Medicare categorizes patient care as either inpatient or outpatient. Medicare Part A, sometimes referred to as hospital insurance, covers inpatient hospital services. This means the care you receive after being admitted to the hospital. Medicare Part B, also known as medical insurance, covers outpatient care such as you receive in a doctor’s office. But what happens if you receive care in the hospital without being formally admitted? This is known as hospital observation and it can be extremely confusing – and costly. In this post, we look at Medicare and observation services, including the financial consequences and how you can protect yourself.

What is hospital observation?

Also known as observation status, hospital observation encompasses care received in a hospital without being admitted.

Observation services are used to determine whether your condition requires being admitted to the hospital as an inpatient. For example, if you go to the hospital complaining of abdominal pain, you may be placed in a room or bed. This allows the doctor to monitor your condition while performing diagnostic tests to determine the cause of your pain.

According to the Center for Medicare Advocacy (CMA), observation status is mainly a billing designation. Although the standard is less than 24 hours, you can remain in observation status for multiple days.

Medicare coverage for hospital observation

How Medicare pays for your care depends on whether the hospital admits you. And, as an outpatient instead of an inpatient, Medicare covers observation services through your Part B benefits. Unfortunately, you'll almost always pay more out-of-pocket in this scenario.

First, you will likely have to pay multiple co-pays. Each copayment can't be higher than the Part A deductible, but when you add them all together, they can easily exceed that amount. The Part A deductible in 2024 is $1,632.

Part B also only covers medications that must be administered by a medical provider, such as injections. Any other prescription medications you're given while in under hospital observation would be under your Medicare Part D prescription drug plan. If the hospital pharmacy is outside your Part D network, or a drug is not covered by your formulary, your costs could be significantly higher.

Finally, if you require skilled nursing facility (SNF) care, you likely have to shoulder the full cost. Medicare Part A only covers SNF care when it follows a 3-day hospital stay as an inpatient. And observation status means you never were an inpatient.

Medicare Part B never covers care received in a skilled nursing facility.

The high cost of hospital observation

If the care you receive is adequate, whether you’re admitted may seem immaterial. However, if you have Medicare, it makes a big difference, particularly when the time comes to pay the bill.

As stated above, Medicare Part A covers inpatient hospital care. However, if you are in observation status, Medicare Part B applies. In that case, your cost is generally 20% of the Medicare-approved amount for any services received. If you do not have Medicare Part B, you are responsible for 100% of the costs incurred while under observation.

The average cost for a hospital stay was $3,231 per day in 2023, and about $14,861 per stay. If you remain in observation status for multiple days, which many beneficiaries do, those costs can add up quickly. Of course, those are just averages. Your costs may be higher or lower. In addition, those averages don't include COVID hospitalization costs, which can be much higher - ranging from $11,000 to $40,000.

If you need skilled nursing facility care, the average cost ranges between $211 and $291 per day. Again, Medicare will not pay a dime toward SNF care if you did not have a qualifying hospital stay first.

Beneficiaries who have Original Medicare and the right Medigap plan don’t have these same worries. That’s because your supplement plan covers your Part B coinsurance costs. Some Medicare Supplement plans also cover your out-of-pocket costs for SNF treatment. Use our Find a Plan tool to compare Medigap plans in your area.

What is the difference between inpatient and outpatient?

You become an inpatient once there is a physician order to admit you to the hospital. Your inpatient status ends the day before you are discharged.

Until a doctor admits you, you remain in outpatient status – even if you are in a hospital. This includes the following outpatient services:

• Emergency room
• Lab tests and x-rays
• Outpatient surgery

You are also considered an outpatient throughout the time you spend in observation status, even if you spend the night – or multiple nights – in the hospital.

How do you know when you're in observation status?

The short answer is, you often don’t know you weren’t admitted. Many patients under observation care are given a bed and even a room. They receive the same quality care as admitted patients do and they may be there for two or even three days (and sometimes more).

Hospitals have dramatically increased their use of the observation status billing code, too. In fact, the number of patients kept under observation doubled between 2006 and 2014. The Centers for Medicare and Medicaid Services (CMS) responded to this rise by implementing MOON, Medicare Outpatient Observation Notice, in 2017. If a Medicare patient is kept under observation for 24 hours, the hospital has 36 hours to notify that patient, both orally and in writing, of their status. In addition, the hospital must explain the financial consequences of their outpatient status.

It’s important to note that a hospital may retroactively change the patient’s status from admitted to observation. However, they may only do so under the following guidelines:

• The status change occurs while the patient is still in the hospital
• No Medicare claim for inpatient admission has been made by the hospital
• A doctor agrees with the utilization review committee that the patient’s status should be changed to observation
• That doctor’s agreement must be included in the patient’s medical record

Potential issues with MOON

There are a couple of potential issues with the MOON policy. First, the patient cannot appeal their observation status and ask Medicare to treat their stay as outpatient. But an even bigger issue may be that not all outpatients receive a MOON. If the patient is classified as outpatient instead of observation status, there is no MOON requirement. You can spend multiple days as an outpatient, just as you can under hospital observation.

What can you do?

Unfortunately, you cannot demand the hospital admit you. However, you can ask your doctor to admit you as an inpatient. Preferably, you do this early in your stay. Remember, to qualify for covered skilled nursing care, you must have first spent three days as a hospital inpatient. You should also talk to your regular doctor and ask them to support your request.

If you did not receive notice that you were an outpatient, file a complaint with your state health department. For those whose nursing home coverage is denied, you can file an appeal with Medicare.

Additional resources

• ClearMatch Medicare: Find a Medicare Plan
• Medicare.gov: Costs
• Social Security Administration: Extra Help