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Observation Status


Many Medicare beneficiaries are classified as being on “observation,” which can result in significantly higher claims and prevent Medicare coverage from being applied for nursing home care for patients who do not have a three-day inpatient hospital stay. 


  • There is no active legislation on this issue.


We urge Congress to support forthcoming legislation that would allow observation stays to be counted toward the three-day mandatory inpatient stay for Medicare coverage of a skilled nursing facility (SNF).


  • No current campaigns


Currently, Medicare beneficiaries who are not officially admitted to a hospital may be classified under “Observation Status,” which is treated as an outpatient procedure for billing purposes. Unfortunately, the common practice of placing a beneficiary on observation status can have significant financial consequences for Medicare beneficiaries, since Medicare Part A and its related coverage rules only apply to actual inpatient care admissions. This may lead patients, many who are extremely sick and may need skilled nursing care to spend many days in the hospital and be charged for services that Medicare would have otherwise paid had they been admitted. Furthermore, hospitals have up to one year to retroactively change admission status to observation, leading unsuspecting beneficiaries with thousands of dollars in bills for SNF care they believed would be covered by Medicare.

The issue stems from policies designed to prevent unnecessary hospital readmissions, where Medicare would penalize hospitals when patients would be re-hospitalized within a month of being discharged. Hospitals with readmission rates above the national average would receive lower Medicare reimbursements, thereby in theory incenting hospitals to adequately treat patients the first time and avoid re-admissions. However, in response to the policy, some hospitals increasingly placed patients under observation status, allowing them to provide care for patients whose conditions were not poor enough to be admitted without the hospital being penalized for a re-admission. Regardless if care was performed in the inpatient unit, these visits would be classified as outpatient procedures and billed under Medicare Part B, which could result in higher cost-sharing for the patient.

As frequency of beneficiaries receiving extended observation services increased as well as high error rates for hospital services that were performed as inpatient instead of outpatient, in 2013, the Center for Medicare and Medicaid Services (CMS) issued guidance designed to determine which hospital stays should be billed for Medicare Part A and which should qualify as outpatient. Beginning in October of 2013, if a physician expected a patient to stay fewer than two midnights, then the services would be classified as outpatient and billed under Medicare Part B. CMS later delayed the enforcement of this policy through March 31, 2015.


  • The recovery audit contractor program, a provisions from the Medicare Modernization Act of 2003, is resulting in significant out-of-pocket costs for seniors living on fixed incomes who can’t afford them, with copayments and prescription drug costs charged to the beneficiary instead of covered by Medicare if not for the loophole.
  • An unintended consequence of this provision has been that hospitals have avoided admitting patients for fear of eventually being charged with a readmission penalty, and instead have placed beneficiaries in a limbo observation status.
  • Over the past five years, there has been a 69% increase in the number of beneficiaries treated under observation status.
  • Medicare beneficiaries are charged a one-time deductible for hospital services over their first 60 days during a stay, but patients who are not admitted for at least three days are not eligible for Medicare coverage in skilled nursing home facilities and patients who are considered outpatient also face a 20% copay for any physician services.
  • The recent uptick in Medicare beneficiaries treated under observation status by hospitals to avoid being admitted is being blamed on the recovery audit contractor program.