For Medicare beneficiaries, being placed on “observation status” rather being formally admitted to the hospital can lead to much higher out-of-pocket costs. A new disclosure law will give patients a heads-up.


The new Notice Act law went into effect in August, and will also require hospitals to warn patients about potentially expensive nursing home stays, as reported recently by The New York Times (“New Medicare Law to Notify Patients of Loophole in Nursing Home Coverage,” August 2016).


“Observation” costs can be extremely high for the patient because it is considered outpatient care, which Medicare does not cover in the same way it does inpatient care. Upon being discharged, many unsuspecting patients were shocked to discover that they had to pay much more as outpatients under observation than they would have if they had been formally admitted and received the exact same care. Patients were then hit with crushing nursing home fees; Medicare covers up to 100 days of care at a time, but only if you spend three days as a hospital inpatient prior to the nursing home stay. The average cost of a private room in a nursing home exceeds $92,000 per year.


The New York Times highlighted just why the new law is a long time in coming, by telling the story of 85-year-old Elizabeth Cannon, who faced a $40,000 bill for nursing care which her family assumed would be covered by Medicare. Following a bad fall, Ms. Cannon spent six and a half days in a hospital before being transferred to a nursing home for rehabilitation and skilled nursing care. However, because she hadn’t been formally admitted to the hospital as an inpatient, Medicare was not liable to pay for her nursing home stay. Before the new Notice Act was passed, this was an all-too-common experience for many Americans who were often unaware of this Medicare loophole until after they were discharged from a hospital. Ms. Cannon has since passed away.


Under the new law, notices will be issued to “each individual who receives observation services as an outpatient” for more than 24 hours. It is estimated that Medicare will need to issue as many as 1.4 million notices a year. The wording on the notice begins: “You’re a hospital outpatient receiving observation services. You are not an inpatient.”


If you or a loved one are in the hospital and have received this notification, you may consult your doctor and request to be reclassified as an inpatient. Although hospitals will only reclassify patients at their discretion, patients will now at least be better informed and less likely to be caught unaware by a nasty surprise in the mail—the last thing anyone wants after a medical crisis.