You may have experienced spending the night in the hospital only to find out that you were considered as Outpatient or Under Observation. What is the difference? You are still being treated by doctors and nurses that work for the hospital, your medicines are coming from the hospital pharmacy, and all your x-rays, blood work, and other lab work is being done through the hospital. So why is this not treated as a Hospital Inpatient stay? In short, to save the hospital money.


The Hospital Readmission Reduction Program penalizes almost all hospitals (with the exception of the Veterans Administration (VA) facilities, critical care, children’s or psychiatric hospitals) for patients who are re-admitted within 30 days of discharge. Last year, almost 3,000 hospitals were penalized, paying nearly $500 million in penalties under this program. This is clearly a deterrent to hospital admittance. If you are never admitted into the hospital, there cannot be a re-admit. To provide clarity on this matter, the Centers for Medicare and Medicaid Services (CMS) adopted the Two Midnight Rule in 2013. Simply stated, an inpatient admission is generally appropriate when you are expected to need two or more midnights of medically necessary hospital care. When applicable, your doctor must order such admission and the hospital must formally admit you for you to become an inpatient. Hospitals are also penalized for inappropriate admissions, not just for re-admissions. So, you can see why, as a nation, hospitals have increasingly just stopped admitting Medicare members.


How does this affect you if you are on Medicare? If you have been admitted into the hospital by your physician, Medicare Part A (Hospital Insurance) covers your hospital services. This means you pay a one-time deductible for all your hospital services for the first 60 days in the hospital. When you are admitted in the hospital, Part B (Medical Insurance) covers most of your doctor services. You should expect to pay 20% of the Medicare-approved amount for doctor services after paying the Part B deductible. In 2016, the MOON Rule was adopted, which requires hospitals to notify patients if they are being held Under Observation.  But this notice is not appealable: it is one of the only Medicare notices that cannot be appealed!


Outpatient hospital services are covered under Part B of your Medicare. This involves paying a copayment for each individual outpatient hospital service. Your copayment for a single outpatient hospital service cannot cost more than the inpatient hospital deductible; however, your total copayment for all outpatient services may be more than the inpatient hospital deductible. You should expect to pay 20% of the Medicare-approved amount after you pay the Part B deductible.


Prescription and over-the-counter drugs you receive in an outpatient setting are not covered under Part B. If you have Medicare prescription drug coverage (Part D), these drugs may be covered, but you may have to pay out-of-pocket for these drugs and submit a claim for reimbursement.
How does this distinction of Hospital Inpatient and Under Observation affect your rehabilitation in a skilled nursing facility (SNF)? Medicare will only cover care you receive in a SNF if you first have a “qualifying inpatient hospital stay.” A qualifying inpatient hospital stay means you have been formally admitted in a hospital by a physician and your stay is for at least three days in a row (counting the day you were admitted as an inpatient, but not counting the day of your discharge). Always ask your doctor or hospital staff if Medicare will cover your SNF stay. If Medicare does not cover your SNF stay, then your Medicare Supplement plan will likewise not cover the SNF stay.

-Hillary Broome, author of ‘Navigating Medicare: How to get Totally Lost on the Road to Medicare’

Hillary Broome