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How Hospital Observation Status Can Cause Trouble for You

It Can Cost You More Money and Prevent You from Being Admitted to the Hospital


Updated May 20, 2014


Double check that your paperwork does not say "observation" anywhere or you may have to pay for the visit from your pocket.

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Hospitals have figured out a sneaky and unethical new way to make money, putting patients at risk both financially and medically. They are using what used to be a good way to help patients who didn't really need to be admitted to the hospital, called "observation status," as a way, instead, to game the system. It is costing patients money out of their pockets and from their taxes, and could possibly affect their medical outcomes, too.

A study released by Brown University in mid-2012 showed that across the United States, hospital admissions had decreased slightly even though the population of Medicare patients had risen. It also showed that patients kept under observational status had increased 25%. Further, those who were kept under observation status, on average, were staying longer than ever before - up to 72 hours without being admitted. These statistics led experts to try to explain why so few patients were being admitted.

What did they figure out? Let's follow the money.

What is hospital observation status?

When patients go to the emergency room, a determination is made about whether they should be admitted to the hospital or not. Some patients are simply sent home with some sort of prescriptive treatment. Others are admitted right away because they will clearly need surgery or some other form of treatment (the hospital can charge for). Others may either be borderline, or they may need treatment for a short period of time, although that "short period of time" can range up to a week or more.

It's those patients who may be put on observational status, probably should not be, and will be hit in the pocket later for extra costs they would not incur if they were, instead, admitted to the hospital.

How does the hospital make money from observation status?

If a patient is assigned observational status, then he is considered to be an "outpatient" - meaning he is not admitted to the hospital. It can be very lucrative for the hospital to assign that patient outpatient status without formally admitting him. Here's how:

  1. Some insurances, including Medicare, don't consider observation status as an admission, and therefore don't cover the cost as they would if the patient was hospitalized. That means the patient can be charged cash for their visit. The cash payment for an outpatient visit is far higher than reimbursement from insurance for an admitted patient's stay because, of course, insurance companies negotiate far lower rates for the patients they pay for.
  2. Medicare does not totally reimburse hospitals for patients who are readmitted within 30 days of leaving the hospital previously. That means that if a Medicare patient was hospitalized, then sent home, and reappears in the emergency room within 30 days, the hospital will be penalized for the readmission. By putting a patient on observational status, they avoid the penalty, and they can charge the patient cash, too.

What are the observation status problems for patients?

In cases when this observation status is questionable for patients, there are a few reasons it can become problematic.

  1. The out-of-pocket costs are higher. Particularly for Medicare patients - if they aren't admitted to the hospital, even if they stay there, the hospital can charge them for many things Medicare doesn't cover if Part B coverage is used.  The latest ruling (2014) says that Medicare patients must be formally admitted, and stay in the hospital overnight for two midnights.
  2. Medical care can be compromised. Hospital stays are so short these days because insurance reimbursements are so low once a patient gets past a certain point in his/her care. That means there are some patients who are being sent home too early. If they begin to get sick again, or find themselves in unmanageable pain, they will try to return to the hospital. But if the hospital is reluctant to admit them, those patients may not get the care they need. The "observation status" designation can compromise the care they get because they have not been fully admitted to the hospital and are therefore not fully part of the hospital process of caring for patients.

    (I expect some hospital personnel would dispute that fact; but the truth is that if they can provide the same care whether or not the patient has been admitted, then it would be unethical for them not to admit that patient.)
  3. Medicare patients who must be admitted to a nursing home are required to be fully hospitalized prior to nursing home admission if they expect Medicare to pay for their nursing home stay. If a patient had been put on observation status unstead of fully admitted, then there will be no nursing home reimbursement - that can amount to hundreds of thousands or more. If Medicare is to cover any nursing home costs, the patient must be formally admitted to the hospital for at least three midnights (not the same rule as the two-midnight rule mentioned above.)

This article addresses only Medicare patients, however, if your healthcare is covered by a private payer, or another government payer (Tricare, Medicaid) then you would be wise to check with them to find out if your observation status is covered.  As time goes on, this policy of not paying for observation status may become a trick used by all payers - and hospitals - to offset lower reimbursements.

It should also be noted that hospitals can determine and change the status of a patient without letting anyone know it's been done. They may tell a patient he is being admitted to the hospital, but the paperwork isntead will reflect observation status. Even if a patient has been admitted, the hospital can change that status at any time.

NextHow to double check status and change out of observation status.

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