What’s the difference if I'm assigned observation status at a hospital instead of being admitted as an inpatient?
Medicare Part A covers hospital care when you are admitted as an inpatient, meaning that your healthcare provider put an inpatient order on your medical chart. In this case, you will pay a Medicare Part A deductible that covers the first 60 days of your hospital care: $1,676 in 2025. (Physician fees are not covered by your Part A deductible because they are covered by Medicare Part B, with a separate deductible and coinsurance.) If you are an inpatient for at least three days, you will also qualify for Part A coverage in a skilled nursing facility (SNF) if you need a short-term extension of care after your hospital stay.
It is a common misconception that if you stay overnight in the hospital that you are an inpatient. In reality, it is all about your orders. When you do not have an inpatient order on your chart, Medicare treats you as an outpatient.
Outpatient status includes care you receive while “under observation.” In this case, Medicare Part B – not Part A – will cover the care you receive in the hospital. Medicare Part B has an annual deductible ($257 in 2025). After that is met, you will pay a 20% coinsurance for each covered service you receive during your observation stay. You cannot be charged more than the Part A deductible amount for any one item, unless you’re in a critical access hospital. Unfortunately, you will not be eligible for Medicare Skilled Nursing Facility coverage after an observation (outpatient) hospital stay, since that requires at least a three-day inpatient stay before you start to receive SNF care.
There might be instances where there is not a significant difference in cost between inpatient and observation care. It depends on the specific tests and services performed during your stay. However, the longer you stay in the hospital, the more likely you will pay much more if you are under observation than if you were an inpatient.
This is because Medicare’s Part A deductible covers 60 days of inpatient care with a one-time fee (plus Part B costs for physician services), whereas there’s a 20% coinsurance for all services provided during an observation stay, and no limit on how high the total bill can be. (Original Medicare, including Part A and Part B, does not have a cap on out-of-pocket costs, which is part of the reason most Original Medicare beneficiaries also have some type of additional coverage in place.)
Many people – more than four out of ten Original Medicare beneficiaries – turn to Medicare supplement insurance plans – also known as Medigap – to pick up some or all their hospital costs. If you are able to afford one of these plans, it could help to decrease what you pay out of pocket if you find yourself in the hospital. All Medigap plans will cover the Part B coinsurance for any services covered by Part B, although Plans K and L only pay 50% and 75% of it, respectively, and Plan N has a $20 co-pay for office visits and a $50 co-pay for emergency room visits. The rest of the Medigap plans will pay 100% of the Part B coinsurance costs that an enrollee would otherwise have to pay out-of-pocket.
Note that if your hospitalization is classified as an inpatient stay and you have to pay the Part A deductible, all Medigap plans except Plan A will cover the Medicare Part A deductible. But Plans K and M will only pay 50% of it, while Plan L will pay 75% of it. The rest of the Medigap plans – except Plan A – will pay 100% of the Medicare Part A deductible.
How does Medicare’s two-midnight rule affect observation status?
The Department of Health and Human Services Office of Inspector General (OIG) found that in 2012, Medicare was paying significantly more for short inpatient stays ($5,142) than for short observation visits for similar care ($1,741). In 2013, Medicare then implemented the “two-midnight rule” for admissions beginning on or after Oct. 1, 2013. This rule added a time factor in determining a beneficiary’s hospital status (inpatient or observation/outpatient). To be considered appropriate for inpatient services, the patient’s admitting physician had to expect that the patient would require more than two midnights in the hospital.
The two-midnight rule initially caused hospitals to increasingly err on the side of classifying patients under observation status, where claims are less likely to be questioned. Laws were then enacted to decrease the risk that beneficiaries were placed under observation when inpatient status was more appropriate.
Congress passed the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) in 2016. The legislation requires hospitals to notify certain patients if they are classified under observation for more than 24 hours. However, the NOTICE Act did not create any appeals rights for Medicare beneficiaries to request that their status be changed – although you could still advocate for this informally. As discussed below, beneficiaries have more rights now due to a subsequent court ruling.
A number of states, including New York and Connecticut, have enacted their own legislation to address challenges with observation status.
Can I appeal my classification as an observation patient?
A federal court ruled on March 24, 2020 that a Medicare beneficiary can appeal the fact that their hospital classified their hospital stay under observation status and request Medicare to pay for subsequently denied skilled nursing facility coverage. And the court’s ruling noted that it would apply to patients whose care had been provided as far back as 2009, meaning that patients could potentially appeal claims that were several years old.
The judge’s ruling applies to you if you were treated for at least three days, and a portion of that was classified as an observation stay – although you can appeal regardless of stay length if you only had Medicare Part A or if more than 30 days passed between the hospital visit and admission to an SNF.
Medicare beneficiary advocates applauded the ruling – which for the first time afforded a specific appeal right to Medicare beneficiaries classified under observation.
Will Medicare pay for skilled nursing facility (SNF) care if I was an observation patient?
Higher out-of-pocket costs for hospital care aren’t the only potential drawback associated with observation status. Sometimes, patients who receive such care wind up needing skilled nursing facility care after the fact. The problem? Medicare won’t cover it.
Medicare Part A will pay for up to 20 days of skilled nursing facility care during which your out-of-pocket cost is $0. Beyond that point, you pay $209.50 per day for days 21 through 100 (in 2025). But to qualify, you must be admitted to the hospital on an inpatient basis for three consecutive days, not including your discharge day. If you stay in the hospital under observation, you’ll be on your own to pay for whatever skilled nursing you need. This applies even if, say, you spend a day in the hospital under observation but orders are then changed to inpatient status for two days before you are discharged. You would not have been an inpatient long enough to qualify.
Here’s what that means for you in terms of cost: A 20-day stay in a skilled nursing facility would cost you $0 if you were admitted as an inpatient for at least three days. With the average cost for a shared room in a nursing facility at $302 per day in 2025, this same 20-day SNF stay would cost you $6,040 if you did not qualify for that Part A coverage.
The takeaway? Before you sign any hospital paperwork, know what status you’re entering under, and advocate for observation status to be changed to inpatient status if you feel that observation status is not appropriate given the nature of your visit. It also pays to read up on Medicare’s rules for inpatient versus outpatient care so you know what rights you have as a patient.
Maurie Backman has been writing professionally for well over a decade, and her coverage area runs the gamut from healthcare to personal finance to career advice. Much of her writing these days revolves around retirement and its various components and challenges, including healthcare, Medicare, Social Security, and money management.
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Tags: coinsurance, eligibility, Medicare Part A, Medigap, observation, outpatient coverage