In January CMS posted two new questions and answers on its FAQ Web site: numbers 9973 and 9974. Both of these relate to hospital outpatient observation services, which has been a problem area for two decades.

While both of these Q&As provide significant guidance, the guidance comes at the lowest level of formality. Because any Q&A on the CMS Web site can disappear just as fast as it appears, be certain to download and save these for possible future reference.

Q&A No. 9973 addresses a rather thorny issue involving the correct use of Condition Code 44 on the UB-04 claim form. Because this is an involved issue, a little background is necessary to understand the guidance. Note that this guidance may be different from interim information you may have received from your fiscal intermediary or Medicare Administrative Contractor (MAC). During recent months there has been conflicting opinions expressed at different levels by different sources.

Condition Code 44

Condition Code 44 is a data element used on the UB-04 and is part of a standard code set administered by the National Uniform Billing Committee, or NUBC. Thus, in theory, the NUBC is the official source for the definition and use of this data element. The NUBC definition is relatively brief:

For use on outpatient claims only, when the physician ordered inpatient services, but upon internal utilization review performed before the claim was originally submitted, the hospital determined that the services did not meet its inpatient criteria.

The NUBC's definition for this condition code appears to indicate that, if the hospital determines that service rendered via an inpatient admission should have been performed via outpatient observation, the hospital can use Condition Code 44 to so indicate and then file the claim as an outpatient observation service. Note that such a determination must be made before the claim is filed. Also, the physician involved does not have to agree or even be involved in the decision and associated process.

Note: many private third-party payers routinely request that short-stay inpatient admissions be changed to observation in order to reduce the payments to the hospital. Additionally, this often happens after the original claim has been filed.

Medicare has altered the requirements for the use of Condition Code 44 significantly. While CMS has updated §290.2.2 to Chapter 4 of Publication 100-04, the Medicare Claims Processing Manual, the main requirements for using Condition Code 44 are the following:

• The change in patient status from inpatient to outpatient is to be made prior to discharge or release, while the beneficiary is still a patient of the hospital;
  
  
• The hospital is not to have submitted a claim to Medicare for the inpatient admission;
  
  
• A physician must concur with the utilization review committee's decision; and
  
  
• The physician's concurrence with the utilization review committee's decision must be documented in the patient's medical record.

An Example

A physician admitted Sarah, an elderly patient, through the Apex Medical Center's ED as an inpatient because of an electrolytic imbalance. Sarah now is doing quite well 28 hours into her stay. Utilization review has been checking the documentation and has asked to meet with the physician. A conference is held and it is determined that Sarah should have been an outpatient observation patient. The physician writes an order for observation care and Sarah is discharged six hours later.

For billing purposes it appears that observation should be billed as 28 + 6 = 34 hours - that is, 34 units of G0378. This basically takes us back to the beginning of the outpatient service, now changed from inpatient service. Presuming there is an appropriate ED visit level, APCs (Ambulatory Payment Classifications) will pay a composite amount. BUT we now have further guidance from Medicare in the form of Q&A No.9973:

Question: How should the hospital report observation services when the patient's status is changed from inpatient to outpatient using Condition Code 44? May the hospital report observation services from the beginning of the hospital outpatient encounter?

While the answer is a bit long, here is what CMS has to say:

Answer: The use of Condition Code 44 pertains to the entire patient encounter, the patient's status, and the hospital bill type submitted. Medicare does not recognize a separate patient status called "observation;" all hospital patients are either inpatients (if they are admitted as inpatients on the order of a physician) or outpatients (registered by the hospital as outpatients). When Condition Code 44 is appropriately used, the hospital reports on the outpatient bill the services that were ordered and provided to the patient for the entire patient encounter. Reporting of individual HCPCS codes on an outpatient claim must be consistent with all applicable instructions and CMS guidance.

However, in accordance with the general Medicare requirements for services furnished to beneficiaries and billed to Medicare, even in Condition Code 44 situations, the hospital cannot report hours of observation services using HCPCS code G0378 (Hospital observation service, per hour) for the time period during the hospital encounter prior to a physician's order for observation services. Medicare does not permit retroactive orders or the inference of physician orders. Like all hospital outpatient services, observation services must be ordered by a physician and the reporting requirements specific to observation services are discussed in detail in the Medicare Claims Processing Manual (Pub. 100-04), Chapter 4, Section 290.2.2. The clock time begins at the time that observation services are initiated in accordance with a physician's order.