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.
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, check out this guide from EvidenceCare
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.
Real-World Examples
Disclaimer: These scenarios are provided for educational purposes only and are not a substitute for professional judgment. Always follow current CMS guidelines, your facility’s policies, and validated clinical decision tools such as InterQual® or MCG when determining patient status and consult your physician advisor as needed.
These examples show how differences in severity of illness, intensity of services, and anticipated length of stay can influence whether a patient is placed in observation or inpatient status.
1. Chest Pain
Observation:
Troponins negative, normal EKG, stable vitals.
No high-risk features.
Plan: serial enzymes, telemetry, and possible stress test.
Expected stay: Less than two midnights.
Inpatient:
Elevated troponins, abnormal EKG, unstable vitals, or ongoing chest pain.
Cardiology consult obtained with probable cardiac catheterization.
Expected stay: Two or more midnights.
2. Heart Failure Exacerbation
Observation:
Mild fluid overload, no hypoxia, stable kidney function.
Good response to initial IV diuretics.
Expected stay: Less than two midnights.
Inpatient:
Severe shortness of breath, significant hypoxia, or worsening renal function.
Requires ongoing IV diuretics, supplemental O₂, or frequent monitoring.
Expected stay: Two or more midnights.
3. COPD Exacerbation
Observation:
Mild wheezing, no hypoxia, no pneumonia on imaging.
Improves with initial bronchodilator and steroid therapy.
Expected stay: Less than two midnights.
Inpatient:
Severe hypoxia requiring high-flow O₂, hypercapnia on ABG, or pneumonia.
Poor response to ED therapy.
Expected stay: Two or more midnights.
4. Abdominal Pain
Observation:
Stable vitals, pain controlled, awaiting labs and imaging.
No confirmed diagnosis requiring urgent surgery.
Expected stay: Less than two midnights.
Inpatient:
Imaging confirms diagnosis such as appendicitis, cholecystitis, or bowel obstruction.
Requires IV antibiotics or surgery.
Expected stay: Two or more midnights.
5. Syncope
Observation:
Single episode, negative initial workup, stable vitals.
No recurrence during monitoring.
Expected stay: Less than two midnights.
Inpatient:
Recurrent episodes, arrhythmia detected on telemetry, or high-risk findings.
Requires extended monitoring and possible intervention.
Expected stay: Two or more midnights.
6. GI Bleed
Observation:
Brief, self-limited episode, stable hemoglobin and vitals.
No active bleeding on endoscopy.
Expected stay: Less than two midnights.
Inpatient:
Ongoing or recurrent bleeding, unstable vitals, or significant hemoglobin drop.
Requires transfusions and possible procedural intervention.
Expected stay: Two or more midnights.
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.
Up next: how to break down status for patients and their loved ones.
