Picture this: You are lying in a hospital bed for four days being treated for a broken bone. You are wearing an ID bracelet and a hospital gown. You hear all sorts of beeps and buzzing, and have doctors and nurses check on you periodically. At the end of the fourth day you are sent to a nearby nursing home for rehabilitation.

Sounds like you’ve been admitted to the hospital, right? Maybe, maybe not.

Now imagine several months later you open a bill for thousands of dollars for your rehabilitation. You thought that Medicare covered these bills, but because the hospital classified your status as under “observation” instead of an “admitted” patient, Medicare will not pick up the tab.

This was the case for Lois Frarie, a 93 year old retired teacher from Monterey, California. Like most people in her situation, Ms. Frarie assumed she was an admitted patient in the hospital and that as a result she would be eligible for Medicare coverage in a skilled nursing facility. As Ms. Frarie and thousands of other patients from all over the country have learned, status does matter.

According to the Medicare rules, Medicare pays for the first 20 days (and a portion of up to the next 80 days) in an approved skilled nursing facility for rehab or other skilled care, but only if the patient has spent at least three full days in the hospital as an admitted patient. However, if a patient has been under observation for any part of the hospital stay, then the patient is responsible for the total cost of rehab.

Observation status is an increasingly common practice where hospitals put patients in beds and provide them with all the other services that are normally associated with a hospital say while calling them outpatients, not inpatients. This slight difference in terminology is important because inpatients qualify for Medicare coverage of their nursing home care following a hospital stay and outpatients do not.

The bottom line is that if you are an admitted patient, then for Medicare purposes you are considered an inpatient, and if you are a patient under observation, then you are considered an outpatient. This distinction, which many feel is unfair, can cost thousands of dollars to unwary patients.

If a patient feels she should have been admitted to the hospital, then she can file an appeal to overturn Medicare’s decision not to pay. Unfortunately, this could take time and the process can be costly.

Advocates who claim the distinction is not fair to patients, have argued in federal court to have Medicare eliminate the observation status. While the fate of the observation status remains to be seen, it is clear that the Medicare rules are filled with details that can be costly if they are over-looked.