Health Information Management

Use case studies to explore observation services

JustCoding News: Outpatient, October 17, 2012

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A patient arrives at the ED complaining of severe abdominal pain, nausea, vomiting, and a low fever. The physician assesses the patient for possible appendicitis. The patient is not sick enough to be admitted but not well enough to go home. So the physician sends the patient off to observation. 

The patient remains in observation for 12 hours and the physician writes a discharge note the following day. Can the coder report 12 hours of observation? Well, it depends on a lot of factors.
Define observation
Like most healthcare services, observation has its own set of coding rules and guidelines that vary by payer. In the Medicare Claims Processing Manual, section 290, CMS defines observation as a:
set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.
The Medicare Benefit Policy Manual further notes that observation is common for patients who present to the ED and require a significant period of treatment or monitoring before physicians can decide whether to admit or discharge them. Typically patients need more than eight hours of care, but less than 24 hours, says Deborah K. Hale, CCS, CCDS, president and CEO of Administrative Consultant Service, LLC, in Shawnee, Okla.
“If you want to learn about observation, section 290 is the place to go,” Hale says.
So at first glance it appears the patient with a rule out appendicitis fits the definition of observation services. The patient was placed in observation to determine the severity and specificity of the illness.
The requirements for observation don’t begin and end with the definition, however. The following case studies will help illustrate some of the other requirements for billing observation services.
Case study 1
The scenario: The patient was placed in observation from the ED (E/M level 5, CPT® code 99285) with rule out unstable angina/myocardial ischemia. The attending physician wrote and authenticated the order for observation at 2 p.m. Wednesday.
The patient was placed on a cardiac monitor and underwent serial cardiac enzymes to rule out myocardial ischemia. The case manager documented that observation was an appropriate level of care because the patient did not meet inpatient criteria.
The attending physician wrote a discharge order at 7 a.m. Thursday and documented that patient was pain-free with the cardiac monitor and cardiac enzymes revealing no ischemia.
The observation: The facility billed 17 units of HCPCS code G0378 for observation services for this patient. Is this correct?
 In this scenario, the facility cannot bill for observation hours because the documentation does not contain any notation of when the observation services started. The physician ordered observation at 2 p.m. and in the past, coders would start counting observation hours from that point.
However, CMS revised its guidelines for observation services and now requires a nurse’s note stating when the observation services began, Hale says. “You have to look at the nurse’s note to determine when observation actually started.”
Without that documentation, the facility cannot bill for observation. If a nurse had documented that observation began at 2:10 p.m., then the facility would be correct in billing for 17 hours of observation.
Case study 2
The scenario: A 65-year-old male patient with type 2 diabetes mellitus 2 presents to the ED at 6 p.m. Monday with chest pain. His risk factors also include hypertension, hyperlipidemia, and a family history of heart disease. His initial cardiac markers are negative and blood sugars are well controlled with diet alone. ED visit concluded at 9 p.m. The physician orders observation services at 9:10 p.m. for further treatment and assessment, including a rule-out myocardial infarction (MI). The nurse documents that observation services began at 10 p.m.
The physician rules out an MI at 7 a.m. Tuesday and writes a discharge order at that time. The nurse documents that all observation services are complete at 7 a.m. However, the patient must wait for a ride home and does not leave the hospital until 9 a.m.
Based on the facility criteria, the patient received a level 4 ED E/M visit.
The observation: The facility bills for a level 4 ED visit using CPT code 99284 and appends modifier -25 (significant, separately identifiable E/M service by the same physician on the same day of the procedure or other service). The facility also bills for 12 units of observation.
In this case, the facility overstated the observation time. According to CMS, the clock begins when the nurse documents when the observation began. In this case, that’s 10 p.m.
CMS also states that observation time ends when all medically necessary services related to observation care are completed. This could be before discharge when the need for observation care has ended, Hale says. It also means that facilities cannot charge for time when a patient is waiting for a ride home or for a bed in a skilled nursing facility.
In this case, observation ended at 7 a.m., so the facility cannot bill for the two hours the patient was waiting for a ride. The facility should actually have billed for nine hours of observation.
