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.


ambiguity in healthcare


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 X

Being in observation status has a significant impact on your hospital bill and is associated with increased out-of-pocket expenses.


spending money








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







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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