Hospital Inpatient or Outpatient Status Determines if Your Insurance Will Pay

Understanding Observation Care.

From the Valley Hospital, Valley Health System.

What is Observation Care?

Observation services are hospital outpatient services that a physician orders to allow for testing and evaluation. This observation period, which normally lasts 24-48 hours, helps the physician decide if the patient needs to be admitted to the hospital for inpatient care or can be released to home or another type of healthcare facility. Observation care may be provided in the emergency department or in another part of the hospital. These frequently asked questions and answers will help you better understand observation care and related insurance and billing information.

Is Observation care considered inpatient or outpatient care?

Observation care is considered an outpatient service. Patients are considered outpatients if they are receiving emergency room services, observation care or any other types of services in which the doctor hasn’t written an order to admit the patient to the hospital. If the doctor has not formally admitted you to the hospital, you are considered an outpatient even if you spend a night in the hospital.

How will I know whether I’m on Observation status or admitted?

The only way to know is ask. Hospitals and doctors don’t just assign you to one status or another, there are National guidelines published in the Medicare Benefit Policy Manual and guidelines used by commercial insurance that must be followed. Even if you demand to be admitted, instead of placed on Observation, it may result in the health insurance company denying all the claims, since you didn’t meet their guidelines for inpatient care.

What if I’m on Medicare?

An Observation stay is billed under outpatient services. Depending on your insurance coverage, you may face certain co-pays or deductible, as defined in the outpatient terms of your coverage.

It also means that you cannot receive Medicare coverage for follow-up care in a nursing home, even though your doctors may recommend it. To be eligible for nursing home coverage, Medicare clients must have first spent at least three consecutive days (or through three midnights) as an admitted patient.

Can I appeal the decision to put me in Observation status rather than as a inpatient?

Yes. When you receive your Medicare Summary Notice, follow the instructions to challenge the charges from the hospital listed under Part B of the notice, if you believe those services should have been billed as inpatient services. If you enter a nursing home, you may be billed for care. Ask the nursing home staff to submit a “demand bill” to Medicare. When it is rejected, you can appeal. The Center for Medicare Advocacy’s online self-help packet offers more details about how to challenge Observation status. For other Medicare contact information, see the attached from the Centers for Medicare and Medicaid (CMS) that has further information.

What if I have Commercial Insurance and not Medicare?

If you have any questions, you can call the Customer Service phone number on the back of your insurance card. Your Customer Service Representative will advise you.


Why You May Pay More if You’re Hospitalized for Observation

How Observation Guidelines Work

By Elizabeth Davis, RN , Verywell health.

Health insurance companies, Medicare, and hospitals are always looking for ways to save money. Assigning you to observation status using observation guidelines saves them money, but might end up costing you more.

When you’re put in the hospital, knowing whether you’ve been admitted as an inpatient or put on observation status is important to you financially. Here’s why it’s important, and what to do.

What is Observation Status? When you’re put in the hospital, you’re assigned either inpatient status or observation status. You’re assigned inpatient status if you have severe problems that require highly technical, skilled care.

You’re assigned observation status if you’re not sick enough to require inpatient admission, but are too sick to get your care at your doctor’s office. Or, you might be assigned to observation status when the doctors aren’t sure exactly how sick you are. They can observe you in the hospital and make you an inpatient if you become sicker, or let you go home if you get better.

How Do I know if I’ve Been Assigned Observation Status or Inpatient Status?

Since observation patients are a type of outpatient, some hospitals have a special observation area or wing of the hospital for their observation patients. But, many hospitals put their observation patients in the same rooms as their inpatients.

This makes it difficult for you to tell if you’re an inpatient or an observation patient. You can’t assume that, just because you’re in a regular hospital room, or in a hospital bed rather than on a gurney, you’re an inpatient.

Nor can you assume since you’ve been in the hospital for a few days you’re an inpatient. Although observation is intended for short periods of time, it doesn’t always work that way. The only way to know is to ask.

How Is My Observation or Inpatient Status Assigned?

Hospitals and doctors don’t just assign you to one status or another because they feel like it, because one status seems better, or because you ask to be assigned to a particular status. Instead, there are national guidelines published in the Medicare Benefit Policy Manual for determining who is assigned to inpatient status, and who is assigned to observation status.

