Inpatient vs. Outpatient Status: How It Can Bankrupt You

This post is about hospital Inpatient versus Outpatient Status, the difference between the two, and how being categorized as one over the other can result in costly medical expenses. While this content pertains mostly to individuals on Medicare, I feel everyone should know this information in the event they or a loved one are hospitalized.

Inpatient vs. Outpatient Status: How it Can Bankrupt You

One of my least favorite parts of being a hospital social worker is being the bearer of bad news. On a typical day, I'll have numerous conversations with patients telling them that their equipment, transportation, and/or post-hospital care is not covered by their insurance. Telling patients that they're liable for up to thousands of dollars in medical expenses is not exactly what I had in mind when I became a social worker.

When it comes to talking to patients about what's not covered, the most infuriating and confusing expenses often stem from whether a patient was admitted to the hospital under Inpatient or Outpatient Status.

Inpatient vs. Outpatient Status

Inpatient Status is when a patient is admitted to the hospital under a doctor's order. Typically, that order reads as follows: "Admit patient to inpatient". In addition to a doctor's order, a patient must meet insurance criteria for an inpatient admission. For Medicare patients, this boils down to the following:
  • Two Midnight Rule: A physician expects a patient to stay in the hospital for more than two midnights based on medical condition.
  • If staying less than two midnights, the patient requires tests and/or procedures than can only be done in an inpatient hospital setting.
Outpatient Status (also known as Observation Status) applies to those getting medical services (x-rays, emergency room care, outpatient surgeries, lab tests, etc.) but do not have a doctor's order admitting them under Inpatient Status. While emergency room patients might be moved to another part of the hospital to spend the night, they are still considered outpatient until a doctor writes an order to change them to Inpatient Status.

How Inpatient vs. Outpatient Affects Your Medical Expenses

Inpatient Status hospital stays are billed under Medicare Part A. Outpatient Status hospital stays are billed under Medicare Part B. While most Medicare patient have both Part A and B, those who have opted out of either will be responsible for uncovered expenses. 

Whether someone is Inpatient or Outpatient Status has the most profound impact on individuals needing to go to a Skilled Nursing Facility (abbreviated SNF and pronounced "sniff" by medical workers) for short-term rehabilitation. In order to be eligible for SNF, a patient must a qualifying hospital stay. A qualifying stay entails 3 Inpatient Status days in the past 30 days.

What Can Go Wrong

The difference between Inpatient and Outpatient Status can be confusing, even for physicians who deal with this sort of situation on a daily basis. Here are a few examples of what can go wrong:
  • A patient is incorrectly admitted under Inpatient Status. This usually occurs with patients hospitalized for non-medical social reasons such as homelessness or lack of caregiver support at home.
    • When a patient is changed from Inpatient Status to Outpatient Status, it is known as Condition Code 44. When this occurs, the entire hospital stay is billed to Medicare as Outpatient Status.
  • A patient is told verbally by a physician that they are being admitted under Inpatient Status. However, the physician neglects to put an Inpatient Status order in writing, and the patient is actually just moved to another part of the hospital to be monitored under Outpatient/Observation Status.
  • A patient is admitted under Inpatient Status, but is medically stable enough to transfer to SNF after only two days (therefore not meeting the 3 day qualifying hospital stay requirement).
As stated above, this has the most adverse affect on individuals needing to go to a SNF. It does not matter what a doctor, nurse, physical therapist, or occupational therapist says. Without a qualifying hospital stay of 3 Inpatient Status days, Medicare will not cover a stay at a skilled nursing facility.

When calling around to various SNFs in the Bay Area, I've gotten quotes ranging from $250-$400/night for a shared room. This is for room and board only. Depending on how long a patient needs care, a SNF stay can be quite costly.

What Else Can Go Wrong?

24 hours after Inpatient Status admission, hospitals are required to give patients an "Important Message from Medicare" Letter (often referred to as the "IM Letter" by hospital staff). This letter outlines your rights as a Medicare recipient. Most importantly, the IM Letter gives you instructions on how to appeal if you feel like you are discharged from the hospital too soon.

If the hospital changes you back to Observation Status via Condition Code 44, the IM Letter no longer applies to you. Hence, you must go through different means should you wish to appeal your discharge.

How Can You Protect Yourself?

