Observation status is a type of outpatient status applicable to patients who are not well enough to go home but not sick enough to be admitted in hospital. Observation care requires a doctor’s order and observation billing is an important component of medical billing services for hospitals. With the increasing proportion of observation patients, efficiency in hospital billing and coding depends on proper physician documentation and capture of observation hours.
Coding and Billing

Criteria for the Use of Hospital Observation Services

According to Harvard Pilgrim Health Care, “Observation Stay is an alternative to an inpatient admission that allows reasonable and necessary time to evaluate and render medically necessary services to a member whose diagnosis and treatment are not expected to exceed 24 hours but may extend to 48 hours, and the need for an inpatient admission can be determined within this specific period”.

The American College of Emergency Physicians (ACEP) notes that most clinicians and payers agree that observation services should be used to potentially forestall a lengthy inpatient admission. Given this condition, observation is appropriate in the following circumstances:

  • Lack of diagnostic certainty, where a more precise diagnosis could decide inpatient admission or discharge to home, or
  • Therapeutic intensity, where extensive therapy has a reasonable possibility of abating the patient’s presenting condition, and thereby prevents inpatient admission.

Observation Codes

There are three sets of observation codes:

  1. CPT codes 99234-99236 Same Day Observation Admission and Discharge are used to report E/M services provided to patients admitted and discharged on the same date of service. To bill Medicare, the patient should spend a minimum of 8 hours in observation status.
    • 99234 Observation or inpatient hospital care for problems of low severity. Documentation requires a detailed or comprehensive history, a detailed or comprehensive exam, and straight forward or low complexity MDM. Typically, 40 minutes are spent at the bedside and on the patient’s hospital floor or unit.
    • 99235 Observation or inpatient hospital care for problems of moderate severity. Documentation requires a comprehensive history, a comprehensive exam, and moderate complexity MDM. Typically, 50 minutes are spent at the bedside and on the patient’s hospital floor or unit.
    • 99236 Observation or inpatient hospital care for problems of high severity. Documentation requires a comprehensive history, a comprehensive exam, and high complexity MDM. Typically, 55 minutes are spent at the bedside and on the patient’s hospital floor or unit.
  2. CPT codes 99218-99220 Initial Date Observation are used to report Evaluation and management (E/M) services provided to new or established patients designated as “observation status” in a hospital. These codes must also be used for Medicare patients who spend <8 hours in observation status.
    • 99218 Initial observation care, per day, for problems of low severity. Documentation requires a detailed or comprehensive history, a detailed or comprehensive exam, and straight forward or low complexity MDM. Typically 30 minutes are spent at the bedside and on the patient’s hospital floor or unit.
    • 99219 Initial observation care, per day, for problems of moderate severity. Documentation requires a comprehensive history, a comprehensive exam, and moderate complexity MDM. Typically, 50 minutes are spent at the bedside and on the patient’s hospital floor or unit.
    • 99220 Initial observation care, per day, for problems of high severity. Documentation requires a comprehensive history, a comprehensive exam, and high complexity MDM. Typically 70 minutes are spent at the bedside and on the patient’s hospital floor or unit.
  3. CPT codes 99224-99226 Subsequent Observation Care are used for observation care services provided on dates other than the initial or discharge date. These codes cover reviewing the medical record and reviewing the results of diagnostic studies and changes in the patient’s status since the last assessment by the physician.
    Per CMS: “In the majority of cases, the decision whether to discharge a patient from the hospital following resolution of the reason for the observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours. In only rare and exceptional cases do reasonable and necessary outpatient observation services span more than 48 hours.” As the ACEP points out, 48 hours can extend over 3 calendar days.

    • 99224 Subsequent observation care, per day, for stable, recovering, or improving patients. “Typically 15 minutes are spent at the bedside and on the patient’s hospital floor or unit.” Documentation requires substantiating at least 2 of 3: a problem focused interval history, problem focused examination, and low complexity MDM.
    • 99225 Subsequent observation care, per day, for the patient responding inadequately to therapy or has developed a minor complication. “Typically 25 minutes are spent at the bedside and on the patient’s hospital floor or unit.” Documentation requires substantiating at least 2 of 3: expanded problem focused interval history, expanded problem focused examination, and moderate complexity MDM.
    • 99226 Subsequent observation care, per day, in which the patient is unstable or has developed a significant complication or a significant new problem. “Typically 35 minutes are spent at the bedside and on the patient’s hospital floor or unit.” Documentation requires substantiating at least 2 of 3: detailed interval history, detailed examination, and high complexity MDM.

CPT code 99217 Observation Discharge

CPT code 99217 covers services on the date of observation discharge, including a final exam, discussion of the observation stay, follow-up instructions, and documentation. It can only be used on a calendar day other than the initial day of observation. This code should not be reported if the patient was placed in observation and discharged on the same day.

Tackling the Challenges of Billing Observation Services

Knowing payer rules as well as the nuances of observation billing is critical for hospitals to get paid. In a recent Revenue Cycle Intelligence article, physician advisor Juliet B. Ugarte Hopkins, MD discussed some of the complexities of reporting observation services. “Observation is actually outpatient status with observation services”, she says, and advises that:

  • Providers should ensure that clinical documentation and order entries support observation status when patients truly need those services
  • As observation services are billed hourly, physicians should capture those observation hours correctly when they are appropriate to be started
  • The medical record should have an observation order to ensure that the hospital captures those observation hours

Ugarte Hopkins observes that patients in observation status may sometimes need additional care or services beyond routine care. In such cases, lack of observation status order could stop payers from reimbursing the hospital for the care they provide patients, she says. A proper understanding of the innumerable payer regulations that specify what qualifies as observation and inpatient status for claims reimbursement is also critical to maximize revenue and combat potential claim denials with regard to status. Partnering with a medical billing outsourcing company with extensive experience in providing hospital billing services is an ideal option to ensure maximum reimbursement for both observation and inpatient care.