Health Information Management

Issue an ABN when observation care is not reasonable, necessary

APCs Insider, March 14, 2008

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QUESTION: Under the 2008 OPPS final rule, CMS packages observation services with evaluation and management (E/M) levels four and five. Should we continue to provide advanced beneficiary notice (ABN) forms to our patients that contain estimated charges unbundled (i.e., room and board for observation level of care) if their observation care was not medically necessary? If the patients receive other covered services, such as the emergency room (ER) level and tests, does this make the observation service reasonable and necessary?

ANSWER: The Medicare Benefit Policy Manual, Chapter 6, 20.5, states:

An ABN should not be issued in the context of reasonable and necessary observation services, whether packaged or paid separately.

Chapter 30 indicates:

If a hospital intends to place or retain a beneficiary in observation for a non-covered service, it must give the beneficiary proper written advance notice of non-coverage under limitation on liability procedures.

CMS also states that non-coverage includes:

Services not reasonable or necessary for the diagnosis or treatment of the patient.

In the January 2008 update to the hospital OPPS, CMS indicated:

When services are not covered as observation services, hospitals must not bill beneficiaries directly for reasonable and necessary observation services for which the OPPS packages payment for observation as part of the payment for the separately payable items and services on the claim. Hospitals should not confuse packaged payment with non-coverage or nonpayment.

See the Medicare Benefit Policy Manual, Chapter 6, Section 20.6, for further explanation of non-covered services and beneficiary notification relative to observation care. You can view the manual on the CMS Web site at

In summary, issue an ABN when the observation care is not reasonable and necessary.

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