Medicare and Observation Services

Observation services include a well-defined set of specific, clinically appropriate services, including X-rays, drugs and lab tests.

You would typically fall under observation status if you arrive through the emergency room and require treatment or monitoring to determine whether you should be admitted.

Some hospitals perform observation in the emergency department, while others provide standard hospital rooms or dedicated observation units.

More than a million Medicare patients receive observation care each year, according to the U.S. Centers for Medicare & Medicaid Services (CMS).

Medicare considers observation care an outpatient service. Outpatient services are covered under Medicare Part B, which means that patients on observation status have fewer Medicare benefits and will pay more out of pocket.

In 2025, the standard monthly premium for Medicare Part B starts at $185 and increases according to income.

The average Medicare Part B deductible for outpatient services in 2025 is $257. After you meet your deductible, you will still have to pay 20% of covered costs for each service received.

Out-of-pocket costs for outpatient beneficiaries are limited to the Medicare Part A inpatient deductible for any single service ($1,676 in 2025), but there is no limit on the number of services that can be administered.

Most Medicare plans do not pay for drugs administered during observational status because Part A doesn’t pay for outpatient services, and hospitals are “out of network” for the pharmaceutical coverage included in Part B and Medicare Part D prescription drug plans.

Medicare Advantage plans are private plans approved by Medicare. Sometimes called Part C, they are similar to HMOs and PPOs in that they may require you to use in-network doctors and hospitals.

They must provide the same coverage as Original Medicare (Parts A and B), but may also include drug coverage. However, you may be limited in where you can receive covered services based on network limitations of the plan.

Medicare Advantage plans include an annual out-of-pocket spending limit, potentially saving you money in out-of-pocket costs for outpatient hospital stays compared to Original Medicare coverage.

Medicare has a three-day inpatient admission requirement to receive coverage for nursing home care. This means you must be admitted to the hospital as an inpatient for three consecutive days — defined as at least two overnight stays — to qualify.

Observation service time does not count toward the three-day inpatient stay requirement. Therefore, observation status beneficiaries referred to a skilled nursing facility (SNF) without spending three days as an inpatient are not covered for SNF care under any public or private Medicare plan.

A study by the AARP Public Policy Institute found that observation status patients referred to an SNF typically paid more than $12,000 out of pocket.

Although only 7% of observation status Medicare beneficiaries were referred to an SNF for additional care, two-thirds of those were not eligible for reimbursement, causing nearly 1 in 3 to forego recommended SNF treatment.

Under what is known as the “two-midnight rule,” Medicare Part A specifies that inpatient admission is generally appropriate when you are expected to require two or more nights of medically necessary hospital care.

Admission must be ordered by a doctor and the hospital must formally admit you. The rule, established in 2014, requires doctors to base their decision on medical judgment.

Stays expected to last less than two midnights are treated and billed as outpatient stays.

Hospitals are required to provide Medicare beneficiaries with a Medicare Outpatient Observation Notice (MOON) explaining your observation status and what it means in terms of cost sharing and implications for coverage of post-hospital SNF services.

MOON forms must be provided for any Medicare patient expected to exceed 24 hours of observational care, along with an oral explanation. This form is to be presented no later than 36 hours after observation services are initiated, and signed by the patient.

Inpatient and outpatient status is determined jointly by doctors and hospitals. Hospitals can retroactively change a Medicare patient’s status from inpatient to outpatient if there is some question as to whether Medicare will pay for inpatient treatment.

If a hospital tells you that you are being placed on observation status, seek immediate help from a doctor. Doctors have leverage and the ability to request that a hospital admit a patient and specify that admission is medically necessary.

If the hospital refuses, ask them to put their reasons in writing. If you are admitted as an inpatient and later notified that the hospital is switching your status to observation, you have the right to request an accelerated review by a patient advocate through a Beneficiary and Family Centered Care — Quality Improvement Organization (BFCC-QIO)

There is no in-hospital appeal process for an outpatient who has not been admitted to the hospital. This is because Medicare’s two-midnight rule is based on a doctor’s medical judgement.

If your doctor doesn’t expect you to be hospitalized for two midnights, you will most likely receive observation care.

If the hospital changes your status and you decide to appeal, ask your doctor or the hospital for any documentation for why your status was changed. You can find information about the appeals process in your plan documentation, along with contact information — which can also be found on your plan membership card.

The appeals process has five levels. At each level, you will receive a decision letter and instructions on how to advance your claim to the next level.