You wake up one morning feeling kind of off, but you go about your day. While doing some yardwork, you feel a bit lightheaded, trip, and fall hard. Your spouse calls for an ambulance, and you’re rushed to the hospital. Unfortunately, since they don’t know what caused the fall, they want to keep you there to monitor you, at least overnight. After a few days of care, you’re ready to head to a skilled nursing facility for rehab.

A week passes, and you’re able to head home. Then you see the bill. Suddenly, you’re expected to pay for services and products you thought were covered by Medicare. Sadly, thousands of seniors find themselves in this exact situation every year. They’ve fallen victim to “observation service.”

What Does Observation Service Mean?

Observation service, sometimes called observation status, is a billing category used for services provided while you’re at an inpatient facility. Generally, it refers to services provided while your doctors are deciding if you need to be admitted to the facility for a longer time. This is usually for emergency departments of an inpatient facility but isn’t limited to there. In fact, observation services can extend beyond a hospital to skilled nursing and other inpatient facilities.

Generally, observation services are ones provided while your doctors are deciding if you need to be admitted to the facility for a longer time.

The official definition of observation service is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.

This means that observation services often include tests, x-rays, or drugs given prior to a decision being made. And while those receiving observation services are at inpatient facilities, they’re officially outpatients. As a result, services that would normally be better covered by Original Medicare are not, leaving more costs for the patient.

Why Doesn’t Medicare Cover These Costs?

In this section, we’ll discuss how observation services cost in Original Medicare. If you have a Medicare Advantage plan, check with the specifics of your plan, since it may differ. When you have Original Medicare, Part A covers inpatient facilities. If you’re receiving observation services — and therefore not admitted as an inpatient — you’ll be covered by Part B.

This means you’ll need to pay the full cost until you meet the annual Part B deductible and 20 percent of any services or therapy after that. Additionally, drugs taken as part of your treatment, which would be covered by Part A under inpatient care, may not be covered under Part B. If you have Part D, but the inpatient facility is not within your network, you pay the full cost.

A stay at a skilled nursing facility for rehab after your hospital stay may not be covered if you were only in observation status.

Finally, if you require a stay at a skilled nursing facility for rehab after your hospital stay, it may not be covered if you were only in observation status. For Original Medicare to cover a skilled nursing facility, you need a three-night inpatient stay at a hospital prior to admittance at the facility. Since observation services are outpatient, none of the days within that status count. This leaves you paying the full cost of the skilled nursing facility, where the bill truly grows.

Luckily, Medicare has a two-midnight rule, which requires you to be admitted as an inpatient after spending two midnights (three days) in the hospital. However, this also means that you can spend five days in the hospital with only two of those counting as inpatient days, making you cover the costs of skilled nursing rehab. This is where observation status gets tricky and vigilance gets important.

What Does This All Mean for Me, and Can I Prevent It?

The Centers for Medicare & Medicaid Services (CMS) places most of the power for the determination of the status on the physician’s judgment. Unfortunately, this can mean that observation status patients can have the same symptoms as inpatients. This inconsistency can make it difficult to tell what your status is.

The best way to know what your status is in an inpatient facility is to ask your doctor. This is especially true if you’ve entered through the emergency department, where services may fit the observation definition more closely. As of March 2017, hospitals are required to provide a Medicare Outpatient Observation Notice (MOON) within 36 hours if you’ve received observation services for 24 hours. The hospital must also orally explain the status and what it means. If you’re already in a skilled nursing facility, you may receive a Notice of Exclusion of Medicare Benefits (NEMB), though this is not required.

At the present time, there is no official way to appeal observation status, though there’s a class action lawsuit that aims to change this.

If you find that you’re receiving observation services, request that you’re admitted and placed in inpatient care immediately. With your doctor’s help, you may be admitted and begin receiving care covered by Part A.

After this, however, it gets much murkier. At the present time, there is no official way to appeal observation status. In August 2017, the Center for Medicare Advocacy began pursuing a class action lawsuit to change this reality. In the meantime, they have developed a toolkit for seniors who find themselves in observation status.

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Hospital and skilled nursing care can be expensive, especially without coverage from Original Medicare. With little recourse to correct your status after the fact or to challenge the decision, it’s easy to unknowingly find yourself owing thousands of dollars after only a few days of care. This is why it’s so important to discover your status early. The sooner you find out if you’re receiving observation services, the sooner you can fix it.

Further Reading

Center for Medicare Advocacy — Observation Status Infographic
The New York Times — Under ‘Observations,’ Some Hospital Patients Face Big Bills
NPR — How Medicare’s Conflicting Hospitalization Rules Cost Me Thousands of Dollars