• Carrie Klaege

What Is Hospital Observation Status VS. A Hospital Stay?

Not All Hospital Stays Are Considered Inpatient Care

When a patient is put into the hospital, they are assigned a status. Inpatient status and observation status are the two most common. When you are admitted to the hospital, it’s not always easy to determine if you’re admitted as an inpatient or admitted under hospital observation status.

The Difference Between Inpatient Status & Observation Status

Inpatient status is what we typically think of as someone being admitted to the hospital. Observation status is a type of outpatient status. However, someone in hospital observation status can spend several days and nights inside the hospital, even though they’re technically an outpatient. In fact, they might be in the very same type of hospital bed, right next door to an inpatient.

Observation used to be a way to keep someone in the hospital for a short time while doctors tried to decide if they were sick enough to need inpatient treatment. Now, observation patients can sometimes be kept in the hospital for days on observation status. It’s easy to see how this can be confusing for patients since we don’t tend to think of “outpatient” as involving an overnight stay in the hospital.

Why Does Inpatient vs. Observation Matter?

Suppose you’re sleeping in the same hospital ward and getting the medical treatment you need. Why should you care whether you’re on inpatient status or observation status? You should care because the difference could cost you hundreds or thousands of dollars.

For people on Medicare, the distinction between inpatient and observation status is crucial in terms of the out-of-pocket costs for that care and the coverage of care in a skilled nursing facility after the hospital stay. This is described in more detail below.

Your health insurance company or Medicare won’t pay for your hospital stay as an observation patient. It would have spent as an inpatient in the same manner. Instead, they’ll pay for your hospital stay using the outpatient services part of your health insurance benefit.

Your share of costs for outpatient services like observation status could be larger than your share of inpatient hospitalization expenses.

Although complex and confusing, there are rules, or at least guidelines, your doctor and hospital follow when deciding whether to assign you hospital observation status or inpatient status.

To understand how the observation guidelines work and why hospitals assign patients to observation status, see why you’ll pay more.


Mr. Smith comes to the emergency room with chest pain. Unable to tell whether Mr. Smith has a heart attack, the cardiologist, Dr. Jones, puts Mr. Smith into the hospital on observation status.

Mr. Smith spends the night in a hospital room attached to a heart monitor. Throughout the night, nurses check on him regularly. He gets oxygen and has blood tests drawn every few hours. Dr. Jones may even have ordered more extensive tests to determine the condition of Mr. Smith’s heart.

Late the next evening, after two days and one night in the hospital, Dr. Jones has enough information to determine that Mr. Smith didn’t have a heart attack. Mr. Smith is sent home.

Mr. Smith’s health insurance company pays for part of his hospital stay charges under Mr. Smith’s outpatient services benefit coverage.

In this case, let’s say that Mr. Smith’s health insurance policy has a 25% coinsurance for outpatient services. So, Mr. Smith pays for 25% of the charge of every blood test and X-Ray. He also pays 25% of the cost for oxygen, the cost for heart monitoring, and the hospital’s hourly charges for outpatient observation services.

Suppose Mr. Smith had received the same exact services as an inpatient rather than on observation status, depending on the type of coverage. In that case, he may have owed a single hospitalization copayment, and his health insurance would have covered the rest of the charges.

But it’s also common for health insurance plans to count hospitalization towards the plan’s deductible and then begin assessing coinsurance charges. In that case, the total amount that Mr. Smith owed may have ended up roughly similar either way.

Under Original Medicare, in 2021, Mr. Smith would pay $1,484 for his hospital stay if he were considered an inpatient, plus Part B costs for physician services that he received during his time in the hospital (that’s a $203 annual deductible, plus 20% of the Medicare-approved amount of the physician services).

But suppose he’s considered an outpatient, and his stay is classified as an observation stay. In that case, he’ll owe the $203 Part B deductible (assuming he hasn’t already met it earlier in the year) plus 20% of all Medicare-approved costs associated with his stay.

So, his costs under observation would depend on how much care was provided to him, and how many tests were run (many Medicare enrollees also have supplemental coverage, in the form of Medigap coverage, Medicaid, or retiree health benefits from a previous employer, which pick up some or all of the out-of-pocket costs under Medicare).

Inpatient vs. Observation and Medicare Coverage of Skilled Nursing Facility Care

Patients are sometimes well enough to leave the hospital but not yet well enough to return home. Skilled nursing facilities can be used to fill this gap. A patient who has a knee replacement, for example, might only need a few days in the hospital but may still need a stepped-down level of care at a skilled nursing facility before being able to return home.

Original Medicare only pays for care in a skilled nursing facility if it’s preceded by at least a three-day inpatient hospital stay (Medicare Advantage plans can waive this requirement, and CMS has also waived it for “people who experience dislocations or are otherwise affected by COVID-19.”)

If you’re in the hospital but under observation status rather than inpatient status, it doesn’t count towards your three days. In that case, once you’re released, you won’t be able to get Medicare coverage for a stay in a skilled nursing facility.

This is one reason why patients and their families need to understand whether inpatient or observational status is being used. This three-day inpatient requirement can be confusing for patients, especially if they don’t know how a hospital stay can still be classified as outpatient care.

What can you do?

The Center for Medicare Advocacy is part of a coalition of organizations fighting the continued harm caused by Observation Status through advocacy and education

Should I Fight or Settle?

If assigned an observation status that you think is incorrect, your first instinct may be to fight if there is a risk of a claim denial. Even so, the reassignment of your status is not always the solution.

Having yourself reassigned as an inpatient may seem like it could save you money if your coinsurance costs are higher for observational (outpatient) care. It may also help if you're on Medicare and you're going to need a skilled nursing facility after hospitalization.

But, remember, your health insurer may refuse to pay the hospital bill if it determines you were incorrectly assigned to inpatient status. If this happens, neither you nor the hospital will likely succeed in fighting the denial.

As such, it is important for you to understand how the assignment was made and what that may or may not cost you. To do so:

  • Ask what specific guidelines were used to assign your observation status.

  • Ask what types of treatments, test results, or symptoms would have qualified you for inpatient status with the same diagnosis.

  • Speak with someone from the billing office who can estimate your out-of-pocket costs whether you’re in observation or inpatient status.

If you’re too sick to do this yourself, a trusted friend, family member, or patient advocate to do so on your behalf.

If a denial is received as a result of the hospital assignment, remember that you have a right to appeal under the law. The hospital will often have a dedicated insurance or financial aid officer to assist you with this. The assigning doctor will also need to participate.

Halpern, J. (2021). What Is Hospital Observation Status VS. A Hospital Stay? - Myelder. Retrieved 7 May 2021, from https://myelder.com/what-is-hospital-observation-status-vs-a-hospital-stay/