Observation Physician Coding FAQ

• Yes, Observation services will use the E/M Guidelines. Of note, unlike emergency medicine, Observation codes are selected based on either Medical Decision Making (MDM) or the physician’s total time. Emergency Medicine E/M codes utilize MDM only.
• As with the other categories of E/M codes, Observation services will not use history and physical exam as elements for code selection. 
• See the 2023 E/M DG FAQ for an in-depth explanation of the MDM guidelines, and refer to FAQ #20 below for details on utilizing Time for E/M coding. 

• The inpatient E/M codes were revised in 2023 to include Observation services. The new code set is entitled “Hospital Inpatient and Observation Care Services.”

• Hospital Inpatient and Observation Care Services E/M codes include:

• • Initial Hospital Inpatient or Observation Care - 99221-99223 
  • Subsequent Hospital Inpatient or Observation Care - 99231-99233
  • Discharge from Hospital Inpatient or Observation Care - 99238-99239
  • Hospital Inpatient or Observation Care Services, Same Day Admission and Discharge - 99234-99236
• The Initial Observation Care codes 99218, 99219, and 99220, Subsequent Observation Care codes 99224, 99225, 99226, and Observation Discharge code 99217 were all deleted in 2023.

• 99221 - Initial hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and straightforward or low-level medical decision making. When using total time on the date of the encounter for code selection, 40 minutes must be met or exceeded.
• 99222 - Initial hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and moderate level of medical decision making. When using total time on the date of the encounter for code selection, 55 minutes must be met or exceeded.
• 99223 - Initial hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and a high level of medical decision making. When using total time on the date of the encounter for code selection, 75 minutes must be met or exceeded.

• 99231 - Subsequent hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and a straightforward or low level of medical decision making. When using total time on the date of the encounter for code selection, 25 minutes must be met or exceeded.
• 99232 - Subsequent hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and a moderate level of medical decision making. When using total time on the date of the encounter for code selection, 35 minutes must be met or exceeded. 
• 99233 - Subsequent hospital inpatient or Observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and high level of medical decision making. When using total time on the date of the encounter for code selection, 50 minutes must be met or exceeded.

• 99234 - Hospital inpatient or Observation care, for the evaluation and management of a patient, including admission and discharge on the same date, which requires a medically appropriate history and/or examination and straightforward or low level of medical decision making. When using total time on the date of the encounter for code selection, 45 minutes must be met or exceeded.
• 99235 - Hospital inpatient or Observation care, for the evaluation and management of a patient, including admission and discharge on the same date, which requires a medically appropriate history and/or examination and moderate level of medical decision making. When using total time on the date of the encounter for code selection, 70 minutes must be met or exceeded.
• 99236 - Hospital inpatient or Observation care, for the evaluation and management of a patient including admission and discharge on the same date, which requires a medically appropriate history and/or examination and high level of medical decision making. When using total time on the date of the encounter for code selection, 85 minutes must be met or exceeded.

• Codes 99238 or 99239 should be reported by the physician/QHP responsible for discharge care provided on a day other than the day the patient was admitted to Observation services. If the patient is discharged on the same day they were admitted to Observation, see the same day admission and discharge service code set, 99234-99236. They are time-based codes only.
• 99238 - Hospital inpatient or Observation discharge day management; 30 minutes or less on the date of the encounter
• 99239 - Hospital inpatient or Observation discharge day management; more than 30 minutes on the date of the encounter

Discharge codes 99238/99239 are to be used to report the total time spent by the physician/QHP for services rendered on the date the patient is discharged from Observation. 

• The physician/QHP must have a face-to-face encounter with the patient on the discharge day.
• Time spent/reported by the physician/QHP does not have to be continuous.
• Discharge day services include (but do not require), as appropriate:
  • Final examination of the patient
  • Discussion of the hospital stay
  • Instructions for continuing care to all relevant caregivers
  • Preparation of discharge records, prescriptions, and referral forms

• Codes 99234-99236 require at least two physician/QHP face-to-face E/M encounters with the patient on the same date of service to report Same Day Admission and Discharge codes 99234-99236.
• CMS applies the “8 to 24 Hour Rule” when reporting Same Day Admission and Discharge codes 99234-99236. In 2024, CPT started to provide similar guidance. See FAQ #9 and #10 below.

The Medicare “8 to 24 Hour Rule” is a policy that determines when to report a Hospital Inpatient or Observation E/M service Same Day Admission and Discharge service. It also determines when to report a Hospital Initial Inpatient or Observation service alone, or with a discharge service. CMS believes the decision to either admit or discharge a patient from observation can be made in 48 hours, usually in less than 24 hours. In the ED setting, this is generally true for medical patients. However, CMS also recognizes that “in rare and exceptional cases” observation services may exceed 48 hours. In the ED setting, this may occur with mental health patients being boarded and treated in an emergency department while awaiting placement in an inpatient psychiatric bed.

