A classification in which you occupy a hospital bed and receive care but are formally an outpatient rather than an admitted inpatient.
Why this matters to you
This has real financial consequences that surprise people. Observation care is billed under Part B rather than Part A, so you may face coinsurance on each service and pay out of pocket for routine medications. It also does not count toward the three-day inpatient stay Medicare requires before covering skilled nursing care afterwards. Ask directly whether you have been admitted or are under observation, and ask again if your stay extends.
Official source
The authoritative definition and current rules are published here:
Rules and figures change. Where this page and the official source disagree, the official source is correct — and we would like to know, so please tell us.