Imagine your mother has spent a couple of nights in the hospital, getting treatment after a fall. You might think she's an inpatient. But instead, she may be on "observation" status.
Financially, this could be very important. Whether she is officially an inpatient or not, Medicare will likely cover at least some of her hospital treatment. But for observation, they pay under Part B, which could mean greater co-pays and additional uncovered expenses, especially for drugs. More money out of pocket. And unless she's been formally admitted, Medicare won't pay for Mom to recover in a skilled nursing facility. That expense adds up VERY quickly.
Medicare has strict rules about whether or not a patient can be admitted to the hospital. If a doctor is unsure, he or she must put the patient in "observation status." Mom can have a hospital room, get an ID bracelet, and receive meals. But if she's there just for observation, it is considered an outpatient service only. In addition to only Part B coverage for her hospital stay, Medicare does not pay for aftercare for outpatients.