This week a Medicare beneficiary won a retrospective change of status appeal that granted him coverage of costly hospital services. The appeal was made possible by CMA’s class action litigation regarding “observation status.” These types of appeals are available for class members who could not appeal at the time of their hospitalizations. They must be filed by January 2, 2026. Read more for details about the appeal and practice tips.
Background
In 2016, “Mr. R” (a pseudonym) was hospitalized near his home in New Jersey with abdominal pain, fever, chills, and nausea. At 65 years old he was new to Medicare and had made a considered choice to enroll only in Part A because it included hospital care, the coverage he most needed and the most expensive level of care. He went to the emergency room without a concern about insurance, thinking his Part A “Hospital Insurance” would provide the coverage he required.
Initially, a physician admitted Mr. R as an inpatient and he was moved to a regular hospital floor. He was treated for an acute GI infection over the course of four days. However, the hospital reclassified him as an observation status “outpatient” before he was discharged, claiming he did not meet Medicare criteria for inpatient admission.
The Problem
Mr. R’s reclassification to observation status meant that he was responsible for the full “sticker price” of his hospitalization. Observation services are covered as outpatient services by Medicare Part B, regardless of where in the hospital they are provided. So even though Mr. R’s care was indistinguishable from that of the inpatients who surrounded him, his services were not covered by Medicare Part A, and he did not have coverage from Medicare Part B for his observation services.
What’s more, at the time of his hospitalization in 2016, Medicare did not permit beneficiaries to appeal the issue of whether their reclassification from inpatient to observation was correct. Mr. R was stuck paying a bill of several thousand dollars. He tried contacting the hospital and other officials, to no avail.
Solution: Retroactive Status Change Appeal
Mr. R is a class member in the Center for Medicare Advocacy’s litigation regarding observation status appeals. These appeals are now available for eligible beneficiaries with hospitalizations dating as far back as 2009. Mr. R submitted an appeal using Medicare’s Request for Retrospective Appeal of Medicare Part A Coverage, along with medical records from his hospitalization and an explanation of why his inpatient admission satisfied the relevant criteria for Part A coverage at the time the hospital services were furnished. The medical records supported the physician’s expectation, at the time of the inpatient order, that he would require hospital care spanning at least two midnights.
Mr. R received a letter from Medicare Eligibility Contractor stating that he had been found eligible for a patient status appeal, and his materials were being automatically forwarded to the contractor responsible for processing first-level appeals. He then received a fully favorable decision this week from the appeal contractor, finding that his hospital stay in 2016 met the applicable Part A hospital inpatient coverage requirements. The decision contains helpful explanatory language:
The change in status from inpatient to outpatient observation…was not appropriate under CMS policy. Although the attending physician and utilization review committee agreed with the change, the original inpatient admission was not erroneous and met the criteria for Medicare Part A coverage under the Two Midnight Rule. At the time of admission, the physician documented a reasonable expectation that the beneficiary would require hospital-level care spanning at least two midnights….This expectation was supported by clinical findings…..
The beneficiary’s improvement after fewer than two midnights does not invalidate the original admission decision. The CMS policy does not permit the use of Condition Code 44 [allowing change from inpatient to outpatient] to retroactively reclassify a reasonable and necessary inpatient stay based solely on the actual length of stay or clinical improvement. Therefore, the change in status was inconsistent with CMS guidance, and the claim should be covered under Medicare Part A.
The decision also specifies that the hospital must refund any payments collected from Mr. R, and then may submit a new claim to Medicare for the inpatient services covered under Part A.
Practice Tips
Hospital reclassifications from inpatient to observation status can result in beneficiaries incurring substantial out-of-pocket costs or forgoing necessary, post-hospital rehabilitation services. Patients in traditional Medicare must be hospitalized for at least three consecutive days as inpatients to be eligible for a Medicare-covered stay in a skilled nursing facility.
Understanding and using change of status appeals can help. Medicare beneficiaries should receive the services and benefits they qualify for, while avoiding unnecessary financial burdens. Change of status appeals are now available and should be used when appropriate. Do not assume a reclassification from inpatient to observation status is final.
Understand Eligibility Requirements
Status change appeals are available for patients who are:
- Admitted as inpatients;
- Subsequently reclassified as outpatients receiving observation services; and,
- Meet other specified criteria (see CMA’s FAQ about the observation status court decision)
Other Considerations
- Deadline: Retrospective appeals of the kind Mr. R submitted must be RECEIVED by the Eligibility Contractor by January 2, 2026.Exceptions for late filing must show “good cause,” such as your own serious illness; death or serious illness in your immediate family; physical, mental, or other limitations; limited English proficiency; or delays due to seeking help from outside resources like a State Health Insurance Assistance Program (SHIP) or senior center.
- As of February 2025, change of status appeals can be filed while the patient is still hospitalized (ideal for avoiding upfront private payments for skilled nursing facility care). These appeals are filed using the Medicare Change of Status Notice issued by hospitals.
- Change of status appeals can also be filed while at a skilled nursing facility or after discharge, once out-of-pocket payments have already been made. Eligible beneficiaries may file them at any time.
- Successful post-payment appeals may result in Medicare coverage and refunds. Mr. R’s decision is one example of a successful post-payment appeal.
For more information, see CMA’s Observation Status Appeal Resources
September 25, 2025 – A. Bers