Medicare guidance is as follows:

• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the same calendar day, and the Observation time is less than 8 hours.
  • The physician/QHP should only report the Initial Inpt/Obs care codes 99221-99223.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the same calendar day and the Observation time is more than 8 hours.
  
  • The physician/QHP should only report the Inpt/Obs Same Day Admission and Discharge codes 99234-99236.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the next calendar day and the Observation time is less than 8 hours.
  
  • The physician/QHP should only report the Initial Inpt/Obs care codes 99221-99223
  • Observation that is continuous before and through midnight is a single service and is reported on the initial calendar date.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the next calendar day, the Observation time is more than 8 hours.
  
  • The physician/QHP should report the Initial Inpt/Obs care codes 99221-99223 for the first day as the date of service
  • The physician/QHP should report Inpt/Obs Discharge code 99238 or 99239 for the total time spent by the physician/QHP on the discharge date.

The 2023 Medicare Physician Final Rule offers this table to explain how to use the 8-24 hour rule to report Observation services. 

The “8 to 24 Hour Rule” is a CMS policy for Same Day Discharge services; other payers may set their own payment policies. Of course, providers must follow the policies of only those payers with whom the provider must comply because of statute, regulation, or contract. In the absence of any contrary policy, CPT coding principles pertain. In 2024, CPT published similar guidance, which is as follows (unchanged for 2025):

Private payers may have their own guidelines. Providers should refer to local payers for guidance.

In some situations, mental health visits for example, patients may receive observation services for more than 2 calendar dates, the clinician shall bill observation services furnished on subsequent day(s) (other than the initial or discharge date) using the subsequent observation care codes (99231-99233).

• There are two basic circumstances when Observation is appropriate:
  • Lack of diagnostic certainty, where further evaluation or testing, or treatment would help inform the decision for admission or discharge, or
  • Therapeutic intensity, where additional therapy can reasonably abate the need for admission.

A patient presents to the emergency department with nausea, vomiting, and diarrhea. After a medically appropriate history and examination, preliminary impressions of gastroenteritis and dehydration are made. The patient has an IV started, and an antiemetic was given. The patient is hydrated intravenously. When appropriate, PO fluids are trialed. The patient continues to be observed until their symptoms improve and they have demonstrated the ability to hold down liquids. After discharge instructions are given, the patient is discharged to follow up with their PCP in a few days or return to the emergency department if symptoms recur.

Other examples of patients who may qualify for Observation services in the ED include:

• Intoxicated head injury patient was observed to rule out significant injury.
• Overdose observed to rule out significant toxicity.
• Chest pain with repeat testing to rule out ischemia.
• Dehydrated patient observed to administer fluids and ability to retain oral liquids.
• Kidney stone observed for adequate pain and emesis control.
• Asthmatic requiring repeat or continuous nebulizer treatment to determine response to treatment.
• Headache patients requiring repeat treatment to determine if they improve with treatment.
• Abdominal pain patients requiring repeat assessment to determine the appropriate disposition.
• Behavioral health patients requiring ongoing evaluation or treatment.

Examples of cases where coding Observation services would generally not be indicated:

• Patient awaiting a ride home.
• Lengthy procedures (laceration repair, reductions, etc.).
• Broken CT/MRI/Ultrasound/… equipment.
• Busy emergency department and delay in assessments due to volume or staffing.
• For additional treatment when disposition of discharge is already established (e.g., finishing infusion).

• CPT MDM/Time requirements are identified in Questions 5-7. 
• General documentation requirements would involve an order of the time the patient is placed in Observation, the discharge time, and for Inpatient/Observation Admit/Discharge on the same date service (99234-99236), at least two face-to-face patient E/M encounters.

• Observation is a "patient status" rather than a place. Observation services may take place in a regular bed in the ED, in a special Observation area of the ED, a formal Observation unit, or even in a hospital bed.
• Per CPT 2026, page 20, “For patients designated/admitted as 'Observation status' in a hospital, it is not necessary that the patient be located in an Observation area designated by the hospital.”

CPT policy has been revised starting in 2023. Per CPT, “When the patient is admitted to the hospital as an inpatient or to Observation status in the course of an encounter in another site of service (e.g., hospital emergency department, office, nursing facility), the services in the initial site may be separately reported. Modifier 25 may be added to the other evaluation and management service to indicate a significant, separately identifiable service by the same physician or other qualified health care professional was performed on the same date.”

However, while the CPT policy has changed, the CMS policy has not. Per CMS, “When the patient is admitted to the hospital via another site of service (e.g., hospital emergency department, physician’s office, nursing facility), all services provided by the practitioner in conjunction with that admission are considered part of the initial hospital inpatient or Observation care when performed on the same date as the admission.” (See Centers for Medicare & Medicaid Services (CMS). (2025). Medicare Claims Processing Manual: Publication 100-04. Chapter 12: Section 30.6.9.1.A. Last accessed October 23, 2025.)

