Wiki Inpatient vs observation


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I do the insurance appeals for various hospital facilities, I have gotten the following denial several times regarding patients that are originally authorized and admitted as an inpatient but their stay was extended due to continued need for medical treatment. The denial that I will get states 'the authorization for an acute inpatient admission has been denied as of _________" (whatever the last authorized date of service was). "The patient could have been admitted to observation".

My question is, since observation pertains to outpatient stays, how would that work. The patient is an inpatient up to the last authorized date of service and then the patient type changes from inpatient to outpatient? Wouldn't the patient technically have to be discharged and readmitted? Please advise
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