Observation, Outpatient, or Inpatient Status Explained

If you receive medical treatment that involves an overnight hospital stay, you are being treated on an inpatient basis. If you are treated in a hospital but don't need to stay, you are being admitted on an outpatient basis.

In between, a person may receive treatment and be admitted to a hospital so they can be watched and reassessed to determine if further treatment is needed. This is admission on an observation basis.

The decision on how you are admitted is largely directed by your condition and approvals by your insurance company. Based on medical codes that classify your condition and treatment (called CPT and ICD-10 codes), your insurer will decide how long—or if—you need to stay in a hospital.

This article explains when you need to be admitted on an outpatient, inpatient, or observation basis and how the decision is made.

Doctor talking to a patient before surgery
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How Long Is Your Hospital Stay?

For the purpose of insurance billing, the length of a hospital stay is based on how many midnights you will spend in the hospital. It is not based on the number of hours you are hospitalized.

So, even if you are admitted at 11:00 p.m., you will be billed for one hospital day (along with any accrued charges) the second it turns midnight.

The hospital bill you receive is separate from the bill you receive from your surgeon or anesthesiologist. The bill not only includes the daily room charge but also charges for food, medical supplies, medical services, and any tests or procedures, such as X-rays.

Definitions of Hospital Stays

Specific definitions are assigned to your admission status, some of which are not as straightforward as they seem. The definitions matter because they have a direct impact on both your billing and out-of-pocket costs.

By definition:

  • Outpatient is when a person leaves the hospital after treatment on the same day. It can also be applied a someone who spends the night in the hospital for whom a doctor has not written an order for inpatient admission. They are still admitted and billed as an outpatient.
  • Inpatient is when a person treated in a hospital is admitted for at least two midnights. It can also be applied to a person who was discharged or transferred to another hospital before two midnights and didn't occupy the bed. They are still admitted and billed as an inpatient.
  • Observation is when a person is admitted to the hospital but has an unclear need for longer care. The purpose is to determine within the span of one midnight whether further treatment or inpatient admission is needed.

In practice, the term "admitted" generally infers inpatient care but can be applied to anyone who is admitted for treatment in a hospital.

Insurance and How Admission Status Is Determined

Every time you are scheduled to have a hospital-based treatment or procedure—such as surgery or to deliver a baby—your healthcare provider will submit prior authorization to your health insurance company. This is to ensure that the procedure is covered along with any hospitalization that may be needed.

The decision to pay and how much to pay is largely based on two codes submitted by your healthcare provider:

  • ICD-10 code: This is an international classification of all medical diagnoses used for insurance claims processing. The U.S. version is issued by the Centers for Medicare and Medicaid Services (CMS) and the National Center for Health Statistics (NCHS).
  • CPT code: Otherwise known as the current procedural terminology (CPT) codes, these classify medical services and procedures. These codes were designated by the U.S. Department of Health and Human Services under the Health Insurance Portability and Accountability Act (HIPAA).

The codes are used by the insurer to determine what services are authorized for coverage of your condition, including whether the treatments are administered on an inpatient or outpatient basis. If inpatient care is indicated, the codes will also direct how many days you are authorized to stay.

If you require emergency care, the ER department will submit a specific CPT code after treatment designating the need for hospital observation. The code can be transitioned to inpatient care if it is decided that further treatment is needed after an overnight stay.

Asking About Overnight Hospital Bills

The amount you pay for a hospital stay is based on your insurance plan, including the deductible. If you have private or employer-sponsored insurance, there may be copayment or coinsurance costs you will need to pay out of pocket.

If out-of-pocket costs are a factor, there may be an outpatient procedure that can be used in place of an inpatient procedure. As long the treatment is appropriate and effective, it is a reasonable option to discuss with your healthcare provider.

For people with Medicare, outpatient services are covered as part of Medicare Part B, while inpatient services are covered under Medicare Part A. Medications may fall under Medicare Part D.

Because there are many rules and regulations governing payment based on the type of Medicare you have, you can reach out for assistance by calling the Medicare Helpline at 1-800-MEDICARE (1-800-633-4227).

The same applies to other federal programs like Medicaid, Children's Health Insurance Program (CHIP), Tricare, and Veteran's Health Administration (VHA).

On the other hand, if you have been discharged from the hospital and are confused about your bill, the hospital billing department can explain the charges and may be able to direct you to financial assistance if you foresee problems paying the bill.

Summary

A hospital outpatient, inpatient, or observation status is about more than just how long you are in hospital. The definition of each can place you in a different category of billing.

The determination of outpatient, inpatient, and observations is based on your condition and treatment recommendation. Based on the CPT and ICD-10 code assigned by your healthcare provider, your insurer will determine what form of treatment they will cover and how many days of hospitalization are needed, if any.

7 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Centers for Medicare and Medicaid Services. Billing and coding: acute care: inpatient, observation and treatment room services.

  2. Medicare.gov. Are you a hospital inpatient or outpatient?

  3. Centers for Medicare and Medicaid Services. Hospital outpatient quality reporting program.

  4. Centers for Medicare and Medicaid Services. Advanced copy- revisions to state operations manual (SOM) hospital appendix A.

  5. Centers for Medicare and Medicaid Services. Hospital coverage under Part B.

  6. American Medical Association. ICD-10.

  7. American Medical Association. CPT overview and code approval.

By Jennifer Whitlock, RN, MSN, FN
Jennifer Whitlock, RN, MSN, FNP-C, is a board-certified family nurse practitioner. She has experience in primary care and hospital medicine.