When a patient arrives at the hospital, typically through the emergency room, they require monitoring and assessment before a physician determines if they are stable enough for discharge or need formal admission. This temporary period of monitoring is designated as “observation status.” While the difference between observation status and formal inpatient admission is administrative, this classification profoundly impacts the duration of the hospital stay, coverage, and the patient’s financial responsibility.
What Exactly is Observation Status?
Observation status is a classification for hospital care considered an outpatient service, even if the patient occupies a hospital bed. It is intended for individuals requiring short-term treatment and assessment to determine if their condition warrants inpatient admission or safe discharge.
The decision to place a patient under observation is made by a physician based on clinical judgment regarding the patient’s severity of illness. Observation allows the medical team time to monitor symptoms, perform diagnostic tests, and administer treatment. The goal is to establish a definitive diagnosis and treatment plan before the patient either stabilizes or requires full admission.
A patient’s status is determined by the physician’s order and the corresponding billing code, not their physical location within the hospital. The care received during observation can sometimes be indistinguishable from inpatient care, including diagnostic tests and intravenous medications.
The 48-Hour Guideline and Its Purpose
Observation status is generally intended to be limited, with a common benchmark of 24 to 48 hours. This guideline is based on the Medicare Two-Midnight Rule. This rule states that a patient is eligible for inpatient admission, covered under Medicare Part A, if the physician expects the hospital stay to span at least two midnights.
If the physician expects a stay of less than two midnights, the patient is typically placed under observation. This status provides a short window for the medical team to determine if the patient can be discharged or requires formal admission.
While 48 hours is the standard expectation, a patient can remain in observation status longer if the physician documents medical necessity. However, prolonged observation stays, especially those extending beyond 72 hours, trigger intense scrutiny from insurance payers and auditors. The observation period officially ends when the patient is formally admitted as an inpatient or discharged.
Financial Consequences of Observation Status
The administrative distinction between observation status and inpatient admission carries significant financial consequences, primarily for Medicare patients. Observation status is billed as an outpatient service under Medicare Part B, while formal inpatient admission is covered under Medicare Part A. This difference affects the patient’s out-of-pocket costs and eligibility for subsequent care.
Under Medicare Part B, the patient is generally responsible for a percentage of the cost—typically 20% coinsurance—for each individual service received, after meeting the annual Part B deductible. Unlike Part A, which involves a single deductible for the entire stay, the Part B coinsurance applies to nearly all services and has no upper limit on the total cost a patient may owe. Additionally, prescription medications administered during the observation stay may not be covered under Part B, leading to separate bills.
The most significant financial impact relates to coverage for a Skilled Nursing Facility (SNF) after discharge. Traditional Medicare requires a qualifying three-day consecutive inpatient hospital stay to activate SNF coverage. Time spent under observation status does not count toward this requirement, meaning patients needing rehabilitation may be responsible for the full cost of the SNF stay.
Changing Status and Patient Rights
A patient’s status can change from observation to inpatient if the physician determines that the medical necessity for a stay crossing two midnights has been met. The physician must write a formal order for admission. The hospital’s utilization review staff evaluates the medical record to ensure it meets the criteria for this change. This conversion is crucial because it retroactively shifts the patient’s care from Part B to Part A coverage for the entire hospital stay.
Federal law mandates that hospitals must inform Medicare beneficiaries placed under observation for more than 24 hours. The hospital must provide the patient with the Medicare Outpatient Observation Notice (MOON) no later than 36 hours after observation begins. This written notice, accompanied by an oral explanation, informs the patient they are an outpatient and explains the implications for cost-sharing and SNF eligibility.
If a patient disagrees with the observation status determination, they have the right to appeal the decision. Seeking a review can sometimes result in the stay being reclassified as inpatient, ensuring Part A coverage and qualifying the patient for subsequent SNF benefits.