Does Medicare Pay for Hospital Observation Status?

Understanding Hospital Observation Status

Hospital observation status refers to a patient’s classification as an outpatient, even if they are receiving care within a hospital bed. This status is distinct from being formally admitted as an inpatient. Hospitals utilize observation status primarily to evaluate a patient’s condition for a short duration, typically less than 48 hours, to determine if their illness or injury warrants full inpatient admission or if they can be safely discharged.

A physician determines observation status based on medical necessity criteria. While patients in observation may stay overnight and receive services like meals, medications, and diagnostic tests, their legal status remains outpatient. This difference between observation and inpatient admission dictates the type of Medicare coverage applied.

Medicare Coverage for Observation Services

Medicare’s coverage for hospital observation services falls primarily under Medicare Part B, which is Medical Insurance. Services received while in observation status, including physician fees, diagnostic tests such as laboratory work and X-rays, and certain medications administered in the hospital, are generally covered as outpatient services. Medicare Part B also covers other outpatient hospital services like emergency care, certain supplies, and preventive services.

Patients are responsible for certain financial obligations under Medicare Part B. This typically includes an annual deductible, which is $257 in 2025. After meeting this deductible, beneficiaries are generally responsible for 20% of the Medicare-approved amount for most covered services received during their observation stay. Medicare Part A does not cover observation services because it is an outpatient designation. Consequently, the Medicare Part A inpatient deductible, which is $1,676 per benefit period in 2025, does not apply to observation stays.

Observation Status and Post-Hospital Care

A significant implication of being under observation status relates to Medicare’s coverage for Skilled Nursing Facility (SNF) care. Medicare Part A generally covers SNF services only after a patient has had a qualifying inpatient hospital stay of at least three consecutive days. This “3-day inpatient stay” rule specifically requires formal inpatient admission, meaning time spent in observation status does not count toward this requirement.

If a patient needs SNF care after a hospital stay that was classified as observation, Medicare Part A will not cover those SNF costs because the 3-day inpatient stay rule was not met. This can result in substantial out-of-pocket expenses for the patient, as they would be responsible for the full cost of SNF care. For instance, in 2025, SNF coinsurance for days 21 through 100 of a covered stay is $209.50 per day, with all costs falling to the patient after day 100 if the qualifying inpatient stay was not met. Understanding this distinction is crucial for financial planning related to post-hospital care.

Handling Observation Status Concerns

Patients have avenues to address concerns regarding their observation status or related billing. Hospitals are mandated by the NOTICE Act to provide a Medicare Outpatient Observation Notice (MOON). This standardized notice informs Medicare beneficiaries, including those with Medicare Advantage plans, that they are receiving outpatient observation services and explains the implications of this status for their Medicare coverage and costs.

Hospitals must deliver the MOON no later than 36 hours after observation services begin, or sooner if the patient is discharged. An oral explanation of the MOON must also be provided, and the patient or their representative should sign to acknowledge receipt. If a patient disagrees with their observation status, they can discuss it with hospital staff, such as doctors, nurses, or case managers, to understand the medical reasoning. For further assistance and counseling on Medicare-related questions, individuals can contact their State Health Insurance Assistance Programs (SHIPs). Beneficiary and Family Centered Care-Quality Improvement Organizations (BFCC-QIOs) are available to review quality of care concerns and appeals, including those related to discharge decisions.