What Is Observation Status And How Does It Affect Those On Medicare?

There was a voicemail waiting for me on Monday morning from Robert, a former client.

“Diane, I’m in a panic. My wife is in the hospital, having hip replacement surgery. Some hospital person gave me a form to sign about observation care. I don’t know what it means or whether it will have any impact on her hospital stay.”

Robert’s wife was in a hospital bed, seeing hospital physicians, and getting care from hospital staff. However, what Robert did not know is that she is not an inpatient. She is on observation status. And that can have a big impact.

Questions about observation status

Many Medicare beneficiaries, like Robert, may not be familiar with observation status. Here are some of their questions that need answers.

What is observation status?

The Healthcare Cost and Utilization Project defined observation status as an “administrative classification of patients seen in hospital emergency rooms or outpatient clinics who have unstable or uncertain conditions potentially serious enough to warrant close observation, but usually not so serious to warrant admission to the hospital. These patients may be placed in beds usually for less than 24 hours without formal admission to the hospital.”

In other words, observation status is a way to monitor, in a hospital setting, a patient whose condition is uncertain. The physician needs more time to determine whether to admit the patient or discharge him or her for follow up as an outpatient. For example, a patient goes to the ER with chest pain and shortness of breath. She is transferred to a hospital bed on observation status.

It’s also becoming common for procedures with a quick discharge, such as hip and knee replacements.

How does the hospital decide whether the stay is observation status or admission?

Medicare says this is a complex medical decision based on your doctor’s judgment and your need for medically necessary hospital care.

Generally, admission is appropriate if a person needs two or more midnights of medically necessary hospital care. But your doctor must order such admission and the hospital must formally admit you in order for you to become an inpatient.

What are the implications of observation status?

1. The costs.

An actual hospital admission falls under Part A, hospital insurance. This part of Medicare covers the hospital room, nursing care, meals, drugs administered as part of the treatment plan, and other services, such as physical therapy or X-rays. Those who have Original Medicare are responsible for a deductible ($1,600 in 2023). Medicare Advantage members can face a per-day copayment, such as $395 for the first five days, or a specified amount per stay, like $500.

Observation status falls under the outpatient component of Medicare, which is Part B, medical insurance. There are separate billing codes for the actual observation care (number of hours), physician and practitioner services, evaluation, and other services. Medicare.gov says that an individual visit cannot be more than the hospital deductible but all visits during an observation stay can add up to considerably more.

For those who chose Original Medicare, the costs apply toward the Part B deductible ($226 in 2023) and, after meeting that, there is a 20% coinsurance. A Medigap policy (Medicare supplement insurance) helps cover the costs. Those with Medicare Advantage are responsible for the plan’s cost sharing.

2. Prescription medications.

Part B does not cover prescription drugs (generally self-administered) you get in a hospital while under observation status. For policy and safety reasons, hospitals don’t allow you to bring in medications from home so the hospital pharmacy must supply the drugs. (This includes the cholesterol, blood pressure, or any other drugs you take every day.)

However, the Medicare Prescription Drug Benefit Manual notes that institution-based pharmacies, such as those in hospitals, are considered out-of-network for Part D prescription drug coverage. That means Part D drug plans will not cover drugs during an observation stay. You will likely have to pay for those drugs and then submit a claim for reimbursement. Each drug plan has a procedure and a form. The cost sharing may be higher. If drugs are not in the plan’s formulary, your physician may need to request a formulary exception.

3. Skilled nursing facility (SNF) care.

Original Medicare beneficiaries may need a rehabilitation stay after major surgery, such as a hip replacement. To qualify for Medicare coverage, the patient must have a three-day hospital admission. If the three days in the hospital were for observation, Medicare will not cover the SNF care.

Some, but not all, Medicare Advantage plans waive the three-day stay requirement.

How long is an observation stay?

Even though observation status was intended for short stays, in the early 2010s, there were reports of stays that were three days or longer. That led the Centers for Medicare and Medicaid to implement some changes. CMS says that observation services, generally, do not exceed 24 hours and those exceeding 48 hours may be subject to medical review. CMS also implemented a notification process. (See next question.)

How will you know that you’re in an observation stay?

Since 2017, hospitals must provide the Medicare Outpatient Observation Notice (MOON) (another great Medicare acronym) to those receiving observation services in the hospital setting for more than 24 hours. This notice includes a space for the hospital to note the reasons for receiving observation care and the implications.

Is there anything I can do to change a stay for observation status into an admission?

You must act before you are sent home. Talk to your physician about admitting you as an inpatient, especially if your doctor thinks you may be in the hospital for two or more midnights. Also discuss the importance of admission if an SNF stay is in your future.

One caution: Even though you may be successful in convincing your physician to admit you, know that the decision is subject to change after discharge. A hospital utilization review committee can determine that the stay did not meet criteria for admission and the hospital has not yet submitted the claim to Medicare.

What if I refuse to sign the MOON?

If you refuse and there is no representative to sign on your behalf, the hospital staff who presented the notice will sign and certify that you received the notice. It won’t have an impact on your observation stay.

More than one million Medicare beneficiaries receive care every year under observation status. If it seems that you could be confronted with circumstances like Robert’s, discuss the situation with your physician. Use this information to steady your nerves and guide your responses.