Medicare Hospital Coverage: Inpatient vs Observation Status

Hospital inpatient vs. observation status determines the Medicare coverage for hospital stays, nursing home rehab, and how much is paid out-of-pocket

Hospital status determines out-of-pocket medical costs

When they’re in the hospital, it’s essential to know your older adult’s hospital status. 

That’s because hospital status affects their out-of-pocket medical costs and eligibility for Medicare coverage of post-hospital nursing home stays.

By law, hospitals are required to notify patients that they might have to pay huge out-of-pocket costs if they stay more than 24 hours without being formally admitted as an inpatient.

But in the bustle and confusion, hospital status isn’t always as clear as it needs to be to help you make informed decisions.

We explain the difference between Medicare inpatient vs. observation status, how Medicare coverage for hospital stays work, how hospital status affects coverage for nursing home stays, and what seniors should expect to pay under each status.


From our partner

Medicare inpatient vs observation status at the hospital

A hospital classifies a patient’s status as either inpatient or observation. 

Having inpatient status means that the person has been admitted to the hospital under doctor’s orders. 

Being under observation status means that the person is staying in the hospital as an outpatient, under observation. They haven’t been admitted.

Don’t assume that you know your older adult’s status based on what procedures are being done or how long they’ve been in the hospital. 

And remember, staying overnight or for many days doesn’t mean that someone has been admitted.


Medicare coverage is based on hospital status

Hospital status determines the Medicare coverage for hospital stays and post-hospital care. 

There are separate coverage rules for inpatient and outpatient hospital stays. Typically, out-of-pocket costs are significantly higher for outpatient stays. 

The difference between an inpatient and outpatient stay could mean thousands of dollars out of your older adult’s pocket.

The timing of when a person is admitted as an inpatient is also very important because Medicare only covers the inpatient portion of a hospital stay.

So, any time spent in the hospital or emergency room before being admitted is considered outpatient time.

That time is covered under outpatient coverage rules and doesn’t count toward the 3 day minimum for covered skilled nursing care.

It’s also important to know that the discharge day doesn’t count as an inpatient day.


How hospital status affects coverage for short-term nursing home stays

When an older adult is hospitalized, a common next step is for them to be discharged to a nursing home (skilled nursing facility) for rehab and further recovery.

But Medicare coverage for these short-term nursing home stays is based on their hospital status. 

In order to be eligible for coverage, a person must have 3 hospital inpatient days. Otherwise, they’ll be responsible for the cost of the skilled nursing facility stay.

For a real-life example, imagine that your mom got very ill and has been in the hospital for 5 days.

When the hospital is ready to discharge your mom to a skilled nursing facility, you suddenly find out that Medicare won’t cover any of the cost.

Typically, Medicare covers short-term nursing home stays after a hospitalization. So why wouldn’t Medicare cover the nursing home in this case?

It turns out that your mom was never admitted to the hospital by the doctor, so she didn’t have inpatient status and had zero inpatient hospital days. 

She didn’t have a “qualifying hospital stay” because she was an outpatient under observation status.

Because of this status, your mom’s hospital costs will now be determined under the rules for outpatient coverage and she’ll also be responsible for the cost of the nursing home stay.


From our partner

Inpatient vs observation status: what seniors should expect to pay

What seniors pay as inpatients:

What seniors pay as outpatients (observation status):

  • For hospital services, pay a copayment for each individual outpatient hospital service. This amount may vary by service.
  • For doctor’s services, pay the Part B deductible + 20% of the Medicare-approved amount.
  • For prescription and over-the-counter medications in the hospital or emergency room, pay out-of-pocket (and try to submit a claim to the drug plan later) or try to use Part D prescription drug coverage.
  • For nursing home / skilled nursing rehab care, pay out-of-pocket.
  • Get more detail about outpatient coverage at


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By DailyCaring Editorial Team


This article wasn’t sponsored and doesn’t contain affiliate links. For more information, see How We Make Money.


  • Reply July 21, 2021

    Alan Forsythe

    From a selfish perspective I am especially interested in the charges I will have to pay after my Medicare Supplement makes their payment. I have Supplement F. Is their a table that breaks down my anticipated charges according to the supplement and the inpatient/outpatient circumstance (as your excellent article did pre-insurance)?

    • Reply July 21, 2021


      It would be best to contact your insurance company to find out what the out-of-pocket costs will be for your specific situation.

  • Reply August 18, 2016

    Lynne G

    Having just enountered this situation in the Main Line Health system in suburban Philadelphia that’s evolved into a quality control review case, I will say that hospitals can play fast and loose with the definition of “observation.” It is not observation if a patient is brought into the ER, kept for up to a week, has repeated episodes of a medical problem during that period and the hospital is unable to treat or manage it. The three-day rule is plain: If a hospital is incapable of keeping the patient’s problem under control for three days, then the patient needs to be admitted. Whether that inability is due to doctor’s skill set, the severity of the patient’s problem or whatever, admission is required.

    But let’s be blunt. A hospital will bring in much more revenue from billing on outpatient charges than inpatient. Also, if a patient is readmitted with the same problem within a defined period of time – meaning the hospital didn’t effectively treat the problem – Medicare does not pay for the second round of treatment. But if the patient’s first go-round was on observation status, that doesn’t count as admission so hospitals don’t risk Medicare non-payment.

    A law alerting patients is great. But if hospitals don’t honor their end of the bargain, it means nothing.

    • Reply August 18, 2016

      Connie Chow

      I’m so sorry you have to go through all this 🙁 Hospitals do have a lot of things they can do to charge patients more. That’s why it’s so important for seniors to have a strong health advocate to make sure they’re getting fair treatment and accurate bills.

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