Health Information Management

Tips for teaching observation coding to physicians

JustCoding News: Outpatient, December 30, 2009

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by Elin Baklid-Kunz, MBA, CPC, CCS

With Medicare's increased emphasis on medical necessity and the Recovery Audit Contractor (RAC) program, it’s important to ensure that physicians assign every patient to the proper status.

Many physicians are not aware of the differences between admitting a patient versus ordering outpatient observation services, and continue to admit patients solely based on the criteria that the patients are in a bed overnight.

Audits of physician evaluation and management (E/M) code levels were not part of the RAC demonstration program. So when hospital inpatient claims were denied for medical necessity and deemed to meet criteria for observation services only, physician claims were unaffected. However, this will not be the case during the permanent RAC program, which will include reviews of E/M services.

CMS confirmed that RACs may review E/M levels in its answer to FAQ # 7738, adding the following:

CMS will work closely with the American Medical Association and the physician community prior to any reviews being completed regarding the level of the visit and will provide notice to the physician community before the RACs are allowed to begin reviews of E/M services and the level of the visit.

This does not mean that the RACs will automatically review physician claims found to be in error during inpatient (Part A) claim reviews, often referred to as “reach thru” denials. However, on June 26, 2009 CMS updated the Overview section of their RAC Web site with the following information:

CMS is often asked about other claim types that may be affected by a full inpatient denial and if the RACs will deny other claim types associated with the inpatient stay, such as physician evaluation and management services. At this time the RAC will not automatically deny claims that are associated with a full inpatient denial. However, these claims may be reviewed individually and there may be a need to fully/partially adjust the claim based on the documentation submitted.

Areas of vulnerability

RACs seem to focus on claims that have the potential to yield the largest recoupment, so physician claims have not garnered as much interest due to their dollar amounts, which are typically smaller than hospital claims. However, when a RAC reviews a hospital service it will review the physician’s record as part of the hospital documentation review as well. This includes reviewing inpatient admission codes (i.e., 99221–99223) that coders should have been reported observation services (i.e., 99217–99220 and 99234–99236).

When auditors downcode the physician’s admission (initial hospital care) service to observation, it reduces the physician payment 15%–30% depending on the level of service provided. (Click here to access a table that outlines calendar year (CY) 2009 Medicare physician fee schedule payment amounts.)

Physicians’ responsibility

Hospitals as well as auditors are going to scrutinize short-stay admissions, so physicians can expect hospitals to work with them to make sure they understand the effect of unnecessary inpatient admissions.

The physician or other practitioner responsible for the patient’s care decides whether to admit the patient as an inpatient. The decision to admit a patient involves complex medical judgment that should take into account the following factors to determine the medical necessity of that admission: 

  • Severity of the patient’s signs and symptoms
  • Medical prediction of adverse outcome involving the patient
  • The need for diagnostic studies that appropriately are outpatient services to help assess whether to admit the patient
  • Availability of diagnostic services at the time and location where the patient presents

CMS considers some procedures “inpatient only” and require the physician to admit the patient.

The importance of the physician orders and documentation

The RAC demonstration project also identified several problems with the order process, and many denials related to short-stay cases involved records without a formal order for inpatient admission signed by the admitting physician.

Additionally, RACs also identified that many orders for admission lacked specificity (i.e., if the order was for observation services vs. inpatient admission). Because of this, many hospitals are reviewing their order process for inpatient admissions to ensure their physician orders are clear, stating the patient should be either “Admitted as an inpatient” or “Placed in outpatient observation.”

Outpatient observation services begin and end with a physician’s order. The physician must write the order prior to initiating observation services, as documented by a dated and timed order in the patient’s medical record. Likewise, outpatient observation services end when the physician orders either an inpatient admission or a discharge from observation.

Medical record documentation

The medical record should contain precise documentation to support the medical decision-making of the physician or other practitioner’s request for a particular service. The request should state one of the following:

  • Patient had an acute condition that required treatment in an inpatient setting at the time of admission
  • Physician needs additional time to evaluate the patient and determine whether the patient needs an inpatient admission

It is also important for physicians and qualified nonphysician practitioners to document the following in the medical record:

  • Language satisfying the E/M guidelines for admission to and discharge from observation care or inpatient hospital care
  • His or her physical presence
  • His or her personal provision of observation care
  • The number of hours the patient received observation care
  • The admission and discharge note, including the assessment of patient risk to determine that the beneficiary would benefit from observation care

In addition to any record prepared as a result of an ED or outpatient clinic encounter, there must be a medical observation record for the patient that contains:

  • Dated and timed physician’s admitting orders regarding the care the patient is to receive while in observation
  • Nursing notes
  • Progress notes the physician prepared while the patient was in observation

Editor’s note: Elin Baklid-Kunz, MBA, CPC, CCS, is the director of physician services for Halifax Health in Daytona Beach, FL. E-mail her at

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