A stay in the hospital can be a stressful time, and the last thing you want to worry about is an unexpected, costly medical bill. Yet, many Medicare beneficiaries receive a bill that is far higher than they anticipated. Often, the reason comes down to a single distinction: whether the hospital classified your stay as “inpatient” or “under observation.”
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These two terms may seem similar, especially when you are in a hospital bed, but they are treated very differently by Medicare and can have a massive impact on your wallet.
What Is the Difference Between Observation and Inpatient Status?
Understanding these two categories is the first step to protecting yourself financially.
- Inpatient Status: You are an inpatient when you are formally “admitted” to the hospital with a doctor’s order. This status means the doctor believes your condition is serious enough to require hospital care that is expected to last at least “two midnights.” Inpatient care is paid for by Medicare Part A (Hospital Insurance).
- Observation Status: This is a form of outpatient care. A doctor may place you under observation to monitor your condition, run tests, or decide if you are healthy enough to go home or sick enough to be admitted. Even if you stay overnight in a regular hospital room, you are still considered an outpatient if you are under observation. This care is paid for by Medicare Part B (Medical Insurance).
How Hospitals Decide Your Status
The “Two-Midnight Rule” is the guideline Medicare uses to help hospitals make this decision.
If your doctor expects you will need medically necessary hospital care for a period that crosses two midnights, you should generally be admitted as an inpatient. If the doctor expects you will need less than two midnights of care, or if they are still deciding on the best course of action, you will likely be placed under observation.
This decision is made by the hospital and your doctor, not by you.
How Observation vs. Inpatient Status Affects Your Medicare Coverage
This is where the costs can change dramatically.
- If you are an INPATIENT (Part A): You are responsible for the one-time Part A deductible for your benefit period. In 2025, this deductible is $1,676. This single payment covers your first 60 days of inpatient hospital care. You do not pay a 20% coinsurance for your hospital stay.
- If you are under OBSERVATION (Part B): Because this is an outpatient service, you are responsible for the Part B deductible (if you have not already met it for the year), which is $257 in 2025. After that, you must pay a 20% coinsurance on all services you receive. This includes the doctor’s fees, diagnostic tests, lab work, and any drugs administered at the hospital.
Real-World Cost Examples
Let us look at how this plays out for a three-day hospital stay.
Scenario 1: Inpatient Status – You are admitted as an inpatient for three days. Your total bill is $15,000. Your Cost: You pay the Part A deductible of $1,676. Medicare Part A pays for the rest.
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Scenario 2: Observation Status- You are under observation for three days. Your total bill for services and tests is $15,000. Your Cost: You pay 20% of the Medicare-approved amount. 20% of $15,000 is $3,000 (plus your Part B deductible if not yet met).
As you can see, the observation stay can end up costing you significantly more out of pocket, and there is no cap on your 20% coinsurance.
The 3-Day Inpatient Rule and Skilled Nursing Facility Coverage
The most financially dangerous part of observation status often comes after the hospital stay.
Medicare will only pay for follow-up care in a Skilled Nursing Facility (SNF) if you have a “qualifying hospital stay.” A qualifying stay is defined as three consecutive days as an INPATIENT.
Days spent under observation do not count toward this 3-day rule.
If you spend four days in the hospital — all under observation — and then need to go to a SNF for rehabilitation, Medicare will not pay for the SNF stay. You will be responsible for 100% of the bill, which can cost thousands of dollars per week.
Your Rights as a Patient
Because this distinction is so important, Medicare requires hospitals to be transparent.
If you are receiving observation services for more than 24 hours, the hospital must provide you with a Medicare Outpatient Observation Notice (MOON). This written notice must explain:
- That you are an outpatient and not an inpatient.
- The reasons why you are receiving observation care.
- How this status affects your cost-sharing and your potential eligibility for SNF care.
This notice must be delivered to you no later than 36 hours after your observation services begin.
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How to Protect Yourself or a Loved One
The best defense is to be proactive.
- Ask Questions Daily: Every day you are in the hospital, ask the doctor or hospital case manager, “Am I an inpatient, or am I here under observation?”
- Request a Review: If you are under observation but feel you are too sick to go home, ask your doctor to re-evaluate your case for inpatient admission.
- Secure Financial Protection: The single best way to protect yourself from the financial shock of observation stays is with a Medicare Supplement (Medigap) plan.
A Medigap plan works with Original Medicare to cover your out-of-pocket costs. If you are under observation (billed under Part B), all Medigap plans pay the 20% Part B coinsurance for you. This means you would be shielded from those high, uncapped hospital bills.
If you are admitted as an inpatient, most Medigap plans (like the popular Plan G) will pay your entire Part A deductible.
With a Medigap plan, you gain peace of mind knowing that whether you are classified as an inpatient or under observation, your major costs are covered.
Can You Appeal Your Observation Stay?
Yes, but the rules are specific. As of 2025, you have new appeal rights if you were originally admitted as an inpatient but your status was later changed to outpatient observation.
If this happens, you can ask for a “fast appeal” while you are still in the hospital. You should contact your state’s Beneficiary and Family Centered Care Quality Improvement Organization (BFCC-QIO) to start this process. You can also file an appeal after you have left the hospital.
