A Refresher: Observation Services

When tracking patients’ admissions status, identifying services rendered, calculating the number of observation hours, and ensuring accuracy and completeness of medical documentation, billing for observation services can be a complex and arduous task. Hospitals are faced with the daunting responsibility of shifting through an enormous amount of documents to extract relevant information required to submit accurate observation service claims. This, in combination with the Centers for Medicare & Medicaid Services’ (CMS’) somewhat “tricky” billing requirements and the implementation of the new CMS contractors (i.e. Recovery Audit Contractors, Medicare Audit Contractors (MACs), etc.), burdens hospitals with not only the difficulty in comprehending how to code and bill observation services correctly, but also the increased pressure of being identified as non‐compliant. Accordingly, hospitals should review coding and billing regulations for observation services to facilitate compliance.  This article is meant to provide an overview on observation services and assist hospitals in avoiding common pitfalls associated with observation services.

What are observation services?
CMS defines observation care as a “well‐defined set of specific, clinically appropriate services which include ongoing short term treatment, assessment and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”1 Patients that are admitted into observation care are considered outpatient. Thus, payment for observation services is through the Outpatient Prospective Payment System (OPPS). Medicare will reimburse hospitals for observation services if all of the following requirements are met: Medical necessity requirements: all observation services are reasonable and necessary. The decision to admit or discharge a patient is usually less than forty‐eight (48) hours (often twenty‐four hours). However, in “rare and exceptional cases reasonable and necessary outpatient observation [can] span more than 48 hours.”