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The use of Medicare observation status in hospitals has increased dramatically over the past several years.[1] The most notable adverse consequence of Observation Status on beneficiaries is financial liability for any post-hospitalization care at a Skilled Nursing Facility.[2] However, many of the beneficiaries the Center assists also find themselves facing large hospital bills for drugs they received while in "outpatient" observation status.

When a patient is in outpatient observation status at a hospital, Medicare Part B is billed, and pays for, 80% of the hospital services provided (Part A pays for inpatient hospital admissions). However, outpatient prescription drugs received in the hospital while a patient is in observation status are not billed to Part B. Instead, the patient must submit a claim to his/her outpatient drug plan, usually a Medicare Part D plan, to receive reimbursement for these drugs.

Part D plans are required to have a process in place to pay claims submitted by beneficiaries who received drugs while they are hospital outpatients. According to Chapter 5 of the Medicare Prescription Drug Benefit Manual, Section 60.1, all Part D plans must ensure that enrollees have access to Part D-covered drugs dispensed at "out-of-network pharmacies."[3] These out-of-network pharmacies include "institution-based" pharmacies, like those in a hospital. In essence, patients in observation status at a hospital cannot be expected to get their outpatient drugs from a pharmacy that contracts with their Part D plan (like a CVS or Walgreens). Rather, they must take the drugs given to them by the hospital, dispensed from the hospital's out-of-network pharmacy.

To submit claims, beneficiaries should call their Part D plan and request an out-of-network pharmacy claim form as soon as they are able, and should check their Part D Evidence of Coverage for any applicable deadlines. The Centers for Medicare and Medicaid Services has provided Part D plans with a model claim form for this purpose.[4] However, individual plans will likely have different forms.  Beneficiaries should submit the completed claim form supplied by their plan and include the bill for medications from the hospital as well as a letter explaining that they were in observation status at the hospital and could not get to an in-network pharmacy. They should cite Chapter 5, Section 60.1 of the Medicare Prescription Drug Benefit Manual in their letter to the plan to remind the Part D plan of their responsibility to pay.

Beneficiaries should remember that if the drugs they received in the hospital are not on the Part D plan's formulary, they may need to ask the Part D plan for an exception to have the drugs covered.[5] Also, after the Part D plan covers the drugs, beneficiaries will still be liable for co-pays. These co-pays may be higher because the hospital pharmacy is an out-of-network pharmacy.  Unfortunately, "outpatient" hospital observation status continues to be a problem for Medicare beneficiaries.

[1] See Sharp Rise In Medicare Enrollees Being Held In Hospitals For Observation Raises Concerns About Causes And Consequences Health Affairs (June 2012) 31:61251-1259;  Office of the Inspector General, Memorandum Report: Hospitals’ Use of Observation Stay and Short Inpatient Stays for Medicare Beneficiaries ( July, 2013)
[2] See The Center for Medicare Advocacy, Observation Status and Bagnall v. Sebelius,
[3] The Medicare Prescription Drug Benefit Manual Chapter 5: Beneficiary Benefits and Protections, 60.1 – Out-of-Network Pharmacy Access available at
[4] The Centers for Medicare and Medicaid Services Model Coverage Determination Request Form, available at
[5] For information on how to request a coverage determination and seek an exception or pursue a Part D appeal see


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