Outpatient Observation Status

The Center is part of a coalition of organizations fighting the continued misuse of Observation Status through advocacy and education, efforts which will be greatly enhanced by our work with the John A. Hartford Foundation.  In addition, in 2011, prior to our work with the John A. Hartford Foundation, the Center for Medicare Advocacy and co-counsel National Senior Citizens Law Center (Now Justice In Aging) filed a nationwide class action lawsuit to challenge this illegal policy and practice, Bagnall v. Sebelius.


  1. Observation Status and Why It Matters
  2. Required Notice
  3. Options for Patients
  4. Video: Center Client Lee Barrows on Observation Status
  5. Share Your Observation Story
  6. Additional Resources - Fact Sheet, Infographics & More
  7. Articles & Updates

Observation Status and Why It Matters

Observation Status is a Medicare billing designation used by hospitals. Unfortunately, it can hurt hospital patients who rely on Medicare for their health care coverage.

People who receive care in hospitals, even overnight and for several days, may learn they have not actually been admitted as inpatients. Instead, the hospital has classified them as Observation Status, which is an “outpatient” category. This designation can happen even for people who are extremely sick and spend many days in the hospital.  For example, we have heard from people with recent hip and pelvic fractures who were designated as Observation Status.

The “outpatient” classification is often a surprise to patients; many do not realize their status until the patient is getting ready to leave the hospital. Most of the time hospital patients are not told or given a written notice when they are designated as outpatients on Observation Status. (Note: The NOTICE Act provided notice – the MOON, discussed below – that a patient is on Observation Status, but no means to appeal the decision).

Neither the Medicare statute nor the Medicare regulations define observation services.  The only definition appears in various CMS manuals, where observation services are defined as:

a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.

In most cases, the Manuals provide, a beneficiary may not remain in observation status for more than 24 or 48 hours.

Even if a physician orders that a beneficiary be admitted to a hospital as an inpatient, since 2004 CMS has authorized hospital utilization review (UR) committees to change patients’ status from inpatient to outpatient.  Such a retroactive change may be made, however, only if (1) the change is made while the patient is in the hospital; (2) the hospital has not submitted a claim to Medicare for the inpatient admission; (3) a physician concurs with the UR committee’s decision; and (4) the physician’s concurrence is documented in the patient’s medical record. CMS explains that retroactive reclassifications should occur infrequently, “such as a late-night weekend admission when no case manager is on duty to offer guidance.” Although CMS anticipated in 2004 that reclassifications would be used less frequently over time, the Center has heard about this practice only recently.

The video below, created by b

Why does this matter?

When hospital patients are classified as outpatients on Observation Status, they may be charged for services that Medicare would have paid if they were properly admitted as inpatients. For example, patients may be charged for their medications. (Thus, people may want to bring their medications from home if they have to go to the hospital.)

Most significantly, patients will not be able to obtain any Medicare coverage if they need nursing home care after their hospital stay. Medicare only covers nursing home care for patients who have a 3-day inpatient hospital stay – Observation Status doesn’t count towards the 3-day stay.

Outpatient Observation Status is paid by Medicare Part B, while inpatient hospital admissions are paid by Part A.  Thus, Medicare beneficiaries who are enrolled in Part A, but not Part B, will be responsible for their entire hospital bill if they are classified as Observation Status.

Required Notice

In the Hospital

AS of March 8, 2017, as required by the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act), hospitals and critical access hospitals (CAHs) are required to give patients both oral and written notice when they are outpatients and not admitted as inpatients.  Hospitals must use the written notice developed by the Centers for Medicare & Medicaid Services (CMS), which is called the Medicare Outpatient Observation Notice (MOON).

Who, Besides the Patient, Can be Given the MOON

Although the NOTICE Act requires hospitals to give oral and written notice to the outpatient, the MOON requires the signature of the patient or the patient’s representative.  Further elaborating on who can be given oral and written notice of a patient’s observation status, CMS’s instructions define three categories of representatives:

  • Appointed representatives, who “are designated by beneficiaries to act on their behalf;”
  • Authorized representatives, who, “under State or other applicable law, may make health care decisions on a beneficiary’s behalf (e.g., the beneficiary’s legal guardian, or someone appointed in accordance with a properly executed durable medical power of attorney); and
  • A person (typically, a family member or close friend) whom the hospital or CAH has determined could reasonably represent the beneficiary, but who has not been named in any legally binding document, [who] may be a representative for the purposes of receiving the MOON.”  The hospital staff person who initiates contact with the family member or close friend must annotate the MOON and record the date, time, and method of contact (in person or by telephone).

