For people who weren't deathly ill, there were usually two reasons that people received a medical separation (which came accompanied by 'flimsy' reason) where I was serving:
1) They did not think the cost-benefit to them was in their favor due to the difficulty of getting medical care for something that here would be considered routine. What is and isn't available would obviously vary by country, but as an example, when I served someone had to have a wisdom tooth extracted and they had to FLY her 6 hours to the closest place for treatment that met whatever standards they set...but that was back before budgets were an issue, so they probably wouldn't do that now, and may have in fact medically separated her.
2) They used medical separation as a reason when someone did something that was against policy or violated a medical rule and the country director agreed not to administratively separate them (admin sep = being fired, in general). An example in my country was people who were caught not taking their malaria pills; that was grounds for immediate admin sep, but usually they would just give you a medical separation instead.
Actually there was a third, which almost happened to me:
3) A non-serious/non-life-threatening injury and/or illness that would take significant time to heal and would have an impact on a PCV's ability to accomplish their projects would sometimes result in an admin separation, especially if a year or less was all that was left of service. Of course, what we as volunteers considered impacting our projects/work is often different from what the medical office did....in my case my arguments won out.
We did have one volunteer who was medically separated due to a non-serious issue that could not be treated/accommodated in-country, and was allowed to come back with the next training group the following year. They did make her do PST again, but she did get to complete a full two years (actually three - the first year with us, plus the two additional).
Good luck with the appeal.