Understanding Observation Care for UB-04 Billing

Observation care, in the context of hospital billing, refers to a well-defined set of services provided to patients whose condition is not severe enough to warrant inpatient admission but requires close monitoring and assessment to determine the need for further treatment or discharge. From a CMS billing perspective, distinguishing observation status from inpatient admission is critical, primarily driven by the 2-midnight rule. This rule helps determine whether a hospital stay is likely to cross two midnights, influencing whether the stay should be billed as inpatient or outpatient observation. Accurate billing ensures appropriate reimbursement and avoids claim denials related to medical necessity.

General Principles for Billing Observation Services on UB-04

When billing for hospital outpatient observation services on the UB-04 claim form, certain fundamental principles apply:

• Report all services, including observation, with appropriate revenue and HCPCS codes.
• Precisely report the total number of observation hours in Field Locator 46 (Service Units).

Observation Status Criteria and Common Billing Scenarios

Observation Following Emergency Room (ER) Visit

When a patient presents to the emergency department and subsequently requires observation services, both the ER and observation services should be billed on the same UB-04 form. This ensures a consolidated claim for the patient’s continuous care episode.

Observation Following Outpatient Surgical Procedure (SDC)

Similarly, observation services that follow an outpatient surgical procedure (Same Day Surgery, SDC) must be reported on the same UB-04 form as the surgical services. This practice streamlines billing for procedural and post-procedure monitoring.

Inpatient Admission Following Observation Stay: Navigating the 2-Midnight Rule Implications for UB-04

If a patient’s observation stay leads to an inpatient admission, both the observation services and the inpatient admission must be billed on the same UB-04 form. This scenario requires careful attention to specific fields:

• Enter the inpatient admission date in Form Locator 6 (Statement Covers Period) as the “from” date. It is crucial NOT to include the observation date within this date range if the observation stay does not meet inpatient criteria, as this can lead to claim denials. The number of admission days must accurately reflect the statement covers period.
• The date on which the patient was admitted for inpatient services or the start of inpatient care should be entered in Field Locator 12 (Admission Date).
• The time of inpatient admission or start of care is recorded in Field Locator 13 (Admission Hour), using a two-digit military time format (e.g., “14” for 2:00 p.m.).

Billing Observation for Per Diem Facilities

For per diem facilities, if observation services convert to an inpatient admission after midnight of the observation day, the date of the observation service should be recorded in Field Locator 45 (Service Date) and the total number of observation hours in Field Locator 46 (Service Units).

Ancillary Services During Observation Stay Billing

All outpatient ancillary services, such as laboratory tests, medications, or therapy, received during an observation stay should be billed using appropriate revenue codes and HCPCS codes on the same UB-04 form as the observation services. This includes:

• Observation with Radiological Procedures: Services like CAT scans, MRIs, and ultrasounds performed during observation should be on the same UB-04.
• Observation with Diagnostic Procedures: Any diagnostic services utilized during the observation period are to be billed on the same UB-04 form.

Key CMS Guidelines for Observation Services

Adherence to official CMS guidelines is paramount for compliant and successful observation care billing. The 2-midnight rule is a cornerstone, stipulating that if a physician expects a patient to require hospital care for two midnights or more, the stay should generally be inpatient. If less than two midnights, it’s typically observation.

For detailed information, refer to official CMS publications:

• Medicare Benefit Policy Manual, Pub. 100-02, Chapter 6, Section 20.6: This section provides comprehensive guidance on medical review of hospital inpatient admissions and patient status determinations. Learn more from CMS.gov.
• Medicare Claims Processing Manual, Pub. 100-04, Chapter 4, Section 290: This manual details the specific billing instructions for outpatient observation services. Access billing guidelines from CMS.gov.

Observation Claim Denial Review and Appeals Process

Claim denials related to observation care are often due to issues with medical necessity documentation, incorrect patient status determination, or billing errors. When an “OI Denial” occurs, a formal review and appeal process must be followed:

• Corrected Claim Appeal: Submit denial reviews as a corrected claim appeal. This typically involves resubmitting the claim with necessary corrections and supporting documentation.
• Provider Claim Appeal Form: A completed Provider Claim Appeal Form must accompany the corrected claim. Ensure all sections are accurately filled out, providing a clear rationale for the appeal and referencing supporting medical records.
• Outpatient Claim Submission: The appeal should be submitted as an outpatient claim, including only the observation room charges. Any other outpatient charges previously submitted on the claim with the observation date of service will likely be denied again if not part of the specific observation service appeal.

Frequently Asked Questions About Observation Care Billing

What if an observation stay exceeds 24 hours but is less than two midnights?

An observation stay can exceed 24 hours. The determining factor for inpatient versus observation status, under the 2-midnight rule, is the expectation of the duration of medically necessary hospital care, not merely the clock hours. If the physician’s expectation at the time of order is that the patient will require less than two midnights of hospital care, it remains an observation stay, even if it extends beyond 24 hours.

How do I bill for extended observation stays that approach or cross two midnights?

If, during an observation stay, the physician determines that the patient requires care spanning two midnights or more, the patient’s status should be changed to inpatient admission. The billing would then follow the “Inpatient Following Observation” guidelines outlined above, with the inpatient admission date and time correctly entered on the UB-04.

Last Updated: October 26, 2023