The following FAQ content reflects 2021 Outpatient Prospective Payment System (OPPS) observation coding information. 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.
1. How did the OPPS rules for Observation change in 2023?
The comprehensive Observation services APC (C-8011) remained the same in 2023.
Starting in 2021, Payment for 8011 Comprehensive Observation Services under Status Indicator J2 is made for the Relative Weight of 27.5754 Value Units at a payment rate of $2283.16. In addition, as discussed below, CMS added requirements for notification to patients receiving Observation services for over 24 hours. 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 2023, observation continues to be paid under a composite APC entitled “Comprehensive Observation Services (COS) APC” (APC 8011). To qualify for COS payment, billing must include the following:
Services that would otherwise qualify for the observation C-APC (C-APC 8011) are not considered to be observation services when they are associated with a surgical procedure (assigned to status indicator "T"). Instead, they are considered to be perioperative recovery, which is always packaged in with the surgical procedure.
If the supervising physician or appropriate non-physician practitioner determined and documented 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. CMS expanded this in the final 2013 OPPS rule by creating a new classification of "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 transition point 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 2023 is an increase in the 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.
The Medicare Outpatient Observation Notice (MOON), effective for dates of service beginning February 21, 2017, under CMS-10611 Transmittal 3695, dated January 20, 2017, remains in effect in 2019. MOON is the form and accompanying instructions required to inform all Medicare beneficiaries when they are considered outpatients and receiving observation services. They would not be considered inpatient status in a hospital or critical access hospital (CAH). The MOON is mandated by the Federal Notice of Observation Treatment and Implication for Care Eligibility Act, passed on August 6, 2015.
The MOON must be delivered to beneficiaries or their representatives (Original Medicare fee-for-service AND Medicare Advantage enrollees) who receive observation services as outpatients for more than 24 hours. However, the MOON must be provided no later than 36 hours after observation services begin. Also included are beneficiaries who:
Observation start time is defined as the clock time observation services are initiated as documented in the patient’s medical record following the physician's order. During the observation period, documentation must identify the date and time of placement into observation and the date and time the patient is either discharged, transferred or admitted to the hospital. Once the patient reaches the 24-hour observation mark, the MOON applies. As a precaution, patients may receive the MOON upon placement in observation, as it must be delivered NO LATER THAN 36 hours after observation services begin. As it must be delivered within 36 hours after observation begins, providing it at the time of transfer into Observation status removes the possibility of delay should the observation period exceed 24 hours.
CMS has provided the appropriate MOON forms for use by institutions and allows some modifications to include logos, contact information, etc., but within certain limits. The most important considerations are the requirements for the type of information that must be provided on the form are as follows:
In addition, the following must be assured:
Both the standardized written MOON form and oral notification must be provided and documented in each patient’s medical record.
What are the two APCs Medicare uses to reimburse hospitals for observation care in 2023?
CMS will continue to recognize observation as “Comprehensive Observation Services,” which will be considered a composite service under APC 8011. This composite service will be paid for all qualifying extended assessment and management encounters. Billing must include services outlined in FAQ1 in order to qualify for the Extended Assessment and Management service.
3. What are the criteria that hospitals must meet in order to receive Medicare payment for observation care?
Because Observation services are outpatient services, placement into observation ought to have been specifically ordered 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:
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 instead 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 two 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:
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.
Hospitals: Medicare pays hospitals (via OPPS) for observation care when the conditions in FAQ 1 are met and specific criteria are documented in the medical record: an order for placement into observation, documentation of risk stratification, and an observation admit note, progress notes and a discharge note that are timed and signed by the physician.
5. Are there specific ICD-10 (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-10-CM diagnosis code requirement for chest pain, CHF and asthma was discontinued effective for any observation service provided on or after January 1, 2008. However, to meet medical necessity requirements that vary from one MAC to another, it is important to clearly document the condition(s) of the patient prior to, during and upon discharge from observation services with the appropriate ICD-10 diagnosis code.
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 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.
7. Does Medicare have any specific time requirements 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. Still, 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 observation period must be included on a single line. The date of service for that line is the date the patient is admitted to observation.
8. When does observation care time begin and end for facility coding?
Per CMS, observation time starts at the 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 when all medically necessary services related to observation care are completed - including follow-up after discharge orders are written. This observation end time is 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.
9. What if the patient bypasses the clinic or ED and is a direct referral to the observation area?
For CY 2021, CMS will again pay for a direct referral to observation using code G0379 (now recognized under APC 5025. 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 5025) 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 8011 will be paid if observation time related to direct referral does not meet observation guidelines, the payment for G0379 is $525.30.
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 should report intravenous infusions and injections in addition to observation service for all payers, including Medicare. Most infusion and injection procedures are status indicator “S” procedures and are paid separately. 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.
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 2019 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.
Status Indicator Q3 is defined as Codes that May Be Paid Through a Composite APC and includes services as follows:
The following table illustrates coding and billing information for each observation category:
12. What outpatient services are now “packaged” into the payment of the ED, clinic, or observation facility?
One of CMS’ goals for OPPS is to increase the packaging of interrelated services into a primary service. Packaged services include a limited number of additional ancillary services, particularly minor procedures and pathology services, except for cochlear implant and auditory implant programming services. CMS will also package payment for a few drugs that function as supplies in a surgical procedure.
In EDs and clinics, most lab work will be packaged and not paid separately in 2023. In addition, many add-on codes will be packaged in 2023. An add-on code is a procedure 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; debridement add-on codes, removal of nail plate add-on codes, and immunization add-on codes.
Initial injections and infusion codes are not packaged. Infusion add-on codes 96368-concurrent infusion and 96376-IV push same drug continue to be packaged in 2023 under Status Indicator “N.”
13. How does the facility report observation services for patients 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.
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. Medicare does not expect anything to change with the Two-Midnight rule in 2023.
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. The physician’s expectation should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. All of these factors should be documented in the ED record to avoid any denials of the admission, which is arranged by the admitting physician. 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 not meeting 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 2023, CMS continues to believe an inpatient admission is generally appropriate for payment under Medicare Part A when the admitting physician expects the patient to require hospital care that crosses two midnights. The factors that lead to a particular clinical expectation must be documented in the medical record in order to be granted consideration. If an unforeseen circumstance, such as a beneficiary’s death or transfer, results in a shorter beneficiary stay than the physician’s expectation of at least two midnights, the patient may be considered to be appropriately treated on an inpatient basis, and payment for the inpatient hospital stay may be made under Medicare Part A. An inpatient admission for a surgical procedure specified by Medicare as inpatient is generally appropriate for payment under Medicare Part A, regardless of the expected duration of care.
Where the admitting physician expects a patient to require hospital care for only a limited period of time that does not cross two midnights, an inpatient admission may be appropriate for payment under Medicare Part A based on the clinical judgment of the admitting physician and medical record support for that determination. The physician’s decision should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. In these cases, the factors that lead to the decision to admit the patient as an inpatient must be supported by the medical record in order to be granted consideration. Although emergency physicians generally do not admit patients, the documentation provided during the ED stay can support the need for admission when the patient is discharged prior to the two-midnight required stay.
Additional Reading: CMS Medicare FFS Payment
Updated April 2023
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