Being informed and knowing the difference between Inpatient Status and Outpatient Status is the first step in protecting yourself from unexpected medical expenses. Here are a few more tips:
  • Ask questions. In the hospital, ask your attending physician whether you are being admitted under Inpatient Status or Outpatient Status. If you don't trust your physician's response, ask to speak to a Nurse Case Manager (also known as Patient Care Coordinator) or member of the Utilization Review/Case Management/Discharge Planning Department. Other hospital employees are not as well-versed in insurance criteria and might give you the wrong information.
  • Bring your medication from home. Medicare Part A covers home medication received in the hospital while Medicare Part B does not. Let's say you decide you leave your routine medication at home and receive the same medication from the hospital pharmacy. In the event you are changed from Inpatient Status to Observation Status via Condition Code 44, you become financially responsible for the home medication given to you during your entire hospital stay. If you take expensive, brand name medication, the costs can be astronomical. To be safe, bring your medication from home and have your medical team give that to you instead.
  • Make sure you receive a MOON Letter or IM Letter. If not, ask for one from the Utilization Review/Case Management/Discharge Planning Department.
    • Medicare Outpatient Observation Notice (MOON) Letter: The main purpose of the MOON Letter is to inform patients that they are hospitalized under Observation Status. This letter is required to be given to all Observation Status patients hospitalized for 24 hours or more. Furthermore, patients must receive a MOON letter within 36 hours after Observation Status services begin. 
    • Important Message from Medicare (IM) Letter: The main purpose of the IM Letter is to inform patients of their Medicare rights and provide instructions on appealing a hospital discharge. This letter must be signed by the patient and a copy must be given to them within 48 hours of Inpatient Status admission. Additionally, another copy of the IM Letter must be provided within 48 hours of discharge.
  • Know who to contact for help.
    • Utilization Review Department: Also known as the Case Management, Care Coordination, or Discharge Planning, this department consists of Nurse Case Managers or Nurse Patient Care Coordinators responsible for justifying hospital stays to insurance companies. Additionally, they are in charge of discharge planning tasks such as ordering equipment and arranging SNF stays. These professionals are the first line of defense when it comes to all things insurance and discharge related.
    • Hospital Ombudsman: A hospital ombudsman is a neutral party responsible for handling patient grievances. Most hospitals have an ombudsman on staff.
    • Medicare: For insurance related concerns, Medicare patients can contact Medicare at 1-800-MEDICARE. For patients with Medicare Advantage plans, contact the customer service number on the the back of your insurance card. Please note that when contacting Medicare, you will likely experience long hold times.
    • SHIP (State Health Insurance Program): SHIPs are state sponsored programs that give free health insurance counseling to Medicare patients. They can also assist with complaints and filing appears. To find your state's SHIP program, go here: SHIP
    • Medicare Beneficiary Ombudsman (MBO): The MBO functions the same way as a hospital ombudsman but is specific to Medicare patients. If contacting 1-800-MEDICARE did not help, you can ask the representative to speak to a Medicare Beneficiary Ombudsman.
    • Beneficiary and Family Centered Care Quality Improvement Organization (BFCC-QIO): BFCC-QIOs are responsible for ensuring quality of care for all Medicare patients. They assist with appeals, grievances, and medical necessity and quality of care reviews. You can find contact information for your state's BFCC-QIO here: Beneficiary and Family Centered Care Quality Improvement Organization (BFCC-QIO)
    • The Joint Commission: Also known as JCHAO, The Joint Commission is a non-profit, independent organization responsible for accrediting roughly 21,000 health organizations in the United States. JCHAO certification is extremely important, and hospitals typically try to make the best impressions possible when they visit. JCHAO has a page on their website where you can report concerns about a healthcare organization or patient safety event: Report a Patient Safety Event
  • Consider Switching to a Medicare Part C Plan (also known as Medicare Advantage): Some Medicare Advantage plans waive the three nights qualifying stay requirement. However, possible trade-offs include higher deductibles, copays, and other out of pocket costs.

Inpatient vs. Outpatient Status: Conclusion

Getting hospitalized is stressful enough without having to deal with financially devastating insurance issues. Hopefully, by knowing the difference between Inpatient Status and Outpatient Status, you can know what questions to ask and better prepare yourself to respond to any complications associated with discharge planning and skilled nursing placement. Unfortunately, unless Medicare changes their policies regarding qualifying stays - or gets rid of Observation Status altogether - there will continue to be patients impacted by this seemingly benign technicality.


  1. Good grief, the more I learn about your system, the more I'm glad I don't have to deal with it.


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