Observation services

Observation services billing

Also see: Medicare observation/Condition Code 44

Observation services are covered only when provided by the order of a physician or another individual authorized by State licensure and hospital staff bylaws to admit patients to the hospital or to order outpatient tests. In the majority of cases, the decision on whether to discharge a patient from the hospital following resolution of the reason for observation care or to admit the patient as 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 See Section 20.6, Chapter 6, of the Medicare Benefit Policy Manual.

Medicare coding

All hospitals are required under Medicare billing rules to report observation charges under 0760 (General classification category) or 0762 (Observation room).

Ancillary services performed while the member receives observation services are reported using the applicable revenue codes and HCPCS codes. See Section 290.2. 1, Chapter 4, of the Medicare Claims Processing Manual.

G0378: No separate payment is made for observation services reported with G0378 and APC 0339. In most circumstances, observation services are ancillary to the other services provided to a patient.

However, when observation care is billed in conjunction with high-level clinic visit (Level 5), high-level Type A emergency department visit (Level 4 or 5), high-level Type B emergency department visit (Level 5), critical care services, or a direct referral as an integral part of a patient's extended encounter of care, payment may be made for the entire extended care encounter through one of two composite APCs when certain criteria is met.

  • APC 8002 (Level I Extended Assessment and Management Composite) describes an encounter for care provided to a patient that includes a high level (Level 5) clinic visit or direct referral for observation in conjunction with observation services of substantial duration (8 or more hours).
  • APC 8003 (Level II Extended Assessment and Management Composite) describes an encounter of care provided to a patient that includes a high level (Level 4 of 5) emergency department or critical care services in conjunction with observation services of substantial duration and also includes high level (Level 5) Type B emergency department visits.

Composite APC payment will not be made when observation services are reported in association with a surgical procedure (T status procedure) or the hours of observation care reported are less than 8. See Section 290.5.1, Chapter 4, of the Medicare Claims Processing Manual.

G0379: Should only be reported when observation services are the result of a direct referral for observation care without an associated emergency room visit, hospital outpatient clinic visits, or critical care service on the day of initiation of services.

  • Hospitals should only report G0379 when a patient is referred directly to observation care after being seen by a physician in the community.
  • Payment may be separately as a low-level hospital clinic visit under APC 0604 or packaged into payment for composite APC 8002.
  • Criteria for payment of G0379 under either APC 0604 or APC 8002 include (1) both HCPCPS codes G0378 and G0379 and (2) no service with a status indicator of T or V or Critical Care (APC 0617) is provided on same day as G0379. If either is not met, the G0379 will be assigned a N and will be packaged into payment for other separately payable services provided in the same encounter.

Only direct referral for observation services billed on bill type 13X may be considered for composite APC payment. See Section 290.5.2, Chapter 4, of the Medicare Claims Processing Manual.

Reporting hours of observation

Observation time begins at the clock time documented in the member's medical record which coincides with the time that observation care is initiated in accordance with a physician order. Hospitals should round to the nearest hour. See Section 290.2.2 Chapter 4, of the Medicare Claims Processing Manual.

Services not covered as observation services by Medicare

Providers must determine whether an item or service either meets (1) the definition of observation care or would be otherwise covered and/or (2) is 'reasonable and necessary' for the treatment the member is receiving, or if the item or service exceeds any frequency limitation or falls outside of timeframe for receipt of a particular benefit. 

If the item is not covered under Part B or if the service is not reasonable and/or necessary, including exceeding frequency or benefit limitations, then a notice of non-coverage must be provided to Part C (Medicare Advantage) members. Learn more about this requirement for notices of non-coverage.

Coverage for medications during observation

Generally only medications related to observation services are covered under a member's Medicare Part C benefit. Maintenance medications not part of an observation stay are covered under the member's Part D benefit.

Note: Medicare allows members to bring their maintenance medications if allowed by hospital policy.