Observation coding continues to be a vulnerable area when it comes to professional billing and coding. RAC contractors have a keen eye on timing of these services, as the relative value can change significantly based on which services actually are rendered.

Whether a patient receives observation, outpatient or even emergency room services, these all can be confusing to code in compliance with CMS and private payer rules. Factors to weigh when determining the most appropriate coding include patient diagnoses, time spent in a unit and overall documentation.

As a general recap, observation services are considered rendered on an outpatient level of care, used for short-term treatment, assessment and reassessment of a patient. Observation allows the physician more time to evaluate the patient and to make a decision to admit or discharge. Observation services have a Place of Service designation of 22.

According to InterQual, a screening tool gauging medical necessity, “observation should be considered when the patient is hemodynamically stable, does not meet acute-care criteria, and if one of the following applies:”

  • Stabilization and discharge are expected within 24 hours.
  • More than six hours of treatment will be required.
  • Clinical diagnosis is unclear and may be determined in less than 24 hours.
  • There’s a procedure in play requiring more than six hours of observation.
  • There are complications of ambulatory surgery or procedures.
  • Symptoms are unchanged at least four hours after emergency department treatment.

As with all E&M services, documentation plays a key role in substantiating an observation service and ensuring that it doesn’t leave a provider exposed to risk of recoupment. 

According to CMS publication 100-04, Medicare Claims Processing Manual Chapter 12, Section 30.6.8: “Observation time begins at the clock time documented in the patient’s medical record, which coincides with the time the patient is placed in a bed for the purpose of initiating observation care in accordance with a physician’s order. A beneficiary’s time receiving observation services ends when all clinical or medical interventions have been completed, including follow-up care that may take place after a physician has ordered the patient to be released or admitted as an inpatient.”

For a physician to bill observation care codes, there must be a medical record that contains dated and timed physicians’ orders regarding the observation services the patient is to receive, plus nursing notes and progress notes  prepared while the patient is being treated. This record must exist in addition to any records prepared as a result of an emergency department or outpatient clinic encounter. 

It is important to note that various payer rules can apply to observation services. Commercial payers only will authorize up to 23 hours of observation time, while Medicare will allow for more than 24 hours if necessary. In the majority of cases, the decision whether to admit a patient or to discharge the patient from the hospital following resolution of the reason for observation care can be made in less than 48 hours (often in less than 24 hours). 

However, in the rare circumstances when a patient receives observation services for more than two calendar days, the physician must bill subsequent services furnished before the date of discharge using the new subsequent visit codes (99224-99246). In various CERT and RAC audits, subsequent codes sometimes were found to be inpatient codes (99231-99233), thus leading to further investigations and paybacks.

CMS’s eight-hour rule requires eight hours of observation on the same calendar date in order to bill CPT codes 99234-99236, as these codes contain RVUs for the discharge component.  CPT has no time constraints, yet some payers have rules that make coding complicated.  We recommend drafting an inquiry to your respective MAC with the following questions:

  • If the patient is seen for less than eight hours, only once in the OBS setting, should the codes 99218-99220 apply, or the outpatient E/M services?
    • Many of the MACs are defaulting to the outpatient codes under this circumstance.
    • Does the same date of admittance and discharge require both an H&P and discharge summary?
      • Many providers are used to documenting only a discharge summary, which has not passed audit criteria for some payers.
      • If a consultant is requested by another provider once a patient is admitted to OBS, what code series should the consultant use?
        • We have found that OBS codes are limited to the OBS attending/admitting provider, and consultants should use the outpatient series of codes (99211-99205).

The level-of-care determination is attracting a heightened degree of scrutiny, as the RACs and MACs are evaluating medical necessity retroactively. At an industry level, hospitals across the nation are feeling the pain, with RACs recouping overpayments for which admissions are determined to be not medically necessary and cases reduced to observation payment status.  

From a compliance standpoint, we recommend a few tips to code proactively for OBS services:

  • Inform medical staff on top diagnoses that typically are treated at observation level in order to avoid potential mistakes with inpatient coding.
  • Provide internal checks and balances for billing to validate patient status before dropping professional charges. 
  • Educate physicians and mid-levels on coding rules based on local and regional MACs’ criteria, doing so no less than once each quarter in order to answer questions and empower their billing decisions.

About the Author

Jana B. Gill, MA, CPC, is a product engineer and developer of Regulatory and Reimbursement software suites for Wolters Kluwer. Jana also is the principal of Gill Compliance Solutions, LLC which specializes in physician compliance, developing internal auditing programs, government appeals (RAC/CERT), coding risk assessments, due diligence for physician/hospital integrations and revenue analyses of hospitalist services. 

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