Medicare Loophole: In the Hospital

The status of your hospital, whether you’re in-patient or out-patient, affects the premium of your hospital services, and may also affect your ability to receive Medicare treatment after a hospital stay at a qualified care facility.

You become an inpatient beginning from when you are officially hospitalized by the order of a doctor. Your last inpatient day is the day before your discharge.

You are an outpatient if you use emergency rooms, outpatient surgery, observation services, laboratory tests, x-rays, or other hospital services, and the doctor has not ordered you to be taken to a hospitalized hospital. In these cases, you are an outpatient, even when you are hospitalized overnight.  Get a supplement plan at

The two-midnight rule

CMS has adopted the two-midnight rule for approvals starting on or after October 1, 2013.

In general, the two-midnight rule states that:

Inpatient admissions are usually payable under Part A if the receiving physician expects the patient to require hospitalization with two midnight nights and the medical record supports this reasonable expectation completely.

Observation services:

Observation Services are services for hospital outpatients that you receive while your doctor decides whether to be hospitalized or discharged. It may extend over several nights in the hospital. This is usually a complicated medical decision based on your need for medically necessary hospital treatment and the judgment of your doctor. This is expected to take at least two or more midnight.

Why it matters:

According to Part A of Medicare, all Inpatient Hospitalization benefits are fully covered by the deductible of Medicare Part A.

If a patient needs after acute care treatment, such as in a nursing home, Part A will cover the first 20 days at a cost of $ 0 after a three-day inpatient stay in a hospital.

Observation stays that fall under Part B coverage, may involve several different services such as emergency department, laboratories, tests, and x-rays. Under Part B, one beneficiary is responsible for 20% of the cost of every single service.

Though not a single outpatient service, copay will be more than $ 1,200 for in-patient hospitals, total co-payments for all services can add up easily. In addition to this bill, there could be non-coverage of medications you receive in the observation status.

Until last August, many people did not even know that they were not hospitalized as inpatients until they received invoices for outpatient services only a few weeks later.

A current law on transparency:

President Obama in August 2015 signed the Notice of Observation Treatment and Implication for Care Eligibility Act, which requires hospitals to notify Medicare beneficiaries in writing within 24 hours of receiving the care. The notification will include:

  • refusal of admission;
  • possible financial impact; and
  • Reasons for refusal of admission

Medicare beneficiaries are playing an increasingly important role in understanding and managing their own health care. Make sure that when you or a relative is hospitalized, you know what level of care you are on. Not asking doctors about your admission status can be a costly mistake.