In an exception to the requirement that the MOON be given in person to the patient, CMS’s instructions allow a hospital to make “an off-site delivery to the representative.”  The hospital must communicate orally all of the information contained on the MOON to the representative and then must send “a copy of the annotated MOON” to the representative “by certified mail, return receipt requested, or any other delivery method that can provide signed verification of delivery (e.g., FedEx, UPS).”  The MOON must be mailed on the same day as the telephone call. Alternatively, if agreed to by the hospital and the representative, the hospital “may send the notice by fax or e-mail.”

Ensuring Beneficiary Comprehension

CMS’s instructions require hospitals to use “their usual procedures to ensure notice comprehension.” These procedures may include “translators, interpreters, and assistive technologies” as well as language assistance services to individuals with limited English proficiency (LEP) consistent with section 1557 of the Affordable Care Act (ACA) and Title VI of the Civil Rights Act of 1964.”   In addition, as required by the ACA and §504 of the Rehabilitation Act of 1973, hospitals must provide auxiliary aids and services free of charge to patients with disabilities. The MOON is currently available in English and Spanish.

Hospital Retention of MOON

The original signed MOON must be retained in the beneficiary’s medical record at the hospital.

In the Skilled Nursing Facility (SNF)

SNFs that believe that Medicare coverage will be denied because of a technical reason, such as a lack of the three-day qualifying hospital stay, may give the resident a Notice of Exclusion of Medicare Benefits (NEMB).[13] Use of the notice by SNFs is optional.

The NEMB-SNF informs the beneficiary that, in the SNF’s view, Medicare will not pay for the resident’s care.  The form offers the beneficiary three options:

  • Option 1: checking “Yes” means that the beneficiary wants to receive the services and wants Medicare to make a decision about coverage.  This option requires the SNF to submit the claim, with supporting evidence, to Medicare.  If Medicare denies payment, the beneficiary agrees “to be personally and fully responsible for payment.”
  • Option 2: checking “Yes” means that the beneficiary wants to receive the services, but does not want the claim to be submitted to Medicare.
  • Option 3: checking “No” means that the beneficiary does not want to receive the services and that no claim will be sent to Medicare.

Options for Patients

There are currently no appeal rights for an Observation classification.

  • If the patient is still in the hospital: 
    • Seek the doctor’s help to “admit the patient as an inpatient.”
    • If the hospital insists on Observation Status, make sure you have received written notice stating this fact and;
    • Tell the hospital the patient wants their status changed because the care is “medically necessary” and an “inpatient hospital level of care.”  Support from the doctor will help.​
  • If the patient is no longer in the hospital:
    • The patient might be able to appeal the hospital care after-the-fact, however, winning Medicare coverage in Observation cases is increasingly difficult. Try to get the patient’s physician to assist.

Remember: If the patient needs nursing home care after the hospitalization, it is particularly important that the hospitalization is considered an “inpatient admission.” (Medicare will only cover nursing home care after a 3-day inpatient hospital stay.)

Video: Center Client Lee Barrows on Observation Status

The Center has heard repeatedly about beneficiaries throughout the country whose entire stay in a hospital, including stays as long as 14 days, is classified by the hospital as outpatient observation.  In some instances, the beneficiaries’ physicians order their admission, but the hospital retroactively reverses the decision.  As a consequence of the classification of a hospital stay as outpatient observation (or of the reclassification of a hospital stay from inpatient care, covered by Medicare Part A, to outpatient care, covered by Medicare Part B), beneficiaries are charged for various services they received in the acute care hospital, including their prescription medications.  They are also charged for their entire subsequent SNF stay, having never satisfied the statutory three-day hospital stay requirement.

Such was the case for Center client Lee Barrows and her husband:

Share Your Observation Story

As the Center anticipated, more beneficiaries have been placed in observation status as the Recovery Audit Contractor (RAC) program moved from demonstration status to a permanent, nationwide program. RAC was authorized by §306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) to detect and correct improper payments in the traditional Medicare program, both overpayments and underpayments.  The review of the three-year demonstration program found that RAC contractors, who were paid on a contingency basis, identified $1.03 billion in improper payments — $992.7 million (96%) in overpayments and $37.8 million (4%) in underpayments.  Most of the overpayments (85%) were collected from inpatient hospitals. The review also reported that only 14% of providers appealed and only 4.6% of RAC overpayment determinations were overturned on appeal.

The Center would like to hear your experiences as we work on solutions to these issues.

Additional Resources - Fact Sheet, Infographics & More

Articles & Updates

  • August 7, 2016 New York Times article on Observation Status and the NOTICE Act, New Medicare Law to Notify Patients of Loophole in Nursing Home Coveragefeatures a Center For Medicare Advocacy client. Center Executive Director Judith Stein says “the new law is an important first step, but Congress and the administration need to do more to protect beneficiaries.”