Does Medicare Cover Observation Status?

Observation status in a healthcare setting refers to a period of evaluation within a hospital to determine if a patient requires formal admission as an inpatient or can be safely discharged. This status allows medical professionals to conduct further testing, monitor a patient’s condition, and assess their response to initial treatments. Observation status is distinct from being admitted as an inpatient, carrying different implications for both care and financial responsibility. This classification sets the foundation for understanding how hospital stays are billed, particularly for those relying on Medicare benefits.

Understanding Observation Status

Observation status is a specific classification for hospital services considered outpatient care, even if a patient remains in a hospital bed overnight. Healthcare providers use this status for individuals who require close monitoring, diagnostic testing, or short-term treatment to determine the severity of their condition. Common reasons for observation include chest pain, asthma exacerbations, or dehydration, where the need for full inpatient admission is not immediately clear. The goal is to make a definitive decision about a patient’s care needs within 24 to 48 hours.

Inpatient admission, by contrast, is reserved for patients whose conditions are more severe, requiring continuous, complex medical management and an expected hospital stay of at least two midnights. The determination between these two statuses hinges on the medical necessity of the services and the anticipated length of hospital care.

Medicare Coverage and Patient Costs for Observation Stays

Medicare’s coverage for observation stays falls under Medicare Part B, rather than Medicare Part A. This distinction impacts patient out-of-pocket costs and subsequent coverage for other services. During an observation stay, Medicare Part B covers various services, including physician fees, diagnostic tests, and hospital services provided on an outpatient basis, such as the use of a hospital bed and nursing care. Patients are responsible for their annual Part B deductible, and then a 20% coinsurance of the Medicare-approved amount for most services received. This coinsurance can apply to each individual service provided, potentially leading to varied and accumulating costs.

Room and board charges during an observation stay are included as part of the hospital’s outpatient services covered by Part B, meaning patients will still pay their coinsurance share for these components. Prescription drugs administered during an observation stay are covered under Medicare Part B if they are given as part of the hospital’s outpatient treatment. However, self-administered medications or those taken after discharge would fall under Medicare Part D, if the patient has such coverage, or be paid out-of-pocket. The time spent in observation status does not count towards the three-day inpatient hospital stay requirement for Medicare Part A coverage of a Skilled Nursing Facility (SNF) stay. This can result in unforeseen financial burdens if post-hospitalization SNF care is needed.

Impact on Skilled Nursing Facility Coverage

Observation status impacts Medicare beneficiaries who may require Skilled Nursing Facility (SNF) care following a hospital stay. Medicare Part A covers SNF services only if the patient has had a qualifying three-day inpatient hospital stay. This means the patient must be formally admitted to the hospital for three consecutive days, not including the day of discharge, for the SNF benefit to activate.

A patient discharged from a hospital after an observation stay, regardless of its duration, will not meet the Medicare Part A prerequisite for SNF coverage. This leaves patients and their families responsible for the full cost of any necessary SNF services. The financial implications can amount to thousands of dollars in out-of-pocket expenses for services that would otherwise be covered by Medicare Part A. Understanding a patient’s hospital status from the outset is important.

Patient Rights and Advocacy

Patients placed in observation status have specific rights concerning notification and recourse. Hospitals are required to provide Medicare beneficiaries with a Medicare Outpatient Observation Notice (MOON) if they receive observation services for more than 24 hours. This notice must be delivered no later than 36 hours after observation services begin, or sooner if the patient is discharged or admitted as an inpatient. The MOON form explains that the patient is an outpatient, not an inpatient, and details the financial implications of this status.

Patients should receive both a written MOON and an oral explanation of its contents, with staff documenting the patient’s receipt or refusal to sign. If a patient believes they should have been admitted as an inpatient, they can discuss their concerns with their treating physician or a hospital patient advocate. A formal appeals process exists for certain Medicare beneficiaries to challenge a reclassification from inpatient to observation status. This process, which can involve several levels of review, allows patients to seek a determination on whether their stay should have been covered under Part A as an inpatient.