These guidelines are vague yet complex and can change every year, so most hospitals and insurance companies use a service that publishes criteria to help them apply the guidelines to each patient. Two of the most popular services are McKesson’s InterQual Criteria and Milliman Care Guidelines.

These inpatient and observation guidelines typically address two different types of criteria. The first criterion is the severity of your illness: are you sick enough to need inpatient admission?

The second criterion is the intensity of the services you’re requiring: is the treatment you need intense enough or difficult enough that a hospital is the only place you can safely receive that treatment? Each criterion point has a whole slew of very specific evaluation points which might include things like blood test results, X-ray findings, physical exam findings, and the types of treatments you’ve been prescribed.

When you’re put into the hospital, the hospital’s case manager or utilization review nurse will evaluate your case, comparing your doctor’s findings, your diagnosis, results from your tests and studies, and your prescribed treatment with the guidelines. He or she will then use those guidelines to help your doctor assign you to either observation status, or inpatient status.

Why Should Observation Status or Inpatient Status Matter to Me?

If you’re an inpatient, but Medicare or your health insurance company determines that you should have been assigned observation status, it can refuse to pay for the entire inpatient hospital stay. You probably won’t discover this until the hospital has submitted the claim and had it denied by the insurance company weeks or even months after your hospitalization.

In fact, the Centers for Medicare and Medicaid Services contracts companies to search Medicare patients’ hospitalization records in an effort to find inpatient admissions that could have been handled in observation status. This happens months or even years after-the-fact. Then, Medicare takes back all the money it paid the hospital for that admission.

Hospitals try to follow the guidelines closely since that’s the easiest and most universally accepted the way to justify why they assigned you that particular status. For example, if your health insurance company or Medicare denies your claim because it determined that you should have been in observation status rather than inpatient status, the hospital will fight that denial by showing that you met InterQual or Milliman guidelines for the status you were assigned. If the hospital doesn’t follow the guidelines closely, it risks claim denials.

But, if you’re assigned to observation status rather than inpatient status, although it’s less likely your insurer will deny your entire claim, you might still take a financial hit. Usually, your share of cost for outpatient services is larger than your share of cost for inpatient admissions. Since observation patients are a type of outpatient, their bills are covered under Medicare Part B, or the outpatient services part of their health insurance policy, rather than under the Medicare Part A or hospitalization part of their health insurance policy. Outpatient coverage can have higher coinsurance rates than inpatient coverage (this is particularly true if you’re on Medicare, since Part B has coinsurance with no out-of-pocket cap unless you have a Medigap plan or Medicare Advantage). So, you may end up paying a larger portion of the bill for observation services than you would have paid for inpatient services.

If you’re on Medicare, observation status will also end up costing you more if you need to go to a nursing home for rehabilitation after your hospital stay. Medicare usually pays for services like physical therapy in a nursing home for a short period of time. But, you only qualify for this benefit if you’re been an inpatient for three days. If you’re in observation status for three days, you won’t qualify.

This means you’ll have to pay the entire bill for the nursing home and its rehab services yourself. You can expect this bill to be several thousand dollars.

Two-Midnight Rule

In 2013, the Centers for Medicare and Medicaid Services (CMS) issued guidance called the “two-midnight rule” which helps to further identify which patients should be admitted as inpatients and covered under Medicare Part A (hospitalization) rather than Part B (outpatient). The rule states that if the admitting doctor expects that the patient will need to be in the hospital for a time period that spans at least two midnights, the care would be billable under Medicare Part A.

In 2015, CMS updated the two-midnight rule to provide more flexibility for case-by-case determinations. The new guidelines still generally call for a hospital stay that spans at least two midnights before Medicare Part A applies, but they also leave some wiggle room for physician discretion. If the doctor believes that the patient’s treatment warrants inpatient admission even when the hospital stay is expected to have a duration of fewer than two midnights, the doctor can still opt to admit the patient as an inpatient.

Should I Fight for Inpatient Status, or Settle for Observation Status?

Although it’s frustrating, it’s not so much a matter of settling for observation status or fighting for inpatient status as it is a matter of making sure you’re in the correct status and understanding what that means to your budget.

