Inpatient vs Observation, simplified

As a nurse case manager, one of the most common questions I get is about the difference between observation status and inpatient status. I totally get why this can be confusing—these terms are thrown around a lot in hospitals, and there’s a big difference when it comes to patient care, billing, and insurance.

So, let’s break it down!

What is Observation Status?

Observation status is typically used when a patient is being monitored, but they don’t yet meet the criteria for inpatient admission. Think of it as a “waiting room” for determining if a patient needs to stay longer for treatment or if they can go home after a short stay. Patients in observation are under continuous monitoring, but they’re not technically admitted as inpatients.

According to CMS guidelines, observation should be used when the physician expects a patient to need at least 24 hours of care but less than two midnights. If a patient stays under observation for less than 24 hours, it’s generally not covered by Medicare, and it’s up to the hospital’s discretion.

For more details, check out this CMS FAQ on observation care.

What is Inpatient Status?

Inpatient status, on the other hand, means the patient has been formally admitted to the hospital. The doctor must expect that the patient will require a stay of at least two midnights, which is a major CMS guideline. Once a patient is admitted, they are considered an inpatient for billing purposes, which impacts how services are reimbursed and what they’re covered for.

Inpatient admission is typically used for patients who need more intensive care or when it's clear that the patient’s condition requires extended monitoring or treatment beyond observation.

For more on inpatient admission criteria, you can visit this CMS Inpatient Admission Guide.

Why Does it Matter?

Why does the distinction between observation and inpatient matter? Well, there’s a big difference when it comes to billing and insurance coverage. For example, Medicare only pays for skilled nursing facility (SNF) care after a patient has been an inpatient for at least three days. So, if a patient is in observation status, even for a couple of days, it won’t count toward that three-day requirement for SNF care.

Additionally, outpatient costs (which is where observation status falls) can end up being higher for patients because insurance may not cover all the expenses, or they may only cover a portion, leading to more out-of-pocket costs. You can find more information on SNF coverage here: Medicare SNF Coverage.

The Bottom Line

The key to differentiating observation vs. inpatient status comes down to the doctor’s judgment and the patient’s clinical needs. It’s important for healthcare providers to document thoroughly to justify the decision to place a patient in observation or admit them as inpatient, and of course, keep the patient and their family informed about their status.

So, next time a patient or family member asks about why someone’s in observation or inpatient, you’ll have a clear, simple explanation ready to go!