News outlets report that this kind of status is leading some Medicare beneficiaries to be surprised by the size of hospital bills because, ultimately, the services they received were not classified as inpatient care.

The Wall Street Journal: Check Hospital Tab
Some Medicare beneficiaries who visit the hospital are getting surprised by big bills because their stays weren't considered inpatient services. The issue arises when a Medicare beneficiary who comes to a hospital is placed in a status called "observation care." This is supposed to mean that patient is being watched while doctors decide if she can be discharged, or if she is ill enough to be admitted as a true inpatient. Observation is typically supposed to last 48 hours or less (Mathews, 2/5).

Boston Globe: Hospital's Medicare Billing Examined
Federal investigators have subpoenaed six years of records from Beth Israel Deaconess Medical Center as part of an investigation into whether the hospital overbilled Medicare by admitting patients for short stays who could have been treated less expensively as outpatients. ... A patient who is treated in the emergency room or has a procedure like a cardiac catheterization may need to stay in the hospital for more than several hours. Hospitals can classify the patient as being in "observation" status, which is usually less than 24 hours but can be longer (Kowalczyk, 2/6).

Related, earlier KHN story: Growing Number Of Patients Find A Hospital Stay Does Not Mean They're Admitted (Jaffe, 9/7/2010).