechanism to challenge the coverage-altering decision to classify them as observation patients, arguing that the lack of appeal procedures deprived them of due process.
Establishing a more fair Medicare appeals process
Following the litigation, the Department of Health and Human Services was ordered to establish appeals procedures for certain beneficiaries who were initially admitted as inpatients but later reclassified to observation and who meet specified criteria. In October 2024, HHS issued a notice implementing the court’s direction and describing the new processes.
The updated rules create two main appeal options:
- Retrospective appeals: These allow members of the lawsuit class who previously were denied the right to appeal a coverage determination to seek review of those past denials.
- Expedited (prospective) appeals: These allow currently hospitalized, eligible beneficiaries who are likely to need post-acute care to obtain a faster review of a reclassification decision while still in the hospital, to help determine coverage for upcoming discharge needs.
Key Medicare rule changes to know about
Coverage after observation status
Under the new rules effective October 2024, Medicare will cover skilled nursing facility care for patients who spent at least 24 hours in observation status, provided they meet applicable medical criteria. This significantly expands access for beneficiaries who previously lost SNF coverage because their hospital time was classified as observation rather than inpatient.
Medical necessity criteria
Coverage under the revised rules still depends on medical necessity. Medicare will evaluate whether SNF-level care is required based on the beneficiary’s clinical condition and the type of services needed. Approval for post-acute care will hinge on that clinical assessment to ensure appropriate placement and services.
Improved communication requirements
Hospitals are now required to provide clearer communication to patients and families about observation status. That includes timely documentation and notification about the patient’s classification, the implications for coverage, and potential post-discharge options. Improved notifications are intended to help beneficiaries and caregivers make informed decisions and plan for any necessary care after leaving the hospital.
Implications for Medicare beneficiaries
These changes aim to reduce the financial burden on patients who need post-acute care following an observation stay. Beneficiaries should, however, keep several considerations in mind:
- Understand your coverage: Review the specific requirements for Medicare Part A skilled nursing coverage and how the new rules apply, including the medical necessity evaluation.
- Coordinate care and communication: Maintain clear communication with hospital providers and family members during a hospital stay to clarify admission status and to prepare for potential post-acute needs.
- Financial planning: Although coverage has expanded, beneficiaries should still review their Medicare plan and consider supplemental insurance to address any possible out-of-pocket costs.
Improvements to Medicare’s skilled nursing care coverage
The October 2024 changes to Medicare’s appeals procedures represent a meaningful step toward improving access to necessary post-acute care for patients who were placed on observation status. Previously, many older adults lost access to Medicare-covered SNF care because their hospital stays were classified as observation rather than inpatient—sometimes without the patient’s knowledge until after discharge.
By creating clear appeal pathways and expanding coverage eligibility in certain situations, the revisions help beneficiaries better navigate post-hospital care with less financial uncertainty. These changes may also affect continuing care retirement communities and other providers that offer or consider offering skilled nursing services.
Beneficiaries and families should stay informed, actively engage with healthcare providers about admission status, and review the terms of their Medicare coverage to ensure they receive appropriate care with minimal unexpected costs.
This post was edited on 10/29/2024 to clarify that this change affects the appeals process and does not alter Medicare’s core definitions.