The Good, the Bad and the Ugly of Observation Status:
If you are a Medicare beneficiary you are entitled up to 100 days of rehabilitation benefits at a rehabilitation facility after a 3 day qualifying inpatient hospital stay.
Patients who are classified as "Observation Status" though staying for numerous days, receiving the same treatment as other hospital patients, occupying a hospital bed and otherwise staying at the hospital are classified as outpatient under the Medicare rules and are denied rehabilitation benefits if transferred to a rehab facility following their stay.
Many Health Care Professionals and those in the legal field witness serious misuse of the observation status designation to shift the cost of care to patients
As cited in the linked to article at the bottom of this post, a University of Wisconsin study concluded that "observation care in clinical practice is very different than what CMS initially envisioned and creates insurance loopholes that adversely affect patients, health care providers, and hospitals."
Legislation is currently pending in Congress to address this issue. For more information and instructions for contacting legislators, see the article below from the Center for Medicare Advocacy.