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Diffences Between Hospital Admission and Observation and the Financial Ramifications

by Patti Urban, CDP

What is the Difference Between Hospital Admission and Hospital Observation? 

The terms "hospital admission" and "hospital observation" refer to different levels of care provided in a hospital setting. Here are the key differences: 

Hospital Admission 

  1. Inpatient Status: Patients are formally admitted to the hospital for an extended stay. 

  1. Length of Stay: Typically involves a stay of 24 hours or more, though it can be shorter depending on the patient's condition. 

  1. Level of Care: Requires a higher level of care and monitoring, often involving complex treatment plans, surgery, or intensive therapies. 

  1. Billing and Insurance: Billed as an inpatient service, which generally means different insurance coverage and potentially higher out-of-pocket costs for patients. 

  1. Documentation: Extensive medical documentation is required, including detailed records of the patient’s condition, treatment plans, and daily progress notes. 

Hospital Observation 

  1. Outpatient Status: Patients are under observation but not formally admitted as inpatients. 

  1. Length of Stay: Usually intended for shorter durations, often less than 24-48 hours, though it can sometimes extend longer if necessary. 

  1. Level of Care: Intended for patients who need monitoring and testing to determine if they should be admitted as inpatients or if they can be discharged. 

  1. Billing and Insurance: Billed as an outpatient service, which can affect insurance coverage and patient costs differently compared to inpatient services. 

  1. Documentation: Requires documentation of the patient's status and observation, but typically less comprehensive than for admitted patients. 

Use Cases 

  • Admission is appropriate for patients needing intensive treatment, surgical procedures, or significant medical interventions. 

  • Observation is suitable for cases where it is unclear if the patient needs to be admitted, such as after certain types of surgeries, for diagnostic tests, or for conditions expected to improve quickly without intensive intervention. 


What is the Financial Difference Between Hospital Admission and Observation? 

The financial differences between hospital admission and hospital observation primarily revolve around how insurance companies classify and reimburse these services, which directly impacts out-of-pocket costs for patients. Here are the key financial distinctions: 

Hospital Admission 

  1. Insurance Coverage

  • Classified as inpatient care. 

  • Often subject to different deductibles and copayments/coinsurance than outpatient services. 

  • Medicare Part A typically covers inpatient hospital stays, including a deductible and potential copayments for longer stays. 

  1. Out-of-Pocket Costs

  • Generally higher than observation status due to the nature of inpatient services. 

  • May involve separate charges for room and board, procedures, medications, and other services. 

  • Can also include costs for extended stays and complex treatments that are less likely under observation status. 

  1. Billing

  • Comprehensive billing that includes various inpatient services and treatments. 

  • Costs are typically bundled into a Diagnosis-Related Group (DRG) for Medicare patients, which can influence the overall reimbursement to the hospital. 

Hospital Observation 

  1. Insurance Coverage

  • Classified as outpatient care. 

  • Covered under Medicare Part B for Medicare patients, which generally has lower deductibles and different copayment/coinsurance structures compared to inpatient care. 

  • Most private insurance plans also differentiate between inpatient and outpatient services, with observation often falling under outpatient benefits. 

  1. Out-of-Pocket Costs

  • Typically lower than for inpatient admission. 

  • Patients might pay a lower copayment for observation services compared to inpatient services. 

  • However, patients may face higher out-of-pocket costs for specific services, like diagnostic tests, that are billed separately. 

  • Medicare patients, for instance, might have copayments for each individual service received during observation, such as blood tests or X-rays. 

  1. Billing

  • Separate billing for observation services, often itemized. 

  • Includes charges for observation bed, diagnostic tests, and treatments. 

  • Generally, does not include a bundled payment system like DRGs, leading to itemized charges. 

Example Scenario 

  • Hospital Admission: If a patient is admitted with severe pneumonia, their stay might include room and board, intensive nursing care, IV medications, and respiratory therapy. The total cost could be high, and under Medicare Part A, the patient might face a significant deductible and potential copayments after a certain number of days. 

  • Hospital Observation: If a patient is observed for chest pain, the costs might include the observation bed, EKGs, blood tests, and other diagnostic services. Under Medicare Part B, the patient would face different cost-sharing, potentially lower overall costs but might pay separately for each test and service received. 

Understanding these financial implications helps patients make informed decisions about their care and prepares them for potential costs associated with different levels of hospital services. 




Patti Urban, GCM, CDP, CSA, is the CEO of Aging Care Planning Solutions, a geriatric care management practice that assists the elderly and their families with advance care planning as well as guidance for patients with life-limiting illnesses. She is also a Certified Dementia Practitioner, Certified End of Life Doula, a Certified Senior Advisor, former Executive Director of a memory-care assisted living community, and former owner of a home care agency.  She can be reached at    




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