How will my costs be affected by inpatient or observation status?

What's the difference if I'm assigned observation status at a hospital instead of 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 2025.¹ This excludes the cost of physician fees, which are covered by Medicare Part B. 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, you are considered to be an outpatient.

Outpatient status includes care you receive “under observation.” In this case, Medicare Part B – not Part A – will cover the care you receive in the hospital. You will pay a 20% coinsurance for each service you receive but cannot be charged more than the Part A deductible amount for any one item.² Unfortunately, you will not be eligible for Medicare Skilled Nursing Facility coverage after your hospital stay.

There will be instances where there is not a significant difference in cost between inpatient and observation costs. 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.

Many people turn to Medicare supplement insurance plans – known as Medigap – to pick up some or all their hospital costs. If you are able to afford one of these plans, it could significantly help to decrease what you pay if you find yourself in the hospital. All Medigap plans will pay the Part B coinsurance, although Plans K and L only cover 50 and 75 percent of it, respectively, and Plan N has a $20 co-pay for office visits and a $50 co-pay for emergency room visits.³

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).⁴ In 2013, Medicare then implemented the “two-midnight rule,” which added a time factor to a beneficiary’s hospital status. To be considered appropriate for inpatient services, care was expected to 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.⁵  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 2016.⁶ The legislation required 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 can still advocate for this informally.

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 beneficiary can appeal classification under observation status and request Medicare to pay for subsequently denied skilled nursing facility care going back to 2009.⁷ 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 ruling⁸ – 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 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 $294 per day in 2024,⁹ this same SNF stay would cost you $5,880 if you did not qualify for that Part A coverage.