Hospital stays are classified based on a patient’s status, which dictates how the hospital bills for services and significantly affects out-of-pocket costs and eligibility for post-hospitalization care. The term “Observation Status” refers to a specific classification used for patients who require short-term assessment, monitoring, and treatment in the hospital. Understanding this designation is necessary for anyone receiving hospital services, particularly those covered by Medicare.
Defining Observation Status
Observation status is a specific category of service intended to provide assessment for patients whose conditions are uncertain or require a short course of treatment. The Centers for Medicare and Medicaid Services (CMS) defines it as ongoing short-term treatment and reassessment while physicians determine if a patient requires formal admission or safe discharge. Crucially, a patient under observation status is officially considered an outpatient, even if they are physically occupying a hospital bed.
The services provided, such as diagnostic tests, medications, and nursing care, are often identical to those received by a formally admitted inpatient. Observation care is typically expected to last less than 48 hours, though a patient may remain under this status for a longer duration. The goal is to make an informed decision regarding the patient’s need for continued hospital care without immediately committing to inpatient admission.
Key Differences Between Observation and Inpatient Care
The primary difference between observation and inpatient status lies in the physician’s expectation of the length of the medically necessary hospital stay. Inpatient status requires a formal admission order and is reserved for patients expected to require comprehensive care lasting at least two midnights. This guideline, known as the “Two-Midnight Rule,” is the main determinant for transitioning a patient from observation (outpatient) to inpatient status.
If the physician anticipates the patient’s condition will require hospital care spanning two midnights, inpatient admission is appropriate. Conversely, if the anticipated duration of care is less than two midnights, the patient is typically placed under observation status. The decision is based on the physician’s clinical judgment at the time of presentation, focusing on the severity of symptoms and the likely time for diagnosis or stabilization. Even if a patient ends up staying longer than 48 hours, they may remain in observation if the physician did not initially expect the stay to cross two midnights.
Financial Impact and Coverage Implications
The distinction between observation and inpatient care has profound financial consequences for patients, especially those covered by Medicare. Inpatient stays are covered under Medicare Part A, which covers the hospital stay after a single, one-time deductible. Observation status, being an outpatient service, is billed under Medicare Part B. This Part B coverage typically requires the patient to pay a co-payment for each service rendered, including tests, procedures, and physician fees, often leaving the patient responsible for 20% of the approved charges with no annual cap.
Skilled Nursing Facility (SNF) Coverage
A significant financial risk relates to coverage for a Skilled Nursing Facility (SNF) stay after discharge. Medicare requires a patient to have been formally admitted as an inpatient for three consecutive midnights to qualify for Medicare coverage of a subsequent SNF stay. Time spent in the hospital under observation status, even if it lasts for multiple days, does not count toward this three-day inpatient requirement. This lack of SNF coverage can result in thousands of dollars in unexpected out-of-pocket costs if the patient requires post-hospital rehabilitation.
Medication Costs
Patients under observation status may also face higher costs for medications administered in the hospital. Medications, including self-administered drugs, are often covered under Part A during an inpatient stay. However, for an outpatient observation stay, these medications may be billed under Part B or Part D, leading to potentially high co-pays or a complete lack of coverage for certain drugs.
Patient Notification Requirements
Hospitals have a legal obligation to inform patients of their status when placed under observation care for an extended period. The Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) mandates this requirement. If a Medicare beneficiary receives observation services for more than 24 hours, the hospital must provide them with a standardized written notice.
This mandatory document is known as the Medicare Outpatient Observation Notice, or MOON form. The hospital must deliver the MOON form no later than 36 hours after the start of observation services. The MOON explains that the patient is an outpatient receiving observation services, not a formally admitted inpatient.
It must also detail the financial implications, including the difference between Part A and Part B billing and the effect on eligibility for a Skilled Nursing Facility stay. Hospital staff must provide an oral explanation of the notice and obtain the patient’s signature to confirm receipt and understanding.