Observation Care Payments to Hospitals FAQ

The following FAQ content reflects 2016 Outpatient Prospective Payment System (OPPS) observation coding information. Several substantive changes were made to policies for hospital observation in 2016. 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 2016?

A number of changes were made in the 2016 final rule with comment period.  The 2016 payment for Observation is $2,174.14

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 2016, observation continues to be paid under a composite APC entitled “Comprehensive Observation Services (COS) APC” (APC 8011)  In order to qualify for COS payment, billing must include:

  • Any procedure that is assigned Status Indicator “T”:
  • Any claim containing 8 or more units of services described by HCPCS code G0378 (Observation services, per hour);
  • Claims that contain services provided on the same date of service or 1 day before the date of service for HCPCS code G0378 and described by one of the following codes:
  • G0379 (Direct referral of patient for hospital observation care) on the same date of service as HCPCS code G0378;
  • 99281(ED Level 1)
  • 99282 (ED Level 2)
  • 99283 (ED Level 3)
  • 99284 (ED Level 4)
  • 99285 (ED Level 5)
  • G0380 (Type B emergency department visit Level 1
  • G0381 (Type B emergency department visit Level 2)
  • G0382 (Type B emergency department visit Level 3)
  • G0383 (Type B emergency department visit Level 4)
  • G0384 (Type B emergency department visit Level 5)
  • 99281 (Critical Care)
  • G0463 (Hospital outpatient clinic visit for assessment and management of a patient)
  • Claims that do not contain a service that is described by a HCPCS code to which status indicator “J1” has been assigned


As in 2015, 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 2016 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 , CMS will recognize observation as “”Comprehensive Observation Services” which will be considered a composite service under APC 8011.  Payment for this composite service will be made 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.

 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 99281, 99282, 99283, 99284, 99285, or G0384 Type B ED visit code, critical care (99291), or a G0463 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 FAQ1 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-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. 

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 2016, CMS will again pay for a direct referral to observation using code G0379 (now recognized under APC 5013). 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 5013) 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 $480.69

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 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.

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 2016 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 (hospital observation per hour) (Medicare)

HCPCS Code for reporting the observation service

2015 APC and Payment

Observation for a minimum 8-hours



G0378 (hospital observation per hour)

Payable under composite APC 8011, $$2,174.14.

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



G0378 (hospital observation per hour)

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 (hospital observation per hour) and G0379 (direct referral to hospital  observation

G0379 (direct referral to hospital observation) is packaged into the composite APC 8011 payment, $$2,174.14. 

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 G0378 and G0379 

 Payment for G0379 (direct referral to hospital observation) is modified by SI J2 for single code payment of $480.69 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 services include a limited number of additional ancillary services, in particular certain 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 ED’s and clinics, most lab work will be packaged and not paid separately in 2016. Iin addition, many add-on codes will be packaged in 2016. 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 continue to be packaged in 2016 under Status Indicator “N”.

FAQ 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.

 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.  The expectation of the physician 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 clearly 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 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 2016, CMS believes 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 2 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 2 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 be used to support the need for admission when the patient is discharged prior to the two-midnight required stay. 

Outlined in the 2016 Final Rule, CMS intends to modify the approach to education of providers and enforcement of the Two-Midnight rule.  CMS will use Quality Improvement Organizations (QIO) to conduct the first line of medical reviews.  Recovery auditors will conduct patient status reviews for those hospitals with consistently high denial rates based on the QIO patient status review outcomes.  QIO’s began medical reviews on October 1, 2015 and continue to ramp up their review throughout 2016.  Beginning January 1, 2016, QIO’s began medical review of short hospital stays under the Two-Midnight policy.  Recovery Audit Contractors (RAC) will review providers that fail to comply with the payment policy and, as appropriate, send claims to the Medicare Administrative Contractor (MAC) for adjustment.

Additional Reading:

CMS.gov Fact Sheet:  Two-Midnight Rule

CMS.gov Inpatient Hospital Reviews Update 12/31/2015

Federal Register/Vol. 80, No. 219/Friday, November 12, 2015/Rules and Regulations


The American College of Emergency Physicians (ACEP) has developed the Reimbursement & Coding FAQs and Pearls for informational purposes only.   The FAQs and Pearls have been developed by sources knowledgeable in their fields, reviewed by a committee, and are intended to describe current coding practice. However, ACEP cannot guarantee that the information contained in the FAQs and Pearls is in every respect accurate, complete, or up to date. The FAQs and Pearls are provided “as is” without warranty of any kind, either express or implied, including but not limited to, the implied warranties of merchantability and fitness for a particular purpose. Payment policies can vary from payer to payer. ACEP, its committee members, authors or editors assume no responsibility for, and expressly disclaim liability for, damages of any kind arising out of or relating to any use, non-use, interpretation of, or reliance on information contained or not contained in the FAQs and Pearls. In no event shall ACEP be liable for direct, indirect, special, incidental, or consequential damages arising out of the use of such information or material. Specific coding or payment related issues should be directed to the payer. For information about this FAQ/ Pearl, or to provide feedback, please contact David A. McKenzie, CAE, Reimbursement Director, ACEP at (972) 550-0911, Ext. 3233 or dmckenzie@acep.org.



Updated 04/29/2016

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