Ever since the Centers for Medicare and Medicaid Services (CMS) created observation as a billable service that
can be provided to Medicare beneficiaries,
confusion has been the rule and not the exception. This begins with the decision about
the proper use of observation. Prior to the
Two-Midnight Rule, the decision of whether
a patient warranted observation services or
inpatient admission was a clinical decision
made by the physician, based on the severity
of the signs and symptoms of the patient and
the medical predictability of an adverse event.1
The Two-Midnight Rule, established in the
2014 Inpatient Prospective Payment Final Rule,
made the decision a somewhat simpler one,
based on the expected time the patient would
require in the hospital, with observation
indicated for patients who have an expecta-
tion of under two midnights and inpatient
admission for those whose hospital
care is expected to require more than
two midnights. But four years later,
most physicians still rely on utiliza-
tion review staff to guide them to the
What is observation?
CMS has defined observation as a
well-defined set of specific, clinically appro-
priate services, including ongoing short-term
treatment, assessment, and reassessment, that
are furnished while a decision is being made
regarding whether the patient will require
further treatment as a hospital inpatient or
will be discharged from the hospital. 2 CMS
also indicated that “observation services must
also be reasonable and necessary to be covered
When initially introduced, 3 observa-
tion could only be used for three conditions:
asthma, chest pain, and congestive heart
failure. In 2006, CMS allowed observation
by Ronald Hirsch, MD, FACP, CHCQM
Ordering and billing
A simple service with
» Observation is a service provided to outpatients and not a status.
» Observation hour counting begins with the order for observation.
» Observation hour counting ends with the end of medically necessary hospital services.
» Hours must be carved out from observation counting in two contrasting situations.
» Although observation is paid as a single payment, compliant hour counting is still required.
Ronald Hirsch ( email@example.com) is Vice President at R1 Physician Advisory
Services in Chicago. @signaturedoc