From my local paper:A quick primer on a confusing situation: Medicare Part A covers hospital care for inpatients. Outpatients, including those on observation status, are covered under Part B. That distinction has generated complaints and controversy for years, as the number of inpatient hospitalizations has declined among Medicare recipients and outpatient stays have become more common.
Why does the classification matter? Outpatients can face higher payments for drugs and coinsurance, but the big-ticket item is nursing home care.
After a hospital discharge, Medicare pays the full cost of skilled nursing for the first 20 days, and most costs up to 100 days — but only for patients who’ve spent three consecutive days as inpatients. Without three inpatient days, patients are on their own.
Basically there is a huge cost savings to Medicare, as well as to the hospital to place you "under observation" when you arrive. Medicare gets away with not having to pay for your skilled nursing stay. The hospital avoids hefty penalties in the event that you need to come back to their hospital if something goes wrong after the surgery ie. an infection where they did the surgery. If they had originally "admitted" you then having you come back would be a second admittance for the same original problem. That triggers the penalty. Placing you originally "under observation" avoids that second admittance penalty trigger.
One thing the article doesn't discuss if how you might be able to challenge and change that original classification when it is first made when you arrive at the hospital. A few years ago listening to a director of nursing give a talk at her skilled nursing facility, I recall that she said first off to make it clear at admittance that you want to be formally admitted to the hospital. If they push back on that then contact your primary care doctor and ask him/her to advocate for you.