What are the Financial Consequences of Observation vs. Admittance?

Jul 13, 2020

​The financial consequences of observation vs. admittance can be a shock. A common misconception of Medicare beneficiaries enrolled in Part A and Part B is if a medical professional is advising an overnight stay, then Medicare Part A is picking up the tab. However, this isn’t always the case.

Difference between Observation and Admittance (Inpatient vs. Outpatient)

When a patient is admitted to the hospital, then Part A of Medicare covers the full cost of that hospital stay for up to 60 days.

However, if a patient is being held only for observation, then they haven’t actually been admitted. This means they would be considered an outpatient.

Common misconceptions that lead patients to believe they have been admitted:

  • Moved to a room in the ER
  • Staying overnight
  • Have been seen by a doctor
  • Moved to a different department

Financial Consequences of Observation vs. Admittance

If admitted to the hospital, then Part A kicks in and there is no co-insurance attached to Part A (inpatient coverage). Typically, this means there is no cost to the patient if they have Medicare Part A.

Conversely, if a patient is only under observation, then Part A does not pay. This would be covered under Part B which only covers 80% of that visit. The other 20% co-insurance would be paid out by the Medicare beneficiary.

Let’s take a knee replacement for instance. This used to be covered under Part A, but is now deemed an outpatient procedure. The average cost in the U.S. is $57,000. So, the Medicare beneficiary would be responsible for $11,400.

MedPAC also notes that all-payer hospital outpatient visits grew 17.6% from 2010-17 while inpatient admissions declined 2.4%

So, why don’t hospitals just admit more Medicare beneficiaries if Part A pays?

Good question. Hospitals must adhere to strict admission guidelines. If they waver from those, the hospital is responsible for the payment. This means they have to pay Medicare for the entire cost of that admission. The hospital audits yield hundreds of millions of dollars be paid back to Medicare for any improper Part A charges. Some years additional items are added to the non-admittance guidelines by Medicare. This is why it’s so important for Medicare beneficiaries to have an annual review of their Medicare coverage.

Best Methods for Establishing Inpatient vs. Outpatient Status

According to Medicare.gov:

  • You’re an inpatient starting when you’re formally admitted to a hospital with a doctor’s order. The day before you’re discharged is your last inpatient day.
  • You’re an outpatient if you’re getting emergency department services, observation services, outpatient surgery, lab tests, X-rays, or any other hospital services, and the doctor hasn’t written an order to admit you to a hospital as an inpatient. In these cases, you’re an outpatient even if you spend the night at the hospital.

The best way to know is to ask.

If you are unsure if a specific procedure will be considered inpatient or outpatient, you can ask your doctor, hospital, go on Medicare.gov, or contact your Independent Agent.

If it’s time for you to have another set of eyes on your Medicare coverage, we can do a thorough review at no cost.


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