Observation Care Payments to Hospitals FAQ

The following FAQ content reflects 2015 Outpatient Prospective Payment System (OPPS) observation coding information. Several substantive changes were made to policies for hospital observation in 2014.  Medicare is considering a number of comments relating to future structure of payment for hospital observation services.  CMS reimburses hospitals for observation using a "composite" APC when the service is provided in conjunction with an appropriate Type A or B ED visit, critical care, clinic visit, or a direct referral to observation.  This composite APC furthers CMS efforts to increase the packaging of related services under the OPPS.  Under OPPS, observation is defined as "Extended Assessment and Management Composite" services.  

FAQ 1:  How did the OPPS rules for Observation change in 2015?

A number of changes were made in the 2014 final rule with comment period.  There were no significant changes in the 2015 final rule, with the exception of an increase in the 2015 APC payment to $1,234.70.

From CY 2008 through CY 2013, in the circumstances when observation care was provided in conjunction with a high level visit, critical care, or direct referral; and is an integral part of a patient’s extended encounter of care, payment was made for the entire care encounter through one of the two composite APCs as appropriate For 2015, observation continues to be paid under a composite APC entitled “Extended Assessment and Management (EAM) Composite” (APC 8009)  This composite will provide payment for all qualifying extended assessment and management encounters rather than recognize the two existing level of EAM composite APCs.    In essence, in order to qualify for EAM payment, billing must include the new clinic visit G-code (G0643), a Level 4 or 5 Type A ED visit code (99284-99285), a Level 5 Type B ED visit code (G0384), critical care (99291), observation per hour (G0378), or direct referral to observation (G0379).  A second change was the creation of a new classification of services appropriate for general supervision. Since 2011, If the supervising physician or appropriate non-physician practitioner determines and documents in the medical record that the beneficiary is stable and may be transitioned to general supervision, general supervision may be furnished for the duration of the service. Medicare does not require an additional initiation period(s) of direct supervision during the service. In the final 2013 OPPS rule, CMS expanded this by creating new classification of services called "nonsurgical extended duration therapeutic services".  These services include 16 observation, injection and infusion services. CMS selected these specific 16 services because they can last a significant period of time, require substantial monitoring, are low risk, and are not surgical.  Because of these characteristics, CMS believed that a relaxed level of supervision would be safe and appropriate after the patient was deemed stable.  Direct supervision, which has the prior standard for observation care, is required during the initiation of observation and then general supervision is allowed once the patient is deemed stable.  The point of transition to general supervision must be documented in the medical record. CMS further stated that the provider could be an MD or NPP if the service was within the scope of licensure, credentialing and bylaws.


A final change in the 2014 OPPS that is still in effect in 2015 is an increase in packaging of interrelated services into a primary service; “Our overarching goal is to make OPPS payments for all services paid under the OPPS more consistent with those of a prospective payment system and less like those of a per service fee schedule, which pays separately for each coded item”. See FAQ 12 below for details.

FAQ 2:  What are the two APCs Medicare uses to reimburse hospitals for observation care in 2015?

In 2015 as in 2014, CMS will recognize observation as “Extended Assessment and Management (EAM) which will be considered a composite service under APC 8009.  Payment for this composite service will be made for all qualifying extended assessment and management encounters rather than for the previous two levels of composite APCs (8002 and 8003).  Billing must include the new clinic visit G-code (G0643), a Level 4 or 5 Type A ED visit code (99284-88285), a Level 5 Type B ED visit code (G0384),critical care (99291), hospital observation per hour (G0378), or direct referral to observation (G0379) in order to qualify for the Extended Assessment and Management service.

 FAQ 3:  What are the criteria that hospitals must meet in order to receive Medicare payment for observation care?

