The Centers for Medicare & Medicaid Services (CMS) has issued proposed regulations and a new form to address the requirements of the NOTICE (Notice of Observation Treatment and Implication for Care Eligibility) Act.

This change to the SSA (Social Security Act) was enacted on Aug. 6, 2015 and is scheduled to go into effect on or about Aug. 6, 2016. CMS has included the proposed CFR (code of federal regulation) changes in the April 27, 2016 Federal Register, which was made available in examination form on April 18, 2016.

Yes, this new requirement is in what we would normally consider the IPPS (Inpatient Prospective Payment System) update regularly published in the Federal Register. Hospital compliance personnel should carefully review the proposed CFR changes, along with the discussions in the preamble of this Federal Register entry.

Ostensibly, this legislation was intended to make certain that Medicare beneficiaries know when they are in observation – that is, outpatient status versus being admitted as an inpatient. Medicare beneficiaries and their families may not know whether they are an inpatient or receiving services as an outpatient in observation. In some cases, especially in hospitals without a dedicated observation unit, even hospital clinical personnel (e.g., nursing staff) may not know whether a patient is an inpatient or an outpatient receiving observation services.

The actual change to the CFR is in the form of a new paragraph, 42 CFR 289.20(y), that is quite short. The basic mandate is that hospitals are required to notify Medicare beneficiaries that they are in observation if the observation services exceed 24 hours. Such notification must be provided to the beneficiary not later than 36 hours after observation services are initiated, or sooner if the individual is transferred, discharged, or admitted as an inpatient. The notification is to be in writing, there is to be an oral explanation, and the notice must be signed by the Medicare beneficiary. If the beneficiary will not or cannot sign acknowledgement of receipt of the notice, then alternative methods of verification are provided in the regulation.

While not explicitly mentioned in the regulation, CMS has developed and is seeking approval for what is call the MOON (Medicare Outpatient Observation Notice) form. Space on the form is being provided so that hospitals can document any unusual circumstances.

The trigger for providing this notice is that the beneficiary receives more than 24 hours of observation services. This raises some fundamental questions with which CMS and the healthcare community have struggled for the past two decades. Now that this notice is being formalized, some of these issues will have to be addressed by hospitals through careful development of policies and associated implementation of procedures.


  1. When does observation begin?
  2. When does observation end?
  3. Are observation services continuous?

Observation begins when a physician orders the observation. This should be noted in the record, listed by date and time. Note that the patient may not be in an observation bed. For instance, the physician may order observation services starting at 8 p.m., while the patient is still in the emergency department. The patient may not actually be brought to the observation bed until several hours later, say at 11 p.m.

Similarly, a physician may order a discharge from observation at a specific time, but services may be provided after the order is actually made, particularly if the discharge is by criteria or after ordered services are provided.

Is observation a continuous service? For billing purposes, the answer is no! However, will the billing process determine when the 24-hour trigger is initiated for the purposes of providing the notification? Consider the following case study:

An elderly patient presents at 3 p.m. with complaints of chest pain and shortness of breath. After an emergency department workup, at 4:30 p.m. the patient is placed in observation through the hospital’s chest pain protocol. The patient is scheduled to have a cardiac catheterization the next morning. The patient is hydrated during the night to help reduce possible toxicity from the LOCMs (low osmolar contrast media) that will be used during the procedure. At 9 a.m. the patient undergoes cardiac catheterization, during which angioplasty is performed on a coronary artery and a stent is placed in a different coronary artery. The patient goes to recovery and then returns to the observation bed at 2 p.m. At 6 p.m., the patient is discharged home.

The question here is whether the notice of outpatient observation must be provided. The observation services started at 4:30 p.m. and ended at 6:00 p.m. the next day. This would appear to be more than 24 hours. But was the patient receiving observation services all that time? For billing purposes, the answer is “certainly not.” Assume that the patient was taken from the observation bed at 8:30 a.m. for the catheterization service. The patient returned to the bed at 2 p.m. For billing purposes, this time will be subtracted from the total observation time. Also, depending upon the hospital’s policies, the hydration services may be deemed as requiring constant attendance and thus also subtracted from the observation time. The basic question from this case study is whether the billing of 24 units of observation time will be used as the auditing measure for the required issuance of the notice.

Many other issues are also raised here. Let us consider another case study:

An elderly patient presented through the emergency department and was admitted to the hospital as an inpatient at 6 p.m. on a Tuesday evening. On Thursday morning, utilization review determined that the inpatient admission was not justified, and the physician agreed. The physician then wrote an order at 9 a.m. on Thursday ordering observation services. The patient is discharged at noon on Thursday.

Keeping in mind that for Medicare, the only way a patient gets into observation is with a physician’s (or qualified non-physician practitioner’s) order. In this case study, the patient was only in observation for three hours, and thus the notification rule would not apply because the observation services did not span more than 24 hours.

Procedurally, the real question for hospitals is this: who is going to provide this notice, explain what is happening, and then gain the appropriate acknowledgement of the receipt of the form and an understanding of the oral explanation? Whoever is doing this will have to have a firm understanding of the Medicare rules and procedures involving outpatient coinsurance, payment for self-administrable drugs, and the over three-midnight rule for SNF (skilled nursing facility) coverage. When there is an oral explanation of what it means to be in observation versus being an inpatient, many questions and concerns about payment are likely.

Let us consider two additional case studies:

An elderly patient presents through the emergency department complaining of fatigue, slight fever, congestion, and coughing. A workup in the emergency department does not identify any specific problems. The attending physician decides to place the patient in observation. This occurs at 11 a.m. on a Saturday morning. The patient remains in observation for three days, with condition deteriorating. The attending physician decides to admit the patient as an inpatient at 10 a.m. on Tuesday morning. By Thursday morning the patient is recovering and is ready for skilled nursing services in order to complete recovery.

An elderly patient presents through the emergency department suffering from fatigue, dehydration, and malnutrition. The patient is placed in observation and remains there for 44 hours. While the patient takes a number of prescription drugs regularly, hospital policy requires that the pharmacy items be dispensed from the hospital’s pharmacy.

The first of these case studies illustrates that there can be problems with not meeting the over three-midnight rule for coverage of skilled nursing services. While the notice will be provided indicating that skilled nursing may not be covered because of the observation status, the patient and/or family may question why the patient was not admitted as an inpatient in the first place.

The second case study addresses the issue of self-administrable drugs. The SSA makes it quite clear that self-administrable drugs are not a hospital benefit. Thus, the patient is to be billed for these drugs. If the patient has Part D coverage, then in theory, that can be claimed by the beneficiary. Note that some hospitals have adopted a policy of not billing for outpatient self-administrable drugs even though this creates a compliance issue. Situations like this are why hospitals will need to review current policies and procedures that might affect or be affected by implementation of the NOTICE Act.

On the compliance front, the issue of enforcement is not really addressed. CMS has indicated that this notice requirement is a condition of participation, as opposed to a condition of payment. We will have to await further subregulatory guidance relative to enforcement.

The bottom line is that the NOTICE Act, the proposed CFR language, and the associated Federal Register discussions should be carefully reviewed. As appropriate, comments and questions should be made during the comment period. In the meantime, hospitals should review their policies and procedures to see what changes need to be made, a general policy and procedure for implementing the NOTICE Act should be developed, and appropriate training for personnel presenting the required notice should begin.

About the Author

Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University.

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