One of the many things that irks me about our healthcare system is the fact that it is so unnecessarily complicated. If you become ill and need to spend the night in the hospital, the last thing you should have to worry about is your admission status. However, you do need to worry about it. Your admission status dictates how insurance companies cover your hospital stay and can make a substantial difference in your bill.
Inpatient vs. Outpatient Status
In the past, there was a clear distinction between inpatient and outpatient status. Patients admitted to the hospital were classified as inpatient. Patients treated in the hospital and sent home, such as those seen in the Emergency Room (ER), were classified as outpatient.
The creation of observation status introduced a “gray zone” in the admission classification system. Observation status was originally created by the Center for Medicare and Medicaid Services (CMS) for Medicare patients treated in the Emergency Room who were too sick to be discharged, but who were felt to need a few additional (up to 24) hours of monitoring or care. As an example, an individual with persistent vomiting and dehydration from a viral illness would be placed in observation status while receiving IV fluids overnight. An individual with chest pain but no definitive evidence of a heart attack would be placed in observation status for monitoring and repeat blood tests.
This “in-between” status addressed two issues: 1) Cost of care: Medicare lowered its payment to hospitals for these shorter hospital stays, 2) Appropriateness of care: Observation status gave doctors time to figure out whether a patient needed to be admitted to the hospital for ongoing treatment or could be safely discharged home.
It wasn’t long before hospital administrators discovered ways to use observation status to their advantage. By placing patients in observation instead of inpatient status, hospitals avoid the financial penalty levied by CMS for patients who return for admission within 30 days. In addition to the readmission penalty, CMS denies payment to hospitals for patients who are incorrectly classified as an inpatient, then discharged after a short (<48-hour) stay. This creates an incentive for hospitals to preferentially place patients in observation status, which likely explains the surge in the number of Medicare patients placed in observation status between 2006-2014, even in those with hospital stays extending beyond 48 hours. These trends have been noted among privately insured patients as well.
So, why do you need to know about this?
Being in observation status has a significant impact on your hospital bill and is associated with increased out-of-pocket expenses. Share on XBeing in observation status has a significant impact on your hospital bill and is associated with increased out-of-pocket expenses.
Observation is an outpatient status, and insurance companies handle inpatient and outpatient services very differently. Under traditional Medicare insurance, outpatient hospital services are covered by Medicare Part B. Unlike inpatient services, which are covered in full by Part A after the patient pays a single deductible, each outpatient hospital service has a separate copayment. These copayments add up and can easily exceed the deductible for inpatient care. Medicare patients in observation status are also responsible for paying 20% of the cost of doctor services after paying a deductible. Lastly, while medications provided during an inpatient hospitalization are covered under Part A, prescription and over-the-counter medications provided during an observation stay are not covered by Part A or Part B. Individuals without Medicare prescription drug coverage (Part D) will find themselves paying out-of-pocket for these medications. Individuals with private health insurance also face much higher bills for observation care and are responsible for a portion of the cost (often 20%) of each service provided.
Days in observation status do not count toward the required 3-day minimum for Medicare coverage of nursing home care. Share on X
Days in observation status do not count toward the required 3-day minimum for Medicare coverage of nursing home care.
After a hospitalization, many seniors are unable to immediately return to their homes and may require continued care in a nursing home for rehabilitation or until their medical condition has stabilized. For Medicare to cover these costs, patients must have spent 3 consecutive days in the hospital as an inpatient. There are countless stories of Medicare enrollees receiving large bills for nursing home stays or being stuck in limbo in the hospital as more and more nursing homes refuse admission to patients who have not met these criteria.
To complicate matters further, you could be in observation status and not even know it. Admission status is not routinely discussed with patients, and the doctor caring for you may not even understand the rules properly. While some hospitals place observation patients in designated units (usually in close proximity to the Emergency Room), your physical location will not provide a clue in many hospitals, where observation patients are placed in standard hospital rooms alongside traditionally admitted patients. Medicare has addressed this issue by enacting a law that requires notification to individuals receiving observation services as outpatients for more than 24 hours and the implications of this outpatient status. There is no such rule for private insurers.
Ask Questions
The best way to avoid being blindsided is to be informed. When you are told that you are being admitted to the hospital, ask the doctor if you will be an inpatient or in observation status. Your admission status can change as your medical condition worsens or improves, so it’s a good idea to ask again if you remain in the hospital for more than one night. While there is nothing you can do to modify your admission status designation, having this information will allow you to prepare for the financial consequences and avoid being surprised by a large bill. You can contact your insurance company for an explanation of your benefits and an estimate of your out-of-pocket costs. By all means, do NOT allow the financial implications to influence your health and safety. If the physician feels you need to stay in the hospital, whether you are in observation status or an inpatient, it is in your best interest to follow the doctor’s orders.
