Updated August 17, 2015.

Definition:

When a patient is put into the hospital, they’re assigned a status. Inpatient status and observation status are the two most common. When you're admitted to the hospital, it's not always easy to figure out if you're admitted as an inpatient, or admitted under hospital observation status.

The Difference Between Inpatient Status & Observation Status

Inpatient status is what we typically think of as someone being admitted to the hospital.

Observation status is a type of outpatient status. However, someone in hospital observation status can spend several days and nights actually inside the hospital, even though he's technically an outpatient. In fact, he might be in the very same type of hospital bed, right next door to an inpatient.

Observation used to be a way to keep someone in the hospital for a short time while doctors tried to decide if he or she was sick enough to need inpatient treatment. Now, observation patients can sometimes be kept in the hospital for days on observation status.

Why Does Inpatient Vs Observation Matter?

If you're sleeping in the same hospital ward and getting the same type of care as, why should you care whether you're on inpatient status or observation status? You should care because the difference could cost you hundreds or thousands of dollars.

Your health insurance company or Medicare won’t pay for your hospital stay as an observation patient in the same manner it would have paid as an inpatient.

Instead, they’ll pay for your hospital stay using the outpatient services part of your health insurance benefit. Your share of cost, or coinsurance, for outpatient services like observation status is larger than your share of cost, or copayment, for inpatient hospitalization.

Although complex and confusing, there are rules, or at least guidelines, your doctor and hospital follow when deciding whether to assign you hospital observation status or inpatient status.

To understand how the observation guidelines work and why hospitals are assigning patients to observation status, see Hospitalized in Observation Status? You’ll Pay More: Inpatient v. Observation Status and How Observation Guidelines Work.

Example:

Mr. Smith comes to the emergency room with chest pain. Unable to tell for sure whether or not Mr. Smith is having a heart attack, the cardiologist, Dr. Jones, puts Mr. Smith into the hospital on observation status.

Mr. Smith spends the night in a hospital room attached to a heart monitor. Throughout the night, nurses check on him regularly. He gets oxygen and has blood tests drawn every few hours. Dr Jones may even have ordered more extensive tests to determine the condition of Mr. Smith's heart.

Late the next evening, after two days and one night in the hospital, Dr. Jones has enough information to determine that Mr. Smith didn't have a heart attack. Mr. Smith is sent home.

Mr. Smith's health insurance company pays for part of his hospital stay charges under Mr. Smith's outpatient services benefit coverage. (If Mr. Smith has Medicare, Medicare Part B will cover part of Mr. Smith's hospital observation charges.)

Since Mr. Smith's health insurance policy has a 25% coinsurance for outpatient services, Mr. Smith pays for 25% of the charge for of every blood test and X-Ray. He also pays 25% of the charge for oxygen, of the charge for heart monitoring, and of the hospital's hourly charges for outpatient observation services.

If Mr. Smith had received the same exact services as an inpatient rather than on observation status, he likely would have owed a single copayment and his health insurance would have covered the rest of the charges.