The facility also qualifies for payment under composite APC 8003, says Cheryl Staley, RHIA, CCS. In order to receive payment under APC 8003, all of the following criteria must be met:
  • At least eight hours of observation services billed with HCPCS G0378 with units of service reflecting number of hours
  • No procedure with a status indicator of T on the same date of service or one day earlier
  • Level 4 or 5 ED visit (99284 or 99285) or critical care ED visit (99291) or level 5 Type B emergency department visit (G0384)
The patient spent nine hours in observation, had a level 4 ED visit, and no status T procedures.
Be sure to report all of the hours of observation on one line using the date the services began as the date of service, Hale says. If coders split the observation into two lines and neither reaches the eight hour minimum, the facility will not qualify for the composite APC payment.
Case study 3
The scenario: A patient is placed in observation directly from a local physician’s office due to symptomatic anemia with hemoglobin of 8.5 and chest pain. The physician documents the order for observation on telemetry due to chest pain and orders a transfusion of two units packed red blood cells. The physician writes the order at 10 a.m. Thursday and the nurse documents observation began at 11 a.m.
The nurse documents the first transfusion of packed red blood cells from 12 p.m.–1:30 p.m. and the second transfusion from 2:30 p.m.–4 p.m.
The physician documents a progress note at 2 p.m. Friday stating, “Hemoglobin and hematocrit are stable. Patient has no chest pain. Will discharge patient home.” The physician then writes a discharge order at 2 p.m.
The observation: The facility initially reported G0378 with 25 units of service. However, coders must carve out time when the patient receives other diagnostic or therapeutic services that require active monitoring, says Staley.
Those services include, but are not limited to:
  • Colonoscopy
  • Chemotherapy
  • Blood administration
  • Unscheduled hemodialysis
  • Physical therapy
In this case, the patient received two blood transfusions that totaled three hours. Coders must deduct those three hours from the observation time, Staley says. So the coder should only report 22 hours of observation.
The facility also qualifies for a composite APC payment under APC 8002, Staley says. In order to receive payment under APC 8002, all of the following criteria must be met:
  • At least eight hours of observation services billed with HCPCS G0378 with units of service reflecting number of hours
  • No procedure with a status indicator of T on the same date of service or one day earlier
  • Direct placement/referral from a physician office for observation services billed with HCPCS code G0379 or level 5 clinic visit (CPT codes 99205 or 99215)
Case study 4
The scenario: A physician writes an order for outpatient observation at 9:30 p.m. Monday and the nurse documents that observation services began at 10 p.m. At 8 a.m. Tuesday, the case manager determined that the observation order was inappropriate because the patient clearly met screening criteria for inpatient admission. The physician agrees and determines that the patient should be an inpatient.
The physician then writes an order for inpatient admission at 8 a.m. Tuesday. While the patient was not initially placed into the correct status, the patient required inpatient hospital care from the beginning of the stay.
The observation: For this patient, the facility cannot bill any observation services, even though the physician ordered observation and the nurse documented the start of observation services, Hale says.
The patient was admitted directly from observation; thus, the observation charges are included on the inpatient bill. Since the observation in this scenario is included on the inpatient bill and paid as part of the MS-DRG, the facility is not entitled to separate payment for the observation hours, according to National Government Services, a MAC.
Facilities also cannot roll back the clock on the inpatient admission even if the physician made a mistake, Hale says. If the physician wrote the inpatient order at 8 a.m., the inpatient stay began at 8 a.m.
Case study 5
The scenario: A patient underwent a left inguinal hernia (LIH) repair Tuesday morning. The physician writes an order to place the patient in observation following surgery for post-op pain control. The nurse documents the patient arrived in recovery at 11 a.m.
The patient had no complications and received no services outside of the routine post-operative services. The physician discharged the patient at 11 p.m.
The observation: Even though the patient was being observed for 12 hours, the facility cannot bill for observation services, Hale says. The observation was part of the regular post-operative treatment and should be billed as recovery room services.
What if the physician documented a post-operative complication, such as “patient placed in observation for post-op vomiting requiring nasogastric tube placement and nothing per os status”? That changes the situation, Staley says. Since the patient is placed in observation because of a complication, the facility can bill for observation as long as the physician writes an order and the nurse documents the start and stop time for the observation.
E-mail your questions to Senior Managing Editor Michelle A. Leppert, CPC, at

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