Revenue Cycle

CMS replaces the term 'observation status' with 'observation services'

Recovery Auditor Report, June 11, 2009

In the July 2009 quarterly updates, CMS revised portions of both the Claims Processing Manual and Benefit Policy Manual related to observation. These changes were characterized as “editorial” in nature, removing certain terms CMS felt were confusing and revising some sections in accordance with that. Additionally, a new section entitled “Policy and Billing Instructions for Condition Code 44” was added to Chapter 1 of the Claims Processing Manual, along with other revisions to information on condition code 44.
Overall, the changes were meant to remove the words and concept of admission and observation status in reference to observation, in favor of the term observation services. Claims Processing Manual Transmittal 1745 puts it this way: “there is no payment status called ‘observation’, observation care is an outpatient service, ordered by a physician and reported with a HCPCS code.” 
However, some of the changes seem confusing rather than clarifying. For instance, under the physician evaluation section the requirement for “admission, discharge and other appropriate progress notes” was changed to “outpatient registration, discharge and other appropriate progress notes”. Read literally, this makes no sense because outpatient registration is a function of the registration department. But it is doubtful that CMS intended to remove the requirement for the physician to make an initial assessment of the patient because the section goes on to still say “timed, written and signed by the physician.” This leaves us with the tortured interpretation of “outpatient registration” to not mean outpatient registration, but rather to mean something akin to the initial note by the physician.
Additionally, some of the changes seem to move the terminology of observation services farther away from the reality of how observation is provided in hospitals. In the section on calculating observation time, the phrase “placed in a bed” was removed, but this doesn’t change the fact that most hospitals place these patients in beds alongside inpatients to receive these observation services.
I do think hospitals should review the changes, which are easy to review because they are in red line in the transmittals. However, you may come away confused. For all the red lining, there was very little substantive change and the new phrases do little to clarify how hospitals should apply the Medicare framework for observation services to the service they current call observation and that they generally provide in the inpatient beds of their facility.

Editor’s note: By Kimberly Anderwood Hoy, JD, CPC, director of Medicare and Compliance for HCPro, Inc. This article was excerpted from the June 2 issue of Medicare Weekly Update.

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