September 5, 2018

Documentation Requirements Update for Observation Care

CMS defines observation care as “a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. Observation status is commonly assigned to patients who present to the emergency department and who then require a significant period of treatment or monitoring before a decision is made concerning their admission or discharge.”

The key parts of the definition are the terms “assessment” and “reassessment,” which need to be clearly documented in the provider’s note. There must be a medical necessity for observation care that requires a prolonged period of stay, typically a minimum of 8 hours to less than 48 hours, which is also clearly outlined in the provider’s documentation.

The first key part to the documentation is the initial assessment. To be able to bill for the highest services, the H&P should contain an HPI, PMH (including surgical history), pertinent family history, social history, review of systems (with at least 10 organ systems), physical exam (with at least 9 organ systems), pertinent labs and imaging, and finally the medical decision making (MDM). The MDM should include a differential diagnosis, plan for work up, and treatment plan. For observation care, the MDM must show the medical necessity for the patient to stay under observation status.

The next key part of documentation is the reassessment. The reassessment note should include a brief update on the patient, including any new physical exam findings, a review of pertinent labs and imaging, and ongoing plan showing continued need for observation care. The reassessments should typically occur every 4-6 hours.

The final part of the documentation includes the discharge note. This should include a summary of the observation stay, including any pertinent physical exam and diagnostic findings, as well as a plan for follow up.

As per CMS, “Observation services are covered only when provided by the order of a physician or another individual authorized by state licensure law and hospital staff bylaws to admit patients to the hospital or to order outpatient tests.” As many observation units are staffed by advanced care practitioners, it is essential that the physician (billing provider) documents pertinent face to face time with the patient and also documents their involvement in the MDM.


  1. CMS Manual System, Pub 100-02 Medicare Benefit Policy, Transmittal 42.
  2. CMS Manual System, Pub 100-04 Medicare Claims Processing Transmittal 2282.
  3. CMS, MLN and DHHS: Evaluation and Management Services ICN 006764 8/2017.

Amit Shah, MD
Good Samaritan Hospital Medical Center
Progressive Emergency Physicians