The outpatient observation generally is ordered when physicians require time to complete the evaluation of an ED patient to determine the need for admission – or to complete simple treatment that can be rendered within in 24 hours – but it also may be ordered following outpatient surgery when the normal recovery period has to be extended for the management of minor complications.

“Normal” recovery times vary depending on the nature of the surgery. While the Medicare Benefit Policy Manual mentions four to six hours as “a guideline for normal recovery,” the manual further indicates that “observation is appropriate when recovery exceeds normal expectations for the type of surgery, and when the patient’s condition requires observation.” Because of this (obviously, recovery for a simple mastectomy is going to be quite different from recovery for an inguinal herniorrhaphy), it is not really possible to define a true “normal” recovery period without considering the type of surgery performed and other factors.

Practices Vary

Surgeons’ practices vary. One surgeon may keep a patient overnight following a certain type of surgery, while another may release his patients the same day for that surgery. It would not be appropriate for a surgeon to order observation for patients kept overnight for uncomplicated recovery, however. Even when common post-op care for a particular operation is labeled “overnight recovery,” the duration of the stay alone does not determine the necessity for observation.

Medicare regulations go on to suggest when a patient’s condition requires observation.  Observation is “restricted to situations where a patient exhibits an uncommon or unusual reaction to a surgical procedure …and the condition requires monitoring and treatment beyond the treatment customarily provided in the immediate post-operative period.”   Examples given in the regulations are drug reactions, difficulty awakening from anesthesia or “other post-surgical complication.”

Other indicators for post-op observation recognized by Medicare QIOs include post-op bleeding, uncontrolled pain, uncontrolled nausea and vomiting, urinary retention, arrhythmias, psychotic reactions and electrolyte imbalance. More serious complications, of course, would justify inpatient admission per the usual admission criteria.

Medical Necessity

Medical necessity for observation is determined by the patient’s clinical condition after a procedure and whether his or her recovery deviates from what would be expected for that procedure. For instance, observation can be ordered after four hours of recovery if a patient generally is expected to be ready for release directly from the recovery room within four hours, but has to be kept for additional treatment due to one of the conditions mentioned above or some other unexpected event such as chest pain or fever. If, however, the surgeon’s routine post-op orders are for recovery beyond six hours, observation would not be appropriate unless some acute event occurs during that recovery period. When a patient’s post-op stay exceeds the expected recovery time, it is appropriate to evaluate for the presence of a condition that would justify the ordering of observation services.

A physician also cannot order observation while the patient is in the OR, or immediately upon arrival to the PACU. It is only when the patient’s post-op recovery is complicated, when there is an “unusual and unexpected event” deviating from normal recovery, that observation can be ordered. There has to be a specific outcome or event that is a clear departure from normal recovery for observation to be ordered.

Limitations of Use of Observation

An order for observation cannot be based on an assessment of the risk of complications or out of concern that the patient may have a difficult post-op course. In these cases, the surgeon may order extended monitoring in recovery and then order observation or admission (depending on the severity of the problem) if an unexpected event actually occurs.

There are other limitations on the use of observation. Observation cannot be ordered in the following circumstances:

  1. For uncomplicated outpatient testing or procedures. These patients are registered under outpatient status and cannot be placed in observation even if they occupy a bed prior to the procedure.
  2. Prior to an outpatient procedure. An order for post-procedure observation only can be written after the procedure and only if there is an unexpected outcome or event, including an exacerbation of a condition – never before the procedure is performed.
  3. For prep prior to an outpatient procedure, including medical clearance, bowel prep, hydration or the administration of medication to reduce the risk of complications.  These services may be performed in a hospital (if hospital policies allow), but the patient would be in outpatient status, without an order for observation.
  4. During routine recovery. Since the recovery period is included in the hospital’s reimbursement for the procedure and the guideline for normal recovery is “four to six hours,” an order for observation should not be written prior to completion of at least four hours of recovery. Recovery can be longer than six hours, but not shorter than four.
  5. For the convenience of the patient, physician or hospital.
  6. In place of a medically necessary inpatient admission or for a type of surgery that appears on the inpatient list.

The Medicare Benefit Policy Manual (Chapter 6) lists observation as “a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment and reassessment before a decision can be made regarding whether a patient will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”

A patient in observation is an outpatient with an order for observation services. An “outpatient in a bed” is an outpatient occupying a hospital bed but not receiving observation services. They are both outpatients. The difference between the two is whether observation is indicated and has been ordered.

A hospital does not get any additional reimbursement for observation of a patient who has outpatient surgery (status indicator “T,” Addendum B) the same day or the day before. Hospital reimbursement for the procedure (the APC) includes recovery and observation. CMS requires the hospital to report observation hours when ordered, but there is no direct reimbursement. While the use of observation for surgical patients has a negligible impact on a hospital’s finances, again, reporting it is a regulatory requirement.

In summary, observation can be ordered for patients having outpatient surgery only if there is a post-operative clinical problem or a minor complication – not for preps or for routine recovery. Patients at risk of complications may qualify for admission for the procedure.

About the Author

Steven J. Meyerson, MD, is a Vice President of Accretive Physician Advisory Services®. He is Board Certified in Internal Medicine and Geriatrics. He has recently been the medical director of care management and a compliance leader of a large multi hospital system in Florida. He has distinguished himself by creating innovative service lines and managing education for Accretive PAS®.

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