Demanding to have yourself reassigned to inpatient status when you actually fit the criteria for observation status might seem like it could save you the money if your coinsurance costs are higher for outpatient care (observation status), and it’s definitely advantageous to be assigned to inpatient care if you’re on Medicare and you’re going to need care afterwards in a skilled nursing facility. But, remember, your health insurance company might refuse to pay the hospital bill if it determines you were incorrectly assigned to inpatient status. Neither you nor the hospital will likely succeed in fighting that claim denial since you didn’t fit the guidelines for inpatient status.

That said, it’s wise to ask what specific guidelines were used to decide that you should be in observation status rather than inpatient status. You might also ask what types of treatments, test results, or symptoms would have qualified you for inpatient status with this same diagnosis. Additionally, consider asking to speak with someone from the billing office who can estimate your out-of-pocket costs whether you’re in observation status or an inpatient.

If you’re too sick to do this yourself, you can give permission to have a trusted family member, friend, or patient advocate ask these questions for you, and follow up on the answers.

Updated February 13, 2018

Editor: Although the date of this article may not be current the information it contains is still valid.


Inpatient or Outpatient hospital Status Affects Your Costs


Your hospital status—whether you’re an inpatient or an outpatient—affects how much you pay for hospital services (like X-rays, drugs, and lab tests). Your hospital status may also affect whether Medicare will cover care you get in a skilled nursing facility (SNF) following your hospital stay.

  • You’re an inpatient starting when you’re formally admitted to the hospital with a doctor’s order. The day before you’re discharged is your last inpatient day.
  • You’re an outpatient if you’re getting emergency department services, observation services, outpatient surgery, lab tests, or X-rays, or any other hospital services, and the doctor hasn’t written an order to admit you to a hospital as an inpatient. In these cases, you’re an outpatient even if you spend the night in the hospital.


Observation services are hospital outpatient services you get while your doctor decides whether to admit you as an inpatient or discharge you. You can get observation services in the emergency department or another area of the hospital.

The decision for inpatient hospital admission is a complex medical decision based on your doctor’s judgment and your need for medically necessary hospital care. An inpatient admission is generally appropriate when you’re expected to need 2 or more midnights of medically necessary hospital care. But, your doctor must order such admission and the hospital must formally admit you in order for you to become an inpatient.

Here are some common hospital situations and a description of how Medicare will pay. Remember, you pay your deductible, coinsurance, and copayment.

Situation Inpatient or outpatient Part A pays Part B pays
You’re in the Emergency Department (ED) (also known as the Emergency Room or “ER”) and then you’re formally admitted to the hospital with a doctor’s order. Outpatient until you’re formally admitted as an inpatient based on your doctor’s order. Inpatient after your admission. Your inpatient hospital stay and all related outpatient services provided during the 3 days before your admission date. Your doctor services
You come to the ED with chest pain, and the hospital keeps you for 2 nights. One night is spent in observation and the doctor writes an order for inpatient admission on the second day. Outpatient until you’re formally admitted as an inpatient based on your doctor’s order. Inpatient after your admission. Your inpatient hospital stay and all related outpatient services provided during the 3 days before your admission date. Your doctor services
You go to a hospital for outpatient surgery, but they keep you overnight for high blood pressure. Your doctor doesn’t write an order to admit you as an inpatient. You go home the next day. Outpatient Nothing Your doctor services and hospital outpatient services (for example, surgery, lab tests, or intravenous medicines)
Your doctor writes an order for you to be admitted as an inpatient, and the hospital later tells you it’s changing your hospital status to outpatient. Your doctor must agree, and the hospital must tell you in writing—while you’re still a hospital patient before you’re discharged—that your hospital status changed from inpatient to outpatient. Outpatient Nothing Your doctor services and hospital outpatient services


Remember, even if you stay overnight in a regular hospital bed, you might be an outpatient. Ask the doctor or hospital. You may get a Medicare Outpatient Observation Notice (MOON) that lets you know you’re an outpatient in a hospital or critical access hospital. You must get this notice if you’re getting outpatient observation services for more than 24 hours.

The MOON will tell you why you’re an outpatient getting observation services, instead of an inpatient. It will also let you know how this may affect what you pay while in the hospital, and for care you get after leaving the hospital.



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