Inpatient or Observation: Knowing the Difference Could Save You Thousands

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When Nancy’s husband fell and broke his hip, he spent four days in the hospital before starting a long road to recovery with several weeks at a skilled nursing rehabilitation center. Nancy was shocked when she got her husband’s medical bill in the mail – he was charged for his entire stay at the skilled nursing care center, something Medicare normally covers.  Nancy learned that, because her husband was initially admitted to the hospital under an “observation stay” status, Medicare would not cover any portion of his stay at the skilled nursing care center. Nancy’s story, although fictitious, is representative of what many Medicare patients experience when they are suddenly admitted to the hospital.

When a Hospital Stay Isn't a Stay

The difference between inpatient and observation status is important because Medicare pays different rates according to each status. Patients admitted under observation status are considered outpatients, even though they may stay in the hospital for several days and receive treatment in a hospital bed.

Hospital admission status affects Medicare coverage of skilled nursing services, and it can cost patients thousands of dollars. Medicare requires a three-day hospital inpatient stay minimum before it will cover the cost of rehabilitative care in a skilled nursing care center. However, observation stays, regardless of length, do not count toward Medicare’s requirement.

Patient advocate groups call this requirement a Medicare loophole that does a disservice to aging adults who need the quality and specialized care that comes from a skilled nursing care center. Many Medicare patients find themselves in a situation like Nancy’s, facing sticker shock. Others must decide whether they will pay out-of-pocket for medically necessary rehab and skilled nursing care, or cut their care short.

Fighting Observation Stays

The inpatient vs. outpatient criteria creates uncertainty for patients and their families. Legislation has been introduced in Congress that, if passed, would deem an individual receiving outpatient observation services in a hospital to be an inpatient with respect to the Medicare three-day stay requirement.  

In the meantime, there are a few things you can do to protect your loved one financially. A new law will require hospitals to give Medicare patients verbal and written notice of an observation status within 36 hours. When your loved one arrives at the hospital, you can also ask questions like:

  • Is the patient’s status inpatient or observation?
  • How long will the hospital stay be?
  • Will there be a need for specialized skilled or rehab care after the patient is discharged?

Asking these questions throughout your loved one’s stay is important because hospitals can change the status from one day to the next. You can ask to have your loved one’s status changed, but it is important to do so while your loved one is still in the hospital. If necessary, you can request the hospital’s patient advocate for assistance. The Center for Medicare Advocacy has published a Self Help Packet for Medicare Observation Status with resources to help you in filing an appeal, if necessary.