How a Hospital Stay on Observation Status Hurts Medicare Recipients

Being admitted to the hospital might seem like a simple concept, but it has a precise meaning. Simply spending the night in a hospital bed in a patient room or ward doesn't mean you've been admitted to the hospital as an inpatient. You can be "held for observation" and treated in the hospital for a couple of days without being formally admitted.

Over the last decade, hospitals have increased the practice of holding patients for observation. Although that can lower the overall cost of care, it might cost you more—especially if you need follow-up care or rehabilitation in a skilled nursing facility (SNF).

Does Medicare Part A Cover Hospital Observation Stays?

Medicare Part A is hospital insurance, and Medicare Part B is medical insurance. Part A covers you only if you're admitted to the hospital as an inpatient. So, being held for observation isn't covered by Part A. It's considered an outpatient service.

Instead, Medicare Part B covers the care provided by the hospital and the doctors when you're held for observation (or seen in the emergency room). The problem is that the copayments and deductibles you pay under Part B are generally higher than those under Part A.

And that's not the only issue being held for observation can cause when it comes to paying for medical care. It can also affect your access to follow-up care.

Does Insurance Cover a Skilled Nursing Facility After an Observation Stay?

It's fairly common for patients to need follow-up skilled nursing care or rehab after hospital treatment. Being held for observation instead of being admitted as an inpatient means follow-up care can cost you more.

Medicare will cover a stay in a skilled nursing facility only after a patient has spent at least three consecutive days in the hospital as an inpatient (not counting the day of discharge or time in the emergency room). (42 CFR § 409.30(a).) So, being held under observation at a hospital could mean you have to pay the entire cost of the SNF care or rehab facility yourself.

(The Improving Access to Medicare Coverage Act of 2024 would change the rules so observation time counts toward Medicare's three-day inpatient requirement for SNF coverage. Parallel bills are pending in the Senate and House of Representatives, but haven't advanced to a floor vote in either chamber.)

How Long Can a Patient Be in Observation Status?

Patient observation status usually lasts no more than 24 hours, but can last as long as 48 hours. If you need to spend more than two nights in the hospital, Medicare generally expects your doctor to admit you as an inpatient. That expectation is based on Medicare's "Two-Midnight" rule for determining a patient's status—observation vs. admission.

Doctors and hospitals use the Two-Midnight guideline when determining whether a patient should be admitted as an inpatient. Under the Two-Midnight rule, Medicare Part A generally covers hospital stays if the treating physician expects the patient to need hospital care for at least two consecutive nights ("two midnights"). (42 C.F.R. 412.3.) Medicare Advantage (Part C) plans also use the Two-Midnight benchmark. (42 C.F.R 422.101.)

However, the Two-Midnight rule is only a guideline for Medicare. A doctor can admit you as an inpatient even if the doctor isn't sure you'll need to stay past two midnights but believes it's medically required. For instance, if you're having surgery that can be done only as an inpatient, you'll be treated as an admitted patient even if you stay at the hospital for fewer than two nights. Or, if unforeseen circumstances, such as a transfer to another hospital, result in a shorter stay than originally expected, you can still be considered an inpatient (on admitted status).

Required Notice for Hospital Observation vs. Admission

Congress recognized that patients were often surprised to learn they were outpatients even after staying overnight in a hospital bed, so they passed the NOTICE Act in 2016. Under this law, hospitals must give you a written notice if you're held for observation for more than 24 hours.

The Medicare Outpatient Observation Notice (MOON) explains whether your stay is officially classified as inpatient or outpatient. The notice is intended to help you understand how your admission status affects your eligibility for skilled nursing facility care or nursing home coverage.

The required notice should explain that Medicare won't cover a stay in a skilled nursing facility unless the patient has spent at least three days as an inpatient (not counting the day of discharge) before going to a nursing home.

If your stay included inpatient care, the notice should indicate whether you were an inpatient for the three days needed to qualify for skilled nursing facility coverage. If you were only held as an outpatient, the notice must also explain why you weren't admitted as an inpatient.

(Note that hospitals must provide the MOON to patients with Medicare Advantage plans. But whether a Medicare Advantage plan will cover your SNF stay depends on the HMO or PPO that operates your plan.)

When you transition from a hospital stay that includes outpatient observation status to a skilled nursing facility, the SNF must provide a Skilled Nursing Facility Advance Beneficiary Notice of Non-Coverage (SNFABN). The notice tells you that Medicare Part A might not cover your skilled nursing care.

While the NOTICE Act makes these notices mandatory, it doesn't provide any form of relief or appeal if a hospital or other medical facility fails to give you the required notice about your eligibility for SNF or nursing home care.

Protect Yourself

If you (or a loved one) are taken to the hospital and treated there for more than 24 hours, ask your doctor to formally admit you to the hospital rather than keeping you for observation. That way, Medicare Part A coverage will be available to cover the stay and any following skilled nursing or rehabilitation facility inpatient care you might need.

Learn how to file a fast appeal if Medicare denies coverage.