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This article highlights one of my greatest job dissatisfiers. The observation versus inpatient debate pits patients against physicians, as patients, wrongly feel that the doctor can change their “status” at a whim. (We cannot-the cases are all reviewed by case Managers-and if we “get it wrong” and put you as inpatient instead of obs, payment will be denied and then you are stuck with the whole bill.). I am emergency medicine and countless patients leave at great peril to themselves due to the financial implications of this rule, and it leaves them angry at the physician and the system. Some insurances have waived the 3 day stay for nursing home coverage requirements, but we have no control over this. Medications not being paid for can have huge implications for patients as many can not go without their blood pressure medication, rate control medications, or blood thinners for the duration of the observation stay., yet they add thousands of dollars to the cost of care- that the patient is responsible for.I think the most important thing for patients to know is that this system is NOT the doing of your physician. I am required to gave this conversation with each of my obs patients before they leave my department and it is often a heart wrenching one- and again status is NOT my decision, it is all decided through a complicated system of “criteria”. This system , although designed with good intentions (cost savings), has actually just further eroded the trust in physicians and the system and left vulnerable patients at risk.
Lane, thank you so much for this very thoughtful and accurate comment. It absolutely pits patients against physicians and is completely out of our control. I stumbled across an article that told patients “tell your doctor to change you to inpatient status” and I thought, “No, no, no. That’s not how it works!” I think I will update the article to clarify this point.
It’s my understanding that patients do NOT have to pay the whole bill if Medicare doesn’t pay for a patient who was classified as admitted (or inpatient) and should have been in observation care (outpatient). When that happens, the hospital doesn’t get paid but under Medicare rules, the patient cannot be charged for the full cost of the hospital visit. If I’m wrong, I’d like to know of any examples where Medicare patients received bills for the full cost after Medicare denied payment to the hospital. Thanks, Susan Jaffe, Kaiser Health News, Jaffe.KHN@gmail.com “FAQ: Hospital Observation Care” at https://khn.org/MjYzMTE
Susan, you are correct. If a Medicare patient is discharged and the hospital bill is denied for inappropriate admission status, the patient is not responsible for the entire hospital bill. HOWEVER, more and more hospitals receive real-time feedback from case managers and physician advisors regarding admission decisions and the lack of medical necessity. Conditiom Code 44 allows the hospital to self-deny these claims prior to the patient being discharged and convert the hospitalization to an observation (outpatient) admission. The patient must be notified, but there is no appeal process and they are then stuck with the charges I discussed in the article.
Thanks for contributing to the discussion!
Thanks so much for sharing this informative piece. This explains the exuberant bill I received following my daughter’s hospital admission for “observation” after an acute respiratory event!
Very informational. Something that irks me too every day as a hospitalist, but always good to read a refresher on why and how I should consider triaging my patients between the two statuses.
Thanks for your comment, Nina. It is incredibly frustrating for patients and physicians.
A little late to the party….I work for a BCBS plan and we see this scenerio often. On an inpatient claim, both observation hours as well as inpatient room and board charges will be billed. Can both be allowed? Can they overlap? Should there be an order to admit for observation and then admit inpatient? We are starting to perform pre-pay audits outside the Medicare arena and looking for ways to be consistent.
Hi Pamela,
Thanks for reading the article. I am certainly not an expert on the insurance side so I recommend you discuss the logistics re: pre-pay audits to one of your colleagues. From a physician’s perspective, I can say that patients often start out in observation status then, due to either the need for ongoing care or a change in clinical status, they are changed to inpatient. The reverse is also true. Some doctors will enter an inpatient order, then realize 1-2 days later the patient doesn’t meet inpatient criteria based on insurance guidelines. At this point they will change the patient to observation status. This is a pitfall for patients who end up with more of the responsibility for the bill.
This was helpful for a layperson like myself. I had to rush my 16 yr old son to the hospital last weekend with severe abdominal pain. As might be expected he was diagnosed with appendicitis and admitted for surgery scheduled the next day. All went well, no complications and we got him out of there in the evening after the surgery. Now I am getting a denial from the health insurance company for the stay, saying he should have been observational. Didn’t even have an idea about this. Wondering now if they will deny the surgery as well as we didn’t wait to see if the appendicitis would subside on it’s own.
