Medicare Observation Status vs. Inpatient Admission: A Costly Distinction

You check into the hospital, spend three nights in a hospital bed, and assume Medicare is covering your stay. Then you get a bill for thousands of dollars -- because you were classified as "observation status" rather than admitted as an inpatient.

This scenario happens to hundreds of thousands of Medicare beneficiaries every year. Understanding the difference between observation status and inpatient admission -- and knowing your rights -- can save you thousands of dollars.

Observation status is an outpatient classification. Even if you're in a hospital bed for multiple days, if you're under observation status, Medicare treats your care as outpatient -- covered under Part B, not Part A.

This distinction has enormous financial consequences:

Inpatient admission (Part A):

• Part A deductible: $1,316 (2017)
• Days 1-60: $0 after deductible
• Skilled nursing facility care covered after 3-day inpatient stay

Observation status (Part B):

• Part B deductible: $183 (2017)
• 20% coinsurance for all services
• Medications billed separately (often at retail prices)
• Does NOT count toward the 3-day inpatient stay required for SNF coverage

The medication issue is particularly significant. Under inpatient status, your medications are included in the hospital's Part A payment. Under observation status, each medication is billed separately under Part B -- and if your drug isn't on the hospital's formulary, you may pay full retail price.

Hospitals use observation status to avoid Medicare audits and potential payment clawbacks. Medicare auditors scrutinize inpatient admissions and can deny payment if they determine the admission wasn't medically necessary. Observation status reduces this risk for hospitals -- but shifts costs to patients.

The most financially devastating consequence of observation status: it doesn't count toward the 3-day inpatient stay required for Medicare to cover skilled nursing facility care.

If you spend 4 days in the hospital under observation status and then need rehabilitation in a SNF, Medicare won't cover the SNF stay -- even though you were in the hospital for 4 days. You pay the full SNF cost out of pocket.

Since 2016, hospitals are required to notify patients who have been under observation status for more than 24 hours. The notice must be provided in writing and explained verbally.

What to do when you receive the notice:

1. Ask your doctor why you're under observation status rather than admitted as an inpatient
2. Ask your doctor to change your status to inpatient if medically appropriate
3. If the hospital refuses, you can request a review by the Beneficiary and Family Centered Care Quality Improvement Organization (BFCC-QIO)

Ask immediately upon admission: "Am I being admitted as an inpatient or placed under observation status?"

Request inpatient admission: If your doctor believes inpatient admission is medically appropriate, ask them to write the admission order.

Keep records: Document your conversations with hospital staff about your status.

Appeal if necessary: If you're billed for observation status and believe you should have been admitted as an inpatient, you can appeal. Contact your BFCC-QIO for assistance.

Consider Medigap: Medigap Plan G covers the 20% Part B coinsurance, which helps with observation status costs -- but doesn't solve the SNF coverage problem.

We do not offer every plan available in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.