
Observation status can be a financial burden, even with insurance coverage. In some cases, insurance may not cover the full costs of observation status, leaving patients with unexpected expenses.
The article highlights that Medicare does not cover observation status in the same way it covers inpatient hospital stays. This can lead to higher out-of-pocket costs for patients.
Insurance coverage for observation status varies greatly depending on the insurance provider and policy. Some policies may cover a portion of the costs, while others may not cover it at all.
Patients should carefully review their insurance policies to understand what is covered and what is not.
What is Observation Status?
Observation status is a hospital billing code that indicates a patient is being monitored but not receiving active treatment. This can be a source of confusion for patients and their families.
A patient is typically placed on observation status when they are being closely watched by medical staff, but not receiving a specific treatment or intervention. This can be for a variety of reasons, such as a doctor wants to keep a close eye on a patient's condition without committing to a specific treatment plan.
Observation status is often used for patients who are experiencing symptoms that are not clearly defined or are uncertain about the best course of treatment. For example, a patient with chest pain may be placed on observation status while doctors run tests to determine the cause of the pain.
In some cases, observation status can be used as a way to avoid the costs associated with being admitted to the hospital as an inpatient. This is because observation status is typically billed as an outpatient service, which can be less expensive than an inpatient stay.
Medicare Coverage
Medicare coverage for observation status can be complex, but let's break it down. If you're in the hospital as an outpatient instead of an inpatient, Medicare covers observation services through your Part B benefits.
You'll likely have to pay multiple copays, which can easily exceed the Part A deductible of $1,632 in 2024. Any prescription medications you're given while in observation status would be under your Medicare Part D prescription drug plan.
If you require skilled nursing facility (SNF) care, you'll likely have to shoulder the full cost because 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.
If you receive hospital observation services for more than 24 hours, you must get a Medicare Outpatient Observation Notice (MOON). This notice explains why you're receiving observation services and how it may affect what you ultimately pay.
Hospitals must give you a written notice if you're held for observation for more than 24 hours, thanks to the NOTICE Act of 2016. This notice is called the Medicare Outpatient Observation Notice (MOON).
Cost and Duration
The cost of hospital observation can be steep, with an average daily cost of $3,231 in 2023, adding up to $14,861 per stay. This is a significant difference from inpatient care, which is covered by Medicare Part A.
If you're under observation status, you'll be responsible for 20% of the Medicare-approved amount for services received, or 100% if you don't have Medicare Part B. Those costs can add up quickly, especially if you need skilled nursing facility care, which averages $211 to $291 per day.
In most cases, observation services last 24-48 hours, but can last longer in rare cases.
The High Cost
The average cost for a hospital stay is a staggering $3,231 per day in 2023, with an average stay costing around $14,861.
If you remain in observation status for multiple days, those costs can add up quickly. COVID hospitalization costs can range from $11,000 to $40,000.
The cost of skilled nursing facility care can range between $211 and $291 per day, and if you didn't have a qualifying hospital stay, Medicare won't pay a dime towards SNF care.
How Long Will Services Last?
In most cases, it will take 24-48 hours for your doctor to decide whether to admit or discharge you.

You can receive observation services anywhere in the hospital, including the emergency department or anywhere else.
The goal with observation services is to keep you safe while your doctor evaluates your condition so they can decide whether to admit you.
Medicare Part B covers all medically reasonable and necessary hospital observation services ordered by a physician.
You can expect to receive observation services for up to 48 hours in most cases, but in rare cases, it may last longer.
How Long Can a Patient Remain in Status?
You can receive hospital observation services anywhere in the hospital, including the emergency department or anywhere else. The goal with observation services is to keep you safe while your doctor evaluates your condition so they can decide whether to admit you.
Most cases involve a 24-48 hour period for your doctor to decide whether to admit or discharge you. In rare cases, you'll receive reasonable and necessary outpatient observation services for more than 48 hours.
Patient observation status usually lasts no more than 24 hours, but can last as long as 48 hours. If you need to spend more than two nights in the hospital, Medicare generally expects your doctor to admit you as an inpatient.
