In or Out? When Hospital Status Determines More Than Your Health

The assumption is that when an individual is admitted to the hospital, he or she is automatically considered a patient. As it turns out, this is not necessarily the case. Increasingly, hospitals are admitting people under what is referred to as observation status. By definition, observation status is the period during which a doctor decides to admit someone as a patient of the hospital or discharge that individual. An inpatient hospital stay is confirmed only when a doctor writes a formal order for admittance. Otherwise, that individual is considered to be under observation status – an outpatient service. Observations status is increasingly utilized as a way to prevent re-admissions, for which hospitals are penalized under the new Affordable Care Act. In addition, less stringent 2008 Medicare guidelines allow for greater flexibility in interpreting the observation status definition. As was written by author Kristen Pavle, one method of measuring up to the Affordable Care Act provisions in order to reduce readmissions is through transitions in care, a form of care coordination during a transitional event.

The Fine Print

While the Centers for Medicare and Medicaid Services (CMS) recommend that patients spend no more than 48 hours under observation status, there is no formal time limit to the stay. There are some extreme cases in which a patient’s entire hospital stay – some as long as 14 days – is characterized as outpatient. Often times, patients are unaware of their observation status because they are receiving the same services as an inpatient such as meals, medication, lab work, etc. Furthermore, Medicare does not require hospitals to inform patients that they are not being formally admitted as a patient or the expenses for which they’re responsible. Patients must be informed of their observation status only as a result of a downgrade from inpatient status.

Why Does This Matter?

A patient’s hospital status is an important consideration, especially for a Medicare-eligible older adult. This is because one’s hospital status also affects their billing and payment. If kept under observation status, Medicare will not cover many services that it would under an inpatient stay. Instead, patients are charged a fee for each individual service rendered and co-pay for every doctor visit provided by the hospital. In an effort to clarify a patient’s coverage, Medicare has released a publication detailing the varying benefits under inpatient and outpatient hospital status.

What is NOT Covered Under Observation Status?

In understanding what Medicare won’t cover for under observation status, two areas are particularly salient for older adult patients:
1. Medication. Medicare outpatient benefits do not cover medication received in the hospital, thereby making over-the-counter and other prescriptions drugs an out-of-pocket expense. Furthermore, hospitals can determine their own pharmacy prices, often driving up the price of medications to generate revenue. Stories of $18 aspirin and $71 for a single blood pressure pill are not uncommon. Occasionally, these drugs are covered under Medicare Part D, but only under certain circumstances. 2. Skilled Nursing Facilities. Observation stays are particularly troublesome for Medicare recipients who are discharged to skilled nursing facilities (SNF) to recover from injury or illness. This is because the qualifying criterion for Medicare coverage is three consecutive days (72 hours) in a hospital as an admitted patient (i.e. not observation status). Even if a SNF believes they are admitting a person who does not qualify under Medicare stipulations, they are not required to inform the individual in the form of a Note of Exclusion from Medicare Benefits (NEMB). Technically, an individual could spend time in a nursing home without ever knowing they are ineligible for coverage. It is only later, once they are billed, that this information will surface.

Bottom Line

A previous Chicago Bridge post, The Scamming of Americaaddressed the growing financial exploitation of seniors. While observation stays are in accordance with CMS guidelines and do not violate any laws, they sure are sneaky. Claims for observation stays over the recommended 48-hour maximum have recently tripled to over 80,000. With more patients being saddled with enormous medical bills from both hospitals and SNFs, many have taken action to appeal their denials of coverage. In November 2011, the Center for Medicare Advocacy and the National Senior Citizen Law Center sued the Department of Health and Human Services over the observation stay policy, claiming patient harm as a result of the status. Some individuals represented in the law suit have incurred bills as high as $30,000, causing severe financial problems. Unfortunately, even if a patient’s observation status is known, not much can be done to reverse it because they are still receiving outpatient Medicare benefits. But the bottom line is: never assume that just because an individual is in the hospital, they are eligible for inpatient coverage.
1. Once admitted, make sure a person’s admission status is known within the first few hours. A hospital does not generally disclose this information, so you must ask. 2. Continually ask the above question, since inpatient status can be changed retroactively as long as an individual is in the hospital. 3. If an individual is under observation status, ask why. Request the appropriate medical records in the case of an appeal.
Armed with this knowledge, inform your clients regarding what services may be denied under Medicare outpatient coverage. For more information, revisit the CMS information brochure.   The editor of this post was Scott Tolans Thanks to juicyrai for sharing the picture used in this post.


Alexi Vahlkamp is currently working toward her Master’s in Social Work at the University of Chicago School of Social Service Administration, with a concentration in older adult studies and administration. Particularly interested in the intersection of health care and social work, Alexi interns for the American Medical Association’s program in Aging and Community Health where she researches pertinent policy issues relating to both older adult patients and their physicians. In addition to her policy background, Alexi works in a clinical capacity with dementia residents at The Wealshire, a long-term care facility in the northern suburbs of Chicago. She received her B.A. in English & Creative Writing from the University of Illinois - Urban Champaign in 2009.


  • Melissa Buckles Haley

    This article was excellent! I have always wondered what criteria constitutes observation status and what was covered and not covered. Thanks for the great resource! Melissa

  • Leah B

    I second that! Medicare and related programs are always really challenging to understand, even by “professionals” who have an ear for policy vocabulary . Thanks for shedding some more light on this pertinent issue.

  • Eric Parker

    Great article. I often have clients who need to utilize Medicare benefits that become available after a 72 hour stay – and I never would have suspected that 72 hours in a hospital might not actually count as 72 hours in the hospital. Now I will be able to tell them to watch out for this. Very helpful.

  • Elyse Baylis

    Excellent and very informative article.

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