Awareness : OBC Tips

Hospital Billing Observation Services

Observation billing is addressed in the online Medicare Claims Processing Manual at Medicare Claims Processing (Pub. 100-04), Chapter 4-Part B Hospital (Including Inpatient Hospital Part B and OPPS), Section 290-Outpatient Observation Services

Section 290.1 states the following:

Observation services must also be reasonable and necessary to be covered by Medicare. In only rare and exceptional cases do reasonable and necessary outpatient observation services span more than 48 hours. In the majority of cases, the decision whether to discharge a patient from the hospital following resolution of the reason for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours.

Since Medicare clearly states that observation over 48 hours should be rare and exceptional, qualified personnel should review all observation cases over 48 hours in order to verify the medical necessity of all hours to be billed. If the documentation clearly shows that a physician actively treated the patient, and that the physician is trying to make the determination whether to admit the patient as an inpatient or discharge him or her, then these hours should be billed. Even though there is no additional payment when more than 48 observation hours are billed, it is still important to bill all appropriate hours of observation because all paid claims with observation hours are included in the claims used to calculate the median cost of observation for Medicare Outpatient Prospective Payment System (OPPS) rate setting. When hospitals have legitimate observation stays over 48 hours, CMS will incorporate this information into the payment rate calculations.

Three day payment window

The three-day payment window rule applies for observation stays of any length that are followed by inpatient admission, which means that the hospital may have to bill the services as part of the inpatient claim. Observation services are considered non-diagnostic services for purposes of the three day rule. You must combine and bill observation hours on the inpatient claim if the principal diagnosis for the observation services and the inpatient stay are an exact match, meaning that all digits of the ICD-10-CM code must match. For more information on the three day payment window rule see the Medicare Claims Processing Manual, Chapter 3 (Inpatient Hospital Billing), Section 40.3, Outpatient Services Treated as Inpatient Services.