The Two-Midnight rule is a guideline for Medicare that determines a patient's status—observation vs. admission. It states that Medicare Part A generally covers hospital stays if the treating physician expects the patient to need hospital care for at least two consecutive nights.
Inpatient vs Outpatient
You're probably wondering what the difference is between inpatient and outpatient status. Well, until a doctor admits you, you're considered an outpatient, even if you're in a hospital. This includes emergency room visits, lab tests and x-rays, and outpatient surgery.
You're only considered an inpatient after a doctor formally admits you. But here's the thing: even if you spend the night or multiple nights in the hospital, you're still considered an outpatient if you're in observation status.
Observation status is a bit of a gray area, and it's not always clear when you're in it. Hospitals have been using this billing code more and more, and the number of patients kept under observation doubled between 2006 and 2014.
Here are some key differences between inpatient and outpatient status:
- Inpatient: You're formally admitted by a doctor and receive inpatient services.
- Outpatient: You receive services such as emergency room visits, lab tests, and outpatient surgery, even if you're in a hospital.
It's worth noting that hospitals may retroactively change a patient's status from admitted to observation, but only under certain conditions. They must do this while the patient is still in the hospital, and no Medicare claim for inpatient admission has been made. A doctor must also agree with the utilization review committee that the patient's status should be changed to observation, and this must be documented in the patient's medical record.
Who Receives Services?
You may require observation services if you present to the emergency department and require a significant period of treatment or monitoring before your doctor can determine whether you need to be admitted.
Your doctor may only admit you if they anticipate you’ll require medically necessary inpatient care that spans two midnights. If you don’t meet this criteria, you may be discharged.
Protect Yourself
If you're taken to the hospital and treated for more than 24 hours, it's essential to ask your doctor to formally admit you to the hospital rather than keeping you for observation.
This is crucial because Medicare Part A coverage will be available to cover your stay, as well as any following skilled nursing or rehabilitation facility inpatient care you might need.
You should learn how to file a fast appeal if Medicare denies coverage, so you're prepared in case of a dispute.
FAQs About the Court Decision
Does your insurance cover observation status? It's a common question, and the answer can be complex. Insurance companies often have specific policies regarding observation status, so it's essential to understand how your insurance works.
In the United States, the Affordable Care Act (ACA) requires hospitals to provide notice to patients and their families when a patient is placed on observation status, but it does not dictate how insurance companies should handle it.
The length of observation status varies depending on the hospital and the patient's condition, but it is usually limited to 48 hours. This is important because Medicare and some private insurance companies may not cover services provided during observation status.
Observation status can be a temporary arrangement, and patients may be moved to inpatient status if their condition requires more intensive care. However, this can be a lengthy process, and patients may be stuck in limbo for days or even weeks.
Medicare has specific rules regarding observation status, including a 3-day hospital stay requirement for coverage of skilled nursing facility care. This means that if a patient is placed on observation status for less than 3 days, they may not be eligible for skilled nursing facility care.
In some cases, patients may be able to appeal their observation status, but this can be a complex and time-consuming process. It's essential to understand your insurance policy and the hospital's policies to ensure you receive the care you need.
Frequently Asked Questions
How is observation status billed?
For patients in observation status, use code 99217 for discharge billing. This code is specifically designed for observation discharge, ensuring accurate billing.
Is observation cheaper than inpatient?
Observation stays are generally more affordable than inpatient hospitalizations, with lower total and out-of-pocket costs for patients. This cost difference makes observation a more budget-friendly option for ED patients requiring hospitalization.
Sources
- https://clearmatchmedicare.com/blog/medicare/medicare-coverage-for-observation-services
- https://www.helpadvisor.com/medicare/hospital-observation
- https://medicareadvocacy.org/medicare-info/observation-status/
- https://www.nolo.com/legal-encyclopedia/how-a-hospital-stay-on-observation-status-hurts-medicare-recipients.html
- https://medicareadvocacy.org/frequently-asked-questions-about-the-observation-status-court-decision/
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