Observation status vs inpatient admission: why it changes your hospital bill

Two people can spend the same night in the same hospital bed and get very different bills. One reason is the status of the stay. Under Original Medicare, observation is outpatient care, and its nights never count toward the three inpatient days needed for skilled nursing care afterward, even if you are admitted later. If you are never admitted, Part B pays, with a copayment for each service, and Part A pays nothing. A Medicare Advantage plan's costs and rules may differ, so ask your plan. This page covers the Medicare rules and is not legal advice.

What is observation status, and how is it different from inpatient?

Under Medicare, you are an inpatient only from the moment a doctor writes an order formally admitting you. Before that, you are an outpatient. Observation is outpatient care that helps the doctor decide whether to admit you or send you home. You can be under observation in a regular bed, even overnight.

Medicare's rule says an inpatient admission is generally appropriate when the admitting doctor expects you to need hospital care that crosses two midnights. A shorter stay can also be inpatient, based on the doctor's judgment. A long stay alone does not mean you should have been admitted: what counts is what the doctor expected when deciding.

The MOON notice

If you get observation care for more than 24 hours, the hospital must give you the Medicare Outpatient Observation Notice, called the MOON, no later than 36 hours after observation starts, or when you leave, if that comes first. It says you are an outpatient, why, and what that means for your costs and for skilled nursing care later. Staff must explain it out loud, and you will be asked to sign it. Medicare Advantage members get it too.

Why the bill changes

• As an inpatient, Medicare Part A covers the hospital stay. You generally pay one deductible for your hospital services for the first 60 days. Part B covers most doctor services, and you usually pay 20% of the Medicare-approved amount after the Part B deductible.
• Under observation, if you are never admitted, Part A pays nothing. Part B covers most hospital outpatient services. After the yearly Part B deductible, you usually pay a copayment for each service, plus 20% for doctor services. In most cases one copayment can't be more than the inpatient deductible, but many copayments added together may be.
• Medicines you usually take yourself, like daily blood pressure pills, are in most cases not covered by Part B in an outpatient setting. Most hospital pharmacies are not part of Medicare drug plans, so you may have to pay the hospital first and then send the claim to your Medicare drug plan (Part D), which may pay part of it back. Keep the bill for those medicines. If your drug plan does not cover them, you pay what the hospital charges.
• If you are admitted after observation at the same hospital, Medicare says that for most hospitals, related outpatient services in the 3 days before the admission date are paid as part of the inpatient stay under Part A.