CMS Introduces New Appeals Process for Medicare Beneficiaries Reclassified from Inpatient to Outpatient

EDITOR’S NOTE: This article updates the final ruling that was initially reported on by Ronald Hirsch, MD in January 2024.  CMS Proposes New Appeal Process – Complexity is High, but Impact is Low – RACmonitor

On Oct. 11, the Centers for Medicare & Medicaid Services (CMS) issued a final rule (CMS 4204-F) establishing a new appeals process for Medicare beneficiaries who are initially admitted to a hospital as inpatients, but later reclassified as outpatients receiving observation services.

This rule is the result of the Alexander v. Azar class-action lawsuit, which sought to establish appeal rights for such patients.

While the court initially ruled against automatic appeal rights, it mandated the creation of additional appeals processes for affected beneficiaries. This new rule will have a significant impact on protecting a subset of beneficiaries from coverage denials due to hospital reclassifications.

The Alexander v. Azar case was filed in 2011 to address Medicare’s lack of appeals rights for patients whose hospital status changed from inpatient to outpatient under observation services. Reclassifying patients can lead to the denial of Medicare Part A coverage for hospital stays and skilled nursing facility (SNF) care, leaving patients with unexpected costs. As stated in numerous broadcasts and articles, Medicare does strive to protect their beneficiaries, which is why this ruling is so timely. Fast-forward to March 2020, the District Court of Connecticut ruled that beneficiaries were not entitled to automatic appeal rights, but directed the Secretary of the U.S. Department of Health and Human Services (HHS) to establish appeals processes for a specific class of beneficiaries.

Eligible beneficiaries for this appeals process include Medicare beneficiaries who, on or after Jan. 1, 2009:

• Have been or will have been formally admitted as a hospital inpatient;
• Have been or will have been subsequently reclassified by the hospital as an outpatient receiving observation services; and
• Have received or will have received an initial determination or Medicare Outpatient Observation Notice (MOON) indicating that the observation services are not covered under Medicare Part A.
• Also, eligible beneficiaries either:
  1. Were not enrolled in Part B at the time of their hospitalization; or
  2. Stayed at the hospital for three or more consecutive days, but were designated as inpatients for fewer than three days, unless more than 30 days have passed without admission to a skilled nursing facility (SNF) following the hospital stay.

Beneficiaries who pursued an administrative appeal and received a final decision before Sept. 4, 2011, are excluded from the class. The court determined that this group of beneficiaries was deprived of due process, and ordered the creation of a new appeals framework for them.

New Appeals Processes

1. Expedited Appeals Process: Beneficiaries who wish to appeal while still in the hospital can now file an expedited appeal with a Beneficiary & Family Centered Care-Quality Improvement Organization (BFCC-QIO). The BFCC-QIO will review the patient’s medical records within one day to determine if the inpatient admission met Medicare Part A coverage criteria. This is particularly important for class members who stayed in the hospital for three or more consecutive days, but were classified as inpatients for fewer than three days, potentially affecting their eligibility for SNF coverage.
2. Standard Appeals Process: For beneficiaries who do not appeal while still in the hospital, a standard appeals process is available. This allows those applicable beneficiaries to challenge reclassification after discharge, following the processing of the hospital’s Part B outpatient claim. The process is similar to the expedited version, but offers extended timeframes for filing and decision-making by the QIO.
3. Retrospective Appeals Process: CMS also introduced a retrospective process for beneficiaries with hospital admissions as far back as Jan. 1, 2009, where status changes occurred before the new appeals processes were in place. Beneficiaries must show that their inpatient admission met the criteria for Medicare Part A coverage. An eligibility contractor will determine if they qualify for an appeal. Once eligibility is established, the appeals will follow Medicare’s existing five-level claim appeals procedures.

Applicable beneficiaries who prevail in their appeal can have their reclassification as outpatients disregarded for determining Part A benefits, including hospital and SNF coverage. The court also mandated that beneficiaries must be provided effective notice of their appeal rights, ensuring they are aware of the protections available to them under the new rule.

Although the guidelines and official notice(s) have not been released yet, CMS has stated that they are intending for them to be available in early 2025. CMS has also confirmed that future guidance will be released on CMS.gov and Medicare.gov.