Hospital Observation Services

Hospital observation services are considered outpatient services.  They are typically used when a period of time is needed to evaluate the progress or regression.  This may include effectiveness of medication/ infusions, results of diagnostic results or other reasons deemed as medically necessary. This period of time will be used to determine whether the patient needs inpatient admission, transfer to another facility, or may be discharged.  It is not appropriate for observation to be used as a routine post operative extended recovery time.  Observation is not determined by any specific unit or bed, but is based upon the physician order.

Several rules apply to observation services.  This is where you will need to be very familiar with your payer's requirements for time and reimbursement.

Medicare will allow 48 hours in observation, or until all ordered interventions have been completed.  Example:  IV has been ordered at hour 45, infusion not complete until hour 49.  Many managed care payers will only cover observation up to 23 hours.  Observation time must be documented in the medical record.  Time begins with the patient's admission to an observation bed.  It is generally expected that observation time will be at least 8 hours.  The patient is typically admitted to observation  through the hospital's emergency department, or by direct admit from a physician office. 

Some common problems with reporting observation services are:  Case management should follow these patients closely and be in contact with the physician as the time deadline approaches.  If the observation status needs to be converted to inpatient, the physician should issue a new order that reflects the status change.  If the patient remains for, say 4-5 days, with no order change, the hospital will likely lose the revenue for time over 48 hours for Medicare patients.  Managed care contracts should state specifically how claims will be reimbursed when both emergency department charges (revenue code 450), and observation charges (revenue code 762) appear on the claim.  Unless this is clearly defined in the contract, the payer will often default to emergency services payment rather than the observation payment rate. 

Keep in mind that Medicare patients who do not have Part B coverage will not have the observation service covered.  This is not an inpatient stay unless the physician specifically changes the order to inpatient status. 

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