Because Observation services are by definition outpatient services, placement into observation ought to have been specifically ordered at a time when it was uncertain if an inpatient admission would be necessary (Chapter 1, Section 50.3.2 of the Medicare Claims Processing Manual. Providers will report the ED or clinic visit code or, if applicable, G0379 (direct referral to observation) and G0378 (hospital Observation Services, per hour) and the number of units representing the hours spent in observation (rounded to the nearest hour) for all Medicare observation services. The Medicare Outpatient Code Editor (OCE) will determine if the service qualifies for reimbursement under a composite APC. Specific criteria include:

  • There must be a physician order to place the patient in observation.
  • For Medicare payment, a HCPCS Type A ED visit code 99284, 99285, or G0384 Type B ED visit code, critical care (99291), or a G0643 HCPCS clinic visit code is required to be billed on the day before or the day that the patient is placed in observation. If the patient is a direct referral to observation, the G0379 may be reported in lieu of an ED or clinic code. In addition, the E/M code associated with these other services must be billed on the same claim form as the observation service and the E/M must be billed with a modifier -25 if it has the same date of service as the observation code G0378.
  • The observation stay must span a minimum 8 hours and these hours must be documented in the "units" field on the claim form.  For facilities, the "clock" starts at the time that observation services are initiated in accordance with a practitioner's order for placement of the patient into observation status.
  • The patient must be under the care of a physician or non-physician practitioner during the time of observation care, and this care must be documented in the medical record with an order for observation, admission notes, progress notes, and discharge instructions (notes) all of which are timed, written, and signed by the physician.  A non-physician practitioner that is licensed by the state and approved by internal credentialing and bylaws to supervise patients in observation may do so. 
  • The medical record must include documentation that the physician used "risk stratification" criteria to determine that the patient would benefit from observation care. (These criteria may be either published generally accepted medical standards or established hospital-specific standards).All related services provided to the patient should be coded in addition to the observation code G0378.
FAQ 4:  How do CPT and Medicare payment policies for observation care differ between physician and hospital payments?

For physician payment for observation care under CPT, there are no procedural restrictions, or specific preceding visit level requirements similar to Medicare's policies for facilities. Physician observation services are billed in lieu of Emergency Department or other Evaluation/Management CPT codes, except for certain exemptions (e.g., Critical Care).

Medicare has an 8-hour minimum for physicians reporting the observation same-day-discharge codes 99234-99236. This 8-hour minimum does not apply to an observation stay that spans 2-calendar days (99217-99220).  CPT lists typical observation times a practitioner could spend at the bedside and on the patient's hospital floor or unit as follows:

  • 99218 - Initial observation care per day, 30 minutes bedside/floor/unit time.
  • 99219 - Initial observation care per day, 50 minutes bedside/floor/unit time.
  • 99220 - Initial observation care per day, 70 minutes bedside/floor/unit time.
  • 99234 - Observation or inpatient hospital care, 40 minutes bedside/floor/unit time.
  • 99235 - Observation or inpatient hospital care, 50 minutes bedside/floor/unit time.
  • 99236 - Observation or inpatient hospital care, 55 minutes bedside/floor/unit time.
  • 99224 - Subsequent observation care, 15 minutes bedside/floor/unit time.
  • 99225 - Subsequent observation care, 25 minutes bedside/floor/unit time.
  • 99226 - Subsequent observation care, 35 minutes bedside/floor/unit time.

As with all CPT typical times, the respective listed guideline times are averages representing a range of times.  Therefore, actual times may be higher or lower depending upon extant clinical circumstances.

Medicare pays hospitals (via OPPS) for observation care when the conditions in FAQ2 are met and specific criteria are documented in the medical record: an order for placement into observation, a risk stratification; and an admit note, progress notes and a discharge note that are timed and signed by the physician.

FAQ 5:  Are there specific ICD-9 (Diagnosis) codes that must be present on the hospital's UB claim form to achieve facility Medicare reimbursement for observation care?

No.  The qualifying ICD-9-CM diagnosis code requirement for chest pain, CHF and asthma was discontinued effective for any observation service provided on or after January 1, 2008. 

FAQ 6:  Are there any diagnostic services that must be provided (and reported on the same claim form as the observation service) during the period of observation care, in order for the facility to be paid by Medicare?

No, the OPPS rules for observation payment changed in 2005 and the reporting of specific diagnostic tests is no longer required. 

FAQ 7:  Does Medicare have any specific time requirements in order for hospitals to be paid for observation care?