For Medicare patients, if both physicians are of the same specialty, in the same group, generally either an ED service 99281-99285 or Observation may be billed, but not both.

Private payers may have their own guidelines and may allow both to be billed. Providers should refer to local payers for guidance.

If the patient is evaluated in the ED on one date of service, and admitted to Observation after midnight (i.e., the next date of service), it might be proper to code both the ED E/M service and the Hospital Inpt/Obs E/M service in some circumstances. 

• The code for the procedure performed in the ED may be assigned in addition to the Observation code. A -25 modifier may be appended to the Observation code when appropriate to indicate a distinct, separately identifiable service. 
• There are no procedure codes that CPT considers bundled into Observation services. As an example, the Observation stay for the head injury evaluation (with a -25 modifier as appropriate), and the laceration repair procedure (performed in the ED) could both be submitted. CMS global procedure rules do not apply to evaluation and management codes.

Yes, the Inpt/Obs E/M codes have time as part of the code descriptor.  The E/M code can be assigned based on Medical Decision-Making or Time. To report Inpt/Obs E/M codes based on time, the physician/QHP must document their total time and satisfy the times specified in the code descriptors to report the E/M code. Of note, Inpt/Obs discharge codes 99238, 99239 are based on time only. 

Time included is the total time on the date of the encounter. It includes both the face-to-face and non-face-to-face time personally spent by the physician on the day of the encounter (includes time in activities that require the physician and does not include time in activities customarily performed by clinical staff).

Calculating the physician’s time, when time is used to report E/M services, includes the following activities, when performed (CPT 2026, page 13-14):

• preparing to see the patient (e.g., review of tests)
• obtaining and/or reviewing separately obtained history
• performing a medically appropriate examination and/or evaluation
• counseling and educating the patient/family/caregiver.
• ordering medications, tests, or procedures
• referring and communicating with other health care professionals (when not separately reported)
• documenting clinical information in the electronic or other health records
• independently interpreting results (not separately reported) and communicating results to the patient/family/caregiver.
• care coordination (not separately reported)

Time spent performing separately billed services, travel time, and teaching that is general and not limited to discussion required for the management of a patient is not counted toward the time used to select the E/M code.

• Yes, add on code +99418 (the “+” sign denotes an add-on code; add-on codes are always performed in addition to the primary service or procedure and must never be reported as a stand-alone code) is used to report prolonged total time (i.e., combined time with and without direct patient contact) provided by the physician or other qualified health care professional on the same date of service of a Inpt/Obs E/M service.
• +99418 is only used when the Inpt/Obs primary E/M service has been selected based on total time, and only after the time required to report the highest-level service was met and exceeded by 15 minutes. +99418 can only be added to Inpt/Obs E/M codes of 99223, 99233, and 99236.
• The first 15 minutes after the time in the code descriptor are bundled post-service time and not reportable. Prolonged total time starts when the time required to report the highest-level primary service has been exceeded by 15 minutes. 
  
  • For example, report +99418 for an Initial Observation encounter (99223) when the physician’s/QHP’s total time on the date of the encounter reaches 90 minutes (75 minutes for 99223 and +99418 for 15 additional minutes). 

Time spent performing separately reported services other than the primary E/M service and prolonged E/M service is not counted toward the primary E/M and prolonged services time. 

CMS agrees with the CPT instructions regarding prolonged services. However, for Medicare patients, prolonged Inpt/Obs E/M services are reported with +G0316 instead of CPT code +99418. (See Centers for Medicare & Medicaid Services (CMS). (2025). Medicare Claims Processing Manual: Publication 100-04. Chapter 12: Section 30.6.15.3 Prolonged Other E/M Visits. https://www.cms.gov/manuals/downloads/clm104C12.pdf. Last accessed October 23, 2025.)

On October 30, 2015, CMS (Medicare) released the final rule for OPPS updates to the "Two-Midnight" rule for physicians to use in determining patient admission status for inpatient or outpatient care under the Inpatient Prospective Payment System for hospitals. CMS stipulates that when a physician anticipates the patient will require care that crosses two midnights and orders inpatient admission based upon that expectation, inpatient status is generally appropriate. At this writing, time spent in Observation or other Outpatient status via an Emergency Department encounter may be retroactively combined with the hospital’s inpatient status to reach the two-midnight Inpatient threshold. The Two-Midnight Rule does not apply to professionally coded services, including Observation services.

Yes, see the FAQ on Mental Health for more information.

To better appreciate the characteristics distinguishing facility coding from physician coding for Medicare Observation services, see ACEP's FAQs on OPPS/APCs and the Facility Observation FAQ.