I’m sure this has been resolved by now. However, for those reading this today – remember there are other ways to deal with hospital bills. First is small claims court. In Florida, the amount of jurisdiction small claims courts have is now $30,000. Soon, as of 2023, small claims courts will have jurisdiction of $50,000. I know from personal experience that when very sick in the ER and while waiting for an OR in a room, all those “forms” that I’ve been given copies of are seemingly irrelevant. All I want is to get treated and get home. However, having proof that the hospital admitted you under one status and then retroactively switched status would be enough to win in most small claims courts. Further, small claims court judges don’t much like failure to specifically perform under the terms of a contract. An insurance company has a contract to perform after the insured has paid their premiums. Also, two important things in small claims 1:st Name Every Person and Every company as a defendant. It is better to name too many people and companies and have the judge throw out some defendants than it is to not name the one company or person you should have named and have the judge throw the case out. 2nd use the sheriff or a process server to serve every defendant. Yes, this costs a great deal more than serving people via registered mail or in person yourself. However, it is the one way you can prove that the defendant was served and prevent them from claiming you did not serve them properly. Assuming you win the case, the cost of the process server or sheriff will be awarded to you as part of your damages. To review, in your small claims case name every doctor, the case manager, the hospital, the insurance companies, your employer (if it is employer-based insurance), the parent company of the hospital, and any reasonable party that might have made a wrong decision. Most of the time none of them will show up in court. Your documentation needs to be up to date and well organized – the judge is not going to be your secretary. Make sure everything is easily identifiable – most importantly any denials based on a status that you can show the hospital or doctor change or incorrectly checked the wrong box.
Next, hospitals know they vastly overcharge. That is why your insurance company will get a bill for a service at $500 and then mark it down to $65 and then pay 80% of that. Without the protection of negotiated rate your insurance company has, you would be stuck with the original $500 billing amount. The billing department at the hospital will most likely not allow you to leave their office if you have a check or cash for a reasonable amount. 10pct to 20pct of the bill is normally very reasonable if you suddenly find you are not getting the negotiated rate of the insurance company. A good friend of mine went to the ER with stomach pains. The hospital verified that her new insurance was in effect and valid. Turns out that it was not going to be valid for one more day. The quick ER visit was just over $5,000. I told her to go in with $750 in cash and show up without an appointment at the billing department. Show them the $750 and then put it back in her purse. Every time they mentioned a higher number, tell them no. After about 30 minutes they took the $750 and gave her an invoice showing a zero balance. The $750 is more than she should have paid with her new insurance but, it solved the matter on the spot. Further, it was more than the hospital would have gotten from the collections agency they would have eventually sold the deb to. So, it worked out for both sides.
I recently experienced the ER monitoring after having chest pain and an abnormal EKG. I have private insurance with one copay amount for inpatient and a different amount for ER visit ($2000 vs. $950). I was charged the $2000 copay amount. Shouldn’t it have been the ER copay amount of $950?
Hi Nancy,
Did they keep you overnight for observation? (Note that you can be in observation status without moving to a new room.) If you were placed in observation status, depending on your insurance plan you may be subject to a different copay, but technically, observation status is an OUTPATIENT status. Were you actually admitted to the hospital? If so, they typically waive the ER copay and charge the
inpatient one instead. Either way, I encourage you to contact your insurance company directly to inquire about the charges. If you have additional questions after speaking with them, contact the hospital’s billing department. Good luck!
There is always a system behind the system. I worked in Williamsburg and I watched hospitals work with nursing homes that needed more private pay funds to stay afloat admit people under the pretense that medicare would pay only for me as a social worker to find out from the discharge planner that the three day stay was non qualifying and they had to pay out of pocket. The only person that was happy was our facility because we knew that they had the money many of them would stroke a check for $20,000 and walk out like it didn’t put a dent in their wallet. We were encouraged not to tell people about long term care Medicaid because we knew the families were rich and they had the money even if they had to borrow it.
I work for a company that we do inpatient Medicare skilled nursing. My patient was supposed to have a 3 midnight stay in hospital we confirmed the dates. Now the hospital is saying three of the days was observation. Is there anyway to fight this. My patient will be stuck with 17,000.00 if Medicare doesn’t pay
The patient can file an appeal with Medicare. If he/she was in observation status a MOON (Medicare Outpatient Observation Notice) should have been issued prior to discharge.
