Medicare Outpatient Observation Status

Medicare Outpatient Observation Status


    It is a hospital classification that can make Medicare patient pay for the cost of their:

    • Hospital stay
    • Hospital prescriptions
    • Nursing home care
      • Patients must be classified as inpatients for 3 days in the hospital in order for Medicare to pay for subsequent nursing home care.


    • May be called “outpatient,” but it has NOTHING TO DO with where a patient receives care or the kind of care received.
    • IS A BILLING CODE. Hospitals use it to protect from overzealous auditors and Medicare readmission penalties.
    • May just seem like semantics, but for Medicare beneficiaries, IT CAN RUIN LIVES.
    • Saddles patients with increased out-of-pocket expenses. Patients who don’t have Medicare Part B are responsible for the FULL COST of the hospitalization.


    Observation Status can be devastating. It can result in thousands of dollars in hospital bills, and thousands more in nursing home bills after a hospital stay.

    • The use of “outpatient” Observation Status isn’t just wrong, it can be DANGEROUS.
    • Many patients CAN’T AFFORD their care if Medicare won’t pay.
    • If post-hospital care in a nursing home won’t be covered by Medicare, many people GO WITHOUT that care altogether, rather than face the enormous bills.
    • The problem is growing: the number of patients cared for under Observation Status DOUBLED from 2006 to 2014.

    In 2012, an average hospital stay in the U.S. ost $10,400, and the median monthly cost for a nursing home in the U.S. was almost $8,000.


    Observation Status is very hard to fight but here’s what individuals can do:

    • ASK
      • Take action at the BEGINNING of a hospital stay to try to stop Observation before it starts.
      • Ask the hospital doctor to “admit the individual as an INPATIENT” based on needed care, tests and treatment.
      • Ask the patient’s regular physician to CONTACT THE HOSPITAL DOCTOR to support this request.
    • ACT
      • FILE AN APPEAL with Medicare, if the patient’s nursing home coverage is denied.
      • FILE A COMPLAINT with the patient’s state health department, if he/she did not get notice about “outpatient” Observation Status.
      • CONTACT the Medicare Agency, your Senators and Congressional Representatives.
      • Write to your local paper, SHARE this graphic on social media and SUBMIT your Observation story at


    Medicare beneficiaries are being denied access to Medicare’s skilled nursing facility (SNF) benefit because acute care hospitals are increasingly classifying their patients as outpatients receiving observation services, rather than admitting them as inpatients. Patients are called outpatients despite the fact that they may stay for many days and nights in hospital beds and receive medical and nursing care, diagnostic tests, treatments, medications, and food, just as they would if they were inpatients. Under the Medicare statute, however, patients must have an inpatient hospital stay of three or more consecutive days, not counting the day of discharge, in order to meet Medicare criteria for coverage of post-acute care in a SNF. As a result, although the care received by patients in observation status is the same as the care received by inpatients, outpatients who need follow-up care in a SNF do not qualify for Medicare coverage. Hospital stays classified as observation, regardless of their length and the type or number of services provided, are considered outpatient. These hospital stays do not currently qualify patients for Medicare-covered care in a SNF; only inpatient time counts.

    Hospitals’ use of observation status and the amount of time patients spend in observation status are both increasing. A study* found a 34% increase in the ratio of observation stays to inpatient admissions between 2007 and 2009, leading the researchers to conclude that outpatient observation status was becoming a substitute for inpatient status. The same study also documented increases in long-stay outpatient status, including an 88% increase in observation stays exceeding 72 hours.

    Support for counting time spent in observation status toward the three-day prior inpatient stay continues to grow. In July 2013, the Office of the Inspector General reported that hospitals varied widely in their use of observation stays and, in calendar year 2012, that beneficiaries had 617,702 hospital stays that lasted at least three nights, but that did not include three inpatient nights. These beneficiaries did not qualify for SNF services under Medicare. The report was supportive of counting observation days towards the three-day inpatient stay minimum requirement. In addition, in September 2013, the congressionally created Long Term Care Commission recommended that the Centers for Medicare & Medicaid Services (CMS) count time spent in observation status toward meeting the prior three-day stay requirement.

    The NOTICE Act and the two-midnight rule do not resolve this problem of observation status for patients. Beginning August 2016, the NOTICE Act requires hospitals to inform patients who are receiving observation services as an outpatient for more than 24 hours that they are outpatients, not inpatients. While receiving written and oral notice informs patients of their status, the law — which is a positive step forward — does not give patients hearing rights or count the time in the hospital for purposes of SNF coverage.

    The two-midnight rule establishes time-based criteria for inpatient hospital status, and most importantly, authorizes physicians to order inpatient status if they believe their patient is likely to be hospitalized for two or more midnights. A revision to the rule in 2015 allows physicians, on a case-by-case basis, to order inpatient status for patients who are likely to be hospitalized for only a single midnight. While the rule and its revision reflect CMS’ concerns about long outpatient stays, hospitals are unlikely to change their practices when CMS provides no meaningful guidance on when an inpatient stay of fewer than two midnights is appropriate. Physician decisions about patient status continue to be reviewed by hospitals under the same standards as before: short inpatient decisions are prioritized for review by Quality Improvement Organizations (QIOs); and the specter of audits by Recovery Auditors (still known as RACs) remains. A RAC’s determination that a patient has been incorrectly classified as an inpatient requires the hospital to return most of the Medicare reimbursement for the patient’s stay, despite the fact that the services were medically necessary and coverable by Medicare.

    Both the NOTICE Act and the two-midnight rule reflect recognition of the problem of observation status for Medicare patients, but they are not sufficient to address the impact on SNF eligibility for beneficiaries in observation.

    Legislation introduced this Congress with bipartisan support would create a full and permanent solution. The Improving Access to Medicare Coverage Act of 2015 (H.R.1571/S.843), introduced by Representatives Joe Courtney (D-CT) and Joe Heck (R-NV) and Senators Sherrod Brown (D-OH), Susan Collins (R-ME), Bill Nelson (D-FL), and Shelley Moore Capito (R-WV) would help Medicare beneficiaries who are hospitalized in observation by requiring that time spent in observation counted towards meeting the three-day prior inpatient stay.