Observation services are defined as the use of a bed and periodic monitoring by the hospital's nursing or other ancillary staff, which are medically necessary to evaluate an individual’s condition or determine the need for possible inpatient admission. Observation services must be specific to the individual and not part of the facility's standard operating procedure or protocol for a given diagnosis or service. Observation determinations made by protocol without consideration of the applicability to the individual will be considered to be not medically necessary. Observation services generally do not exceed 24 hours. Although some individuals may require a second day of observation, it is rare for medically necessary observation services to span more than 48 hours

Observation services are only medically necessary when the individual’s current condition requires outpatient hospital services, or when there is a significant risk of deterioration in the immediate future such that continued observation in a non-hospital environment is inadvisable.

Hospital observation services are eligible for reimbursement separate from the emergency room charges when treatment and/or evaluation requires six or more hours, and ANY of the following apply:

• The individual's clinical condition is stable or improving, and a discharge decision is expected within 24 hours; or
• Psychiatric crisis intervention/stabilization with observation is required every 15 minutes; or
• There is no change in symptoms after four hours of treatment in the emergency department, and an admission decision is expected within 24 hours.

Observation services for the convenience of the individual or others are not medically necessary. Services that are otherwise covered are also not covered as outpatient observation services. Separate reimbursement for these observation services for ANY of the following is non-covered: (This list is not all-inclusive):

• Standing orders following outpatient surgery; or
• No professional provider orders for observation services; or
• Extended observation following a procedure; or
• Services provided concurrently with chemotherapy; or
• Inpatient discharged to outpatient observation status; or
• Routine preparation prior to, and recovery after, diagnostic testing; or
• Routine recovery and post-operative care after same-day surgery; or
• Awaiting transfer to another facility; or
• Outpatient blood administration (e.g., blood transfusion); or
• Less than 6 hours of observation.

Observation services less than six hours are eligible for reimbursement consideration when the individual is directly entered to observation without an emergency room visit, and the necessary criteria are met.

Documentation Requirements

• All documentation must be maintained in the medical record and available upon request. Failure to produce the requested information may result in a denial for the service.
• Every page of the record must be legible and include appropriate identification information (e.g., complete name, dates of service(s)). The record must include the physician or non-physician practitioner responsible for and providing the care to the individual.
• The submitted medical record should support the use of the selected diagnosis code(s). The submitted CPT/HCPCS code should describe the service performed. The medical record for inpatient admissions should support the diagnoses, and support the selection of the principle diagnosis.
• The physician documentation should clearly differentiate an order for outpatient observation from an order for inpatient admission and be dated and timed. The physician must:
  • Indicate in the  medical record that the individual is designated or admitted as observation status; and
  • Clearly document the reason for the individual to be admitted to observation status; and
  • Initiate the observations status, assess, establish and supervise the care plan for observation and perform periodic reassessments.
• Medical records will be expected to demonstrate the consistency between the physician order (physician intent), the services actually provided (inpatient or outpatient) and the medical necessity of those services, including the medical appropriateness of the inpatient or observation stay. The medical record must clearly support the medical necessity for observation and should include a timed order to observe which will support the number of hours billed. 

Physician services are expected to be billed consistent with an individual’s status as an inpatient or an outpatient. Because patient status may change prior to discharge, communication among those involved in the care of the individual is essential.

Please refer to the Table Attachment for Guidelines for Observation Services and Coding Guidelines.