I was recently in the hospital for 5 days first went to the ER with chest pains, abdominal pain throwing up and diarrhea. After several test the doctor told me I needed my gallbladder taken out and was told I was being admitted into the hospital. This was on a Friday the surgeon scheduled my surgery for Monday morning. After my surgery, which I was still technically in the hospital I experienced severe vomiting and abdominal pain the doctor said I needed to stay and ended up staying 2 extra nights. When I went to file my Aflac paperwork it was denied because I was placed in observation status and states on the paperwork I was there for a routine physical exam and rest cures for the entire hospital stay, I was never told I was in observation status and I ended up missing 3 weeks without pay. Also I was in the hospital from 1/31-2/5 had my surgery on the 3rd but the surgeon’s office stated I had my surgery on the 5th which makes it a outpatient surgery which Aflac doesn’t cover either. My question is shouldn’t I have been classified as inpatient after the diagnosis was clear I needed my gallbladder removed? Is there anyway I can get this fixed?
Hi Tamako,
I’m so sorry that happened to you. Unfortunately, admission status has very little to do with how long you’re in the hospital. There is no time limit for observation status, although years ago it was limited to hospital stays spanning 24-48 hours. Also, because a cholecystectomy (the medical term for removing the gallbladder) is considered an outpatient surgery (meaning you can go home the same day, depending on what time the surgery is done), the need for this surgery does not automatically make you an inpatient. Insurance plans have their own guidelines about what qualifies for observation vs. inpatient status.
Let me point out a few important issues:
1) In an ideal world, you should have been informed about your admission status. It is totally reasonable to assume after being in the hospital for 5-6 days that you were an inpatient. I always advise patients and their family caregivers to inquire about their admission status proactively. While there’s not a lot you can do to change the status, it’s always better to be informed so you can prepare for the financial consequences.
2) The fact that the decision to perform surgery was made on a Friday, yet the surgery was not scheduled until Monday implies physician convenience, lack of a sense of urgency, or both. This is always looked upon negatively by insurance companies. They are no longer willing to pay for patients to sit in the hospital for days waiting for surgery.
3) If the surgeon’s documentation regarding your surgery date is inaccurate, that is something you can and should address. You can obtain a copy of your medical records, which should have an operative report dated 1/3 (not 1/5). Submit a copy of that report to Aflac but, as I stated above, the procedure itself is considered an outpatient procedure unless there were significant complications.
I hope you are able to get to the bottom of this. Thanks for reading the article and for your comment!
a few days ago I went to the ER with head pain. From the beginning I stressed I was on Medicare. When told I would be admitted for a heart issue following a routine blood test (which was not what I came to the ER for) I clearly and emphatically asked “is this considered an admission or observation” stating that Medicare does not cover observation and that I was on a fixed income and could not afford something that was not covered. I was assured that it was a overnight hospital admission not observation. That since no beds were available I’d spend the night in the ER and be discharged the next day. After having second blood test I was informed that I had a very bad heart which was surprising since the week before I received a clean bill of health from my cardiologist. Later that morning my cardiologist again gave me a clean bill of health discharging me on the heart issue.
Since my initial visit was for head pain I was scheduled for an MRI later in the day (the CAT scan done the previous night was normal but the hospital was concerned they may have missed something) and was moved to a room. Again I questioned “observation or admission” stating again Medicare’s lack of coverage for observation. Again I was assured it was admission and I was handed a paper to sign that I later found out was for permission to be admitted observation. I unfortunately took the staff members word as truth at face value and did not read it due to not having my eyeglasses nearby. Every time I asked or questioned I was told it was an admission. The MRI was not dome until 2 days later. And that is only because as soon as I was moved to a room I asked to speak to the nursing administrator who explained that admissions and observation are used by ER staff interchangeably that all ER patients are put into observation. I was also told by the nursing staff on the that the MRI could be either the next or the day after. The nursing administrator was the one who saw to it I got it the next day and was then discharged.
Now I will be charged for something I have no way of paying simply because my understanding of the meaning of the word admission is “the act or process of accepting someone into a hospital as an inpatient” and the hospitals meaning of the same word is “admissions into observation which is a special service or status that allows physicians to place a patient in an acute care setting, within the hospital, for a limited amount of time to determine the need for inpatient admission. The patient will receive periodic monitoring by the hospital’s nursing staff while in observation”.
This happened to me last February. I had a hip replacement and spent one night in the hospital and little did I know but they used observation status and it ended up costing me over $2200.00 instead of the $295 for a one night stay as an admitted patient. I was ticked off about this. I have a Humana Medicare Advantage plan.