Late last week, the Centers for Medicare & Medicaid Services (CMS) finalized a rule that codifies appeal rights for people with Medicare who are admitted to the hospital as inpatients and later reclassified as outpatients receiving observation services.

These classifications and reclassifications can have huge financial implications for beneficiaries. First, people who do not have Medicare Part B might lack coverage for hospital outpatient services. A reclassification can force them to pay for the outpatient stay out of pocket.

More commonly, Medicare coverage of skilled nursing facility (SNF) room and board requires a prior three days of Medicare-covered inpatient hospital care. Outpatient services do not trigger this coverage, so people who leave the hospital after having observation status do not have access to Medicare coverage for their subsequent skilled nursing facility stay and must pay out of pocket, if a facility will accept them at all.

These reclassifications can be particularly frustrating for patients because the experience of a stay with observation status may look identical to a stay with inpatient status and, in the case of the plaintiffs in the lawsuit that triggered this rule change, hospitals may even change how a stay is classified retroactively. This means that even a patient who expressly inquired as to their classification and was told that they were an inpatient may have that stay changed after they have left the hospital. This can leave the patients on the hook for thousands of dollars in hospital services if they do not have Part B or in charges for SNF care.

With this change, people in Original Medicare who are initially admitted as inpatients can file an appeal if their status is later changed to outpatient observation status. This includes people who are in the hospital before transferring to a nursing facility as well as individuals who have had status changes since January 1, 2009.

We applaud this final rule as well as the Center for Medicare Advocacy, Justice in Aging, and pro bono firm Wilson Sonsini Goodrich & Rosati who brought the underlying case on behalf of a nationwide class of Medicare beneficiaries.

We frequently hear from people with Medicare who have had their status reclassified from inpatient to outpatient and who face financial burdens as a result. We also support further work to mitigate the effect of the three-day inpatient stay requirement, including its full elimination, to increase access to needed SNF care and to recognize changing health care practices.

Read more about observation status from Medicare Interactive.

Read more about policy solutions for the interaction of observation status and skilled nursing coverage.

Read the Center for Medicare Advocacy’s frequently asked questions for more information about the case.