Yes. Observation care must be provided hourly for a minimum of 8-hours. In billing for observation service, the units of service represent the countable number of observation hours that the patient spends in observation. This countable observation time is exclusive of any time the patient was out of the observation area without an RN and exclusive of any time that a separately billable procedure was performed that required active monitoring.  Medicare will not pay separately for any hours a beneficiary spends in observation over 24-hours, but all costs beyond 24-hours will be included in the composite APC payment for observation services. Observation services with less than 8-hours of observation are not eligible for Medicare reimbursement and would be billed with the appropriate E/M level (99281-99285 or Critical Care 99291). If a period of observation spans more than one calendar day, all of the hours for the entire period of observation must be included on a single line and the date of service for that line is the date the patient is admitted to observation.

FAQ 8:  When does observation care time begin and end for facility coding?

Per CMS, observation time starts at the clock time documented in the patient's medical record, which "coincides with the time that observation services are initiated in accordance with a physician's order for observation."  Observation ends at the time when all medically necessary services related to observation care are completed - including follow-up after discharge orders are written.  This observation end time is the time when all clinical or medical interventions have been completed, including the nursing follow-up care performed after the physician's observation discharge orders were written. This does not include the time a patient might spend waiting for transportation.

FAQ 9:  What if the patient bypasses the clinic or ED and is a direct referral to the observation area?

For CY 2015, CMS will again pay for a direct referral to observation using code G0379 (now recognized under APC 0633). CMS expects that hospitals will bill this service in addition to G0378 when a patient is referred directly to observation care after being seen by a physician in the community. Hospitals should not bill HCPCS code G0379 (APC 0633) for a direct referral to observation care on the same day as a hospital clinic visit, emergency room visit, critical care, or after a "T" status procedure that is related to the subsequent admission to observation care. If observation criteria are met the composite APC 8009 will be paid if observation time related to direct referral does not meet observation guidelines, the payment for G0379 is $386.95.

FAQ 10:  Can the facility report intravenous infusions and injections during a separately payable observation stay? How does the facility report intravenous infusions performed during observation?

Yes, facilities may report intravenous infusions and injections in addition to observation service for all payers including Medicare. If an infusion is started in the ED or clinic visit preceding observation subsequent or concurrent hours of infusion may be coded in observation but the initial service codes would not be coded a second time, unless a second IV infusion site was initiated.  CMS directs facility providers to follow CPT rules for coding injections and infusions.

FAQ 11:  Are additional procedures payable to a facility when reported in addition to observation?

Separate payment is allowed for services with status indicators S (significant procedure not subject to discounting) and X (ancillary service) when billed with G0378. The payment policy is the same for many non-Medicare payers. As in years before, payment in 2015 is not allowed if a surgical procedure or any service that has a status indicator of "T" occurs on the day before or the day that the patient is placed in observation. However, all services related to the observation services should be coded. The OCE logic will determine payment. The following table illustrates coding and billing information for each observation category:


Observation Type

Reported in addition to ED, Clinic, Critical Care

Reported with observation code G0378 (Medicare)

HCPCS Code for reporting the observation service

2013 APC and Payment

Observation for a minimum 8-hours




Payable under composite APC 8009, $1234.70.

Observation services for less than 8-hours after an ED or clinic visit




The separate ED or clinic visit alone would be paid. Observation would not be paid.  Any other separately billable service such as infusions will also be paid.

Initial nursing assessment of patient directly referred to observation, minimum 8-hours


Report all related T and V status services


Both G0378 and G0379 

G0379 is packaged into the composite APC 8009 payment, $1234.70. 

Initial nursing assessment of patient directly referred to observation and does not otherwise meet criteria for observation


Report all related T and V status services


Both G0378and G0379 

 Payment for G0379 is modified by SI Q3 for single code payment of $386.95 when observation stay does not meet criteria.*

IV infusion billed with observation service

YES, if service provided

YES, if service provided

CPT infusion codes

Mapped to corresponding APC and paid separately.

Status Indicator Q3 is defined as Codes that May be Paid Through a Composite APC and includes services as follows:

  1. Paid under OPPS, Addendum B displays APC assignments when services are separately payable’
  2. Addendum M displays composite APC assignments when codes are paid through a composite APC
    1. Composite APC payment based on OPPS composite-specific payment criteria.  Payment is packaged into a single payment for specific combinations of services.
    2. In other circumstances, payment is made through a separate APC payment or packaged into payment for other services.
FAQ 12:  What outpatient services are now “packaged” into the ED, clinic, or Observation facility payment?

