Coding for Observation Services

December 15, 2010
Betsy Nicoletti

Coding for observation services can be confounding. Currently, CPT and CMS disagree on which code to report on the second day of observation. In 2011, that is changing.

Coding for observation services can be confounding. The status of the patient changes from admission to discharge, and sometimes, even after the discharge. CPT and CMS disagree on which code to report on the second day of observation - if a patient is not discharged that day. And payer denials are all too frequent when the code submitted by the physician does not match the status of the code submitted by the facility.

Thankfully, in 2011 one of these problems is solved.

Observation (OBS) is an outpatient service. A patient admitted to observation status is typically treated and observed for a number of hours to determine whether or not the patient needs to be admitted to inpatient status, discharged, or sent to another facility. Some payers limit the number of hours a patient may be in observation status. Medicare does not pay a hospital separately for all observation services, limiting payment to a few diagnosis codes. Case managers at hospitals want to select the status (inpatient versus observation) that is most accurate. If the patient is eligible for inpatient status, they urge the physician to change the order from OBS to inpatient status. However, if the patient does not meet Medicare's criteria for inpatient status, it would be a compliance error for the hospital to bill them as such.

Physicians get paid for both observation and inpatient services. What matters is that the physician submits claims for the same status as the hospital, to prevent a denial and resubmission. Practically speaking, this means the billing or coding staff should check on the status of the patient a day or two after the patient has been discharged, before submitting the claim.

A patient who is admitted to observation status is billed with codes 99218-99220. If the patient is discharged the next day, use observation discharge code 99217. There is only one observation discharge code. Both services must be documented in order to bill for each. Neither of these services may be billed based on time.

A patient who is admitted and discharged from the hospital (either OBS status or inpatient status) within the same calendar date is billed using codes 99234-99236. These codes pay a higher amount, because the discharge service is included in the payment. For Medicare, the patient must be in OBS or inpatient status for longer than eight hours to bill using these codes. Also, there must be two face-to-face services: the admission and the discharge, and both must be documented. If the physician admits the patient, but then calls in the discharge order because the patient is better, and the physician does not go to the hospital and see the patient, bill only for codes 99218-99220. Many physicians miss this: if using codes 99234-99236, document two visits and two notes, one for the admission and one for the discharge.

If a patient is admitted to observation status and changed to inpatient status that same calendar date, bill only for the inpatient admission.

What about the new codes for observation in 2011? CPT added subsequent observation status codes for patients who are admitted to observation and are either not discharged on day two or switched to inpatient status. Time may be used to report these subsequent observation visit codes. The visits require two of the three key components of history, exam, and medical decision making. The bad news: they are out of sequence in the CPT book, and that may cause confusion. The codes are 99224-99226.

Don't forget: Cards, forms, and computer programs used for charge capture need to be updated for 2011 to reflect these new codes.

Betsy Nicoletti is the founder of She is the author of "A Field Guide to Physician Coding." She believes all physicians can improve their compliance and increase their revenue through better coding. She may be reached at