Observation Status and Medicare: Update

Observation Status and Medicare: Update Image

A recent court decision will allow a law suit by patients on observation status who are seeking a way to challenge that status to continue. This is good news for patients who have faced huge medical bills because they were on observation status during a hospital stay rather than being admitted.


If you are treated at a hospital your care is considered ‘inpatient’ ‘outpatient’ or 'observation status’ and that status affects who pays for your care – you or Medicare. The patients involved in this law suit received care in the hospital, in some cases for several days, but the care was provided under observation status rather than inpatient status. These two categories of care feel the same to the patient who is in a hospital room being treated by hospital staff, receiving tests and drugs, and staying overnight – perhaps several nights. But, when it comes to billing and after-care, the distinction is important if you are on Medicare for several reasons: 

  • Inpatient hospital care is paid under Medicare Part A which covers all expenses.
  • Observation status is considered outpatient care and is covered under Medicare Part B so your out-of-pocket coinsurance and charges for X-rays, drugs and lab tests are higher.
  • The hospital can and often does change a patient’s status from inpatient to observation during the course of the time in the hospital.
  • More importantly, observation care does not count as a stay in the hospital when it comes to qualifying for rehabilitation or skilled nursing care at the time of discharge. Without three inpatient days, you do not qualify for coverage.

The Court Case

The court case mentioned (Alexander v Azar) speaks to the fact that patients have no easy way to challenge the observation status designation – and many patients would save thousands of dollars if they could change the designation.  The case is a nationwide class action suit brought by individuals who were forced to pay up to $30,000 for post-hospital skilled nursing care because they were on observation status. The issue they raise is that there are no rules about how to appeal the hospital decision to provide care under observation status instead of inpatient status.

All of the government grounds to dismiss the case were denied so the suit will continue through the courts.

Attorneys for those bringing the suit said that their clients “… deserve a fair process to determine whether they will receive Medicare coverage.” They also said “ … these vulnerable patients have a right to appeal to Medicare …”

We will continue to watch this case and keep you posted.