One of CMS’ goals for OPPS is to increase packaging of interrelated services into a primary service. Packaged codes are listed in Addendum P of OPPS. For 2015 as in 2014, CMS will package five categories of items or services:

  1. Drugs, biologicals and radiopharmaceuticals that function as supplies when used in a diagnostic test or procedure.
  2. Drugs and biologicals that function as supplies when used in a surgical procedure.
  3. Certain diagnostic lab tests.
  4. Certain procedures described as “add-on” codes.
  5. Device removal procedures.

In ED’s and clinics, most lab work will be packaged and not paid separately in 2015. In addition, many add-on codes will be packaged in 2015. An add-on code is a procedure that is performed in addition to a primary procedure and is never reported alone. Examples of packaged add-on codes include 99292--critical care, each additional 30 minutes; 99145 and 99150- Moderate sedation codes; debridement add-on codes, removal of nail plate add-on codes, and immunization add-on codes.

Injections and infusions are not packaged. Drug administration add-on codes are not packaged. Infusion add-on codes 96368-concurrent infusion and 96376-IV push same drug, were packaged in 2013 and continue to be packaged in 2015 under Status Indicator “N”.

FAQ 13: How does the facility report observation services for patient who are not Medicare?

Non-Medicare payers have different policies so providers should check with these payers to determine their specific payment policies. Some payers require the reporting of only a revenue code and a charge; others may require CPT Observation codes, some allow the reporting of Medicare's G0378 HCPCS code.

 FAQ 14:  How does the "Two-Midnight Rule" instituted in 2013 affect billing for Hospital Observation Services to Medicare?

CMS implemented a controversial “Two-Midnight Rule” in 2013 that directs Medicare contractors to assume hospital admissions are reasonable and necessary for patients who stay in a hospital through two midnights. Hospital stays that are shorter are presumed legitimate if coded as outpatient observation.

The Two-Midnight rule requires that patients admitted to the hospital are expected to be hospitalized over two midnights.  When this does not occur, Medicare will consider the outpatient services provided immediately in advance of the admission as evidence of the need for hospital admission.  Emergency physicians providing observation services should remember to document all information relevant to the patient risk stratification, signs and symptoms, current medical needs, risk of patient risk factors for and adverse event and comorbidities that assist the admitting physician in making the decision to admit the patient.  Although the time a patient spends in the ED or observation prior to admission will not be considered as part of the Two-Midnight inpatient stay,  it will be considered during the medical review process for purposes of determining whether the Two-Midnight benchmark was met and, therefore, whether payment for the admission is generally appropriate under Medicare Part A.  Admitted patients who do not meet the Two-Midnight rule may be reclassified as observation.  However, condition 44, used when utilization review reclassifies admitted patients as observation patients, will not apply.

In general, CMS will not conduct post-payment patient status reviews for claims with dates of admission October 1, 2013 through March 31, 2015.

CMS will conduct prepayment patient status probe reviews for dates of admission on or after October 1, 2013 but before March 31, 2015.  Medicare Administrative Contractors (MACs) will conduct patient status reviews using a probe and educate strategy for claims submitted by acute care inpatient hospital facilities, Long Term Care Hospitals (LTCHs) and Inpatient Psychiatric Facilities (IPFs) for dates of admission on or after October 1, 2013 but before March 31, 2015.

  • MACs will select a sample of 10 claims for prepayment review for most hospitals (25 claims for large hospitals).
  • Based on the results of these initial reviews, MACs will conduct educational outreach efforts and repeat the process where necessary

NOTE 1:  RACs can still continue to audit based on pre-2-midnight criteria, e.g., medical necessity, coding compliance.

NOTE 2:  MACs (Medicare Administrative Contractor) can audit based on the 2-midnight rule, as well as medical necessity, coding compliance, etc.

Additional Reading:

Medicare Claims Processing Manual (Pub. 100-4; Chapter 4; Sections 290.2.2 - 290.5; Transmittal 1745; Change Request 6492, May 22, 2009 implemented July 6, 2009.

Updated 05/22/2015

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