Observation under Medicare

Sometimes a member is admitted to a hospital as an inpatient but, upon internal review, the hospital determines the services did not meet inpatient criteria and the admission is changed to observation. This rule has become informally known as "condition code 44." CMS and the QIO use this code to track and monitor these occurrences.

Though CMS views this as a relatively infrequent situation such as in late-night weekend admissions when there is no case manager available to offer guidance on the admission, this change is permitted under Center for Medicare and Medicaid Services (CMS) rules. It applies to Part C (Medicare Advantage) plans.

Review process for changing an admission from inpatient to outpatient

Under hospital Conditions of Participation (COPs), Medicare requires that all hospitals conduct utilization reviews (UR) to ensure that all UR requirements of 42 CFR 482.30 are met. The hospital UR committee reviews the case and, in consultation with the admitting or treating practitioner, determines whether or not the admission/a continued stays medically necessary. At that point, the admission may be changed from inpatient to outpatient status. A change to outpatient moves the patient to observation status.

Criteria for the change in status

The change in status is permissible if all of the following conditions are met prior to discharge. If status is changed post-discharge, services are not billable.

  • The hospital has not submitted a claim for inpatient admission
  • A physician concurs with the utilization review committee's decision
  • The physician and utilization review committee's decision is documented in the patient's medical record

The medical record should contain orders and notes that indicate why the change was made, the care was furnished to the member, and the participants making this decision to change the status.

Informing the patient

The member or patient must be informed about this change through a written notification of the decision that the admission was not medically necessary. The form requires the patient's signature. A copy must be given to the practitioner responsible for the care of the patient.

If the member refuses to sign

The hospital should annotate the form indicating the member refused to sign and give the member a copy of this annotated form.

The member's refusal to sign does not affect the hospital's ability to bill Priority Health and/or the member for any applicable cost share.

Billing the status change

Priority Health does not accept 12X type of bill for status changes. Under uniform billing guidelines, the hospital submits an outpatient claim using bill type 13x.

If submitting electronically, this information should be placed in the ANSI X12N 837 I in Loop 2300, HI segment, with qualifier BG on the outpatient claims.

Also see Medical/surgical services > Observation for more details.

Member liability

The member will owe his/her applicable outpatient hospital copay and any other associated outpatient hospital copays.

The member may also owe for any Part D drug he/she receives. CMS also has a publication (CMS Publication 11333,How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings, that explains how it covers self-administered or Part D drugs.

More information on Condition Code 44

MLN Matters SE0622, Condition Code 44

Medicare Claims Processing Manual Section 50.3, Chapter 1

WPS-Medicare - Condition Code 44

Medicare Claims Processing Manual Chapter 25, Completing and Processing Form CMS-1450 Data Set

Section 150 et seq., Chapter 13, Medicare Managed Care Manual