You can spend a night or more in a hospital bed, wearing a hospital gown and receiving care from hospital staff, and still not be an inpatient. Many patients are surprised to learn they were under "observation," which counts as outpatient care. The difference can affect how much you pay and, for people with Medicare, whether a later stay in a skilled nursing facility is covered.
This guide explains the two statuses, the rules Medicare uses, and what you can do. It is general information, not legal or insurance advice. Coverage rules for private insurance and Medicaid vary, so check with your plan.
The basic difference
| Inpatient | Observation (outpatient) | |
|---|---|---|
| How it starts | A doctor writes a formal inpatient admission order | The care team needs time to decide whether you should be admitted |
| Medicare coverage | Medicare Part A (hospital insurance) | Medicare Part B (medical insurance) |
| What you typically pay with Original Medicare | A Part A deductible per benefit period, covering most hospital costs for the first 60 days | Part B coinsurance for each service, which can add up |
| Self-administered drugs | Generally covered as part of the stay | Usually not covered by Part B, so the hospital may bill you |
| Counts toward the 3-day rule for skilled nursing facility coverage | Yes | No |
Observation is commonly used for problems like chest pain, fainting, dehydration or abdominal pain, when doctors need tests and monitoring to decide whether a patient needs admission or can go home safely.
The Two-Midnight Rule
For Original Medicare, CMS uses the Two-Midnight Rule to guide inpatient admissions. In general, inpatient admission is appropriate when the admitting doctor expects the patient to need hospital care that crosses at least two midnights. Shorter stays are usually treated as outpatient or observation, with some exceptions, such as procedures on Medicare's inpatient-only list.
Since 2024, CMS has required Medicare Advantage plans to follow the same inpatient admission criteria as Original Medicare, although plans can still review stays.
The doctor makes the decision based on medical judgment, and hospitals have review processes to check that status is assigned correctly.
Why the 3-day rule matters
Original Medicare covers care in a skilled nursing facility (SNF) after a hospital stay only if you had a qualifying inpatient stay of at least three consecutive days. The day of discharge does not count, and days spent under observation do not count, even if you were in the hospital for several days in total.
This is where observation status can become expensive. If you need rehabilitation in a nursing facility after a hospital stay that was mostly observation, Original Medicare may not pay for it. Some Medicare Advantage plans and certain care programs waive the 3-day requirement, so check with your plan.
The MOON notice
Hospitals must give Medicare patients a Medicare Outpatient Observation Notice (MOON) if they receive observation services for more than 24 hours. The notice must be given no later than 36 hours after observation begins, or before you leave if that is sooner. It explains that you are an outpatient, why, and what that means for your costs and SNF coverage. Hospitals must also explain the notice orally.
If you have not received a MOON and are unsure of your status, ask.
What to do in the hospital
- Ask your status. Ask the doctor or nurse, "Am I an inpatient or under observation?" Ask again if your stay continues, because status can change.
- Ask why. If you are under observation but expect to stay longer or need a nursing facility afterward, ask the doctor whether inpatient admission is appropriate.
- Talk to the case manager. Hospital case managers and social workers can explain coverage and plan for discharge.
- Bring your own medications only if allowed. Since self-administered drugs may not be covered in observation, ask whether you can use your own, but follow hospital policy.
Appeals and reclassification
A hospital can sometimes change a patient's status from inpatient to observation during a stay, after an internal review. When that happens, you should be told. CMS has created an appeals process for certain Original Medicare patients whose status was changed from inpatient to observation, particularly when it affects coverage of a later skilled nursing facility stay. Ask the hospital or call 1-800-MEDICARE for details on how to use it.
If you think a bill reflects the wrong status, you can also appeal through the regular Medicare claims appeals process, starting with the Medicare Summary Notice.
Private insurance and Medicaid
Private insurers and Medicaid programs also use observation status, but they set their own rules for when a stay counts as inpatient and how cost sharing works. Some plans charge a flat copay for observation, others apply deductibles and coinsurance. Call your plan to ask how observation is covered.
Where to learn more
Medicare.gov publishes a guide called "Are You a Hospital Inpatient or Outpatient?" that explains these rules in more detail. For questions about understanding the bill after a stay, see How to Read a Hospital Bill. If cost is a concern, see Hospital Financial Assistance.
Observation is used in all kinds of hospitals, from large acute care hospitals to small critical access hospitals.