Guest Post: Documentation requirements for observation services

by Kimberly Anderwood Hoy Baker, JD

Medicare covers observation care as an outpatient service under Part B payments. (Medicare reimburses different healthcare providers under different systems or parts—Part A for hospital payments, Part B for medical/doctor’s services, Part C which allows private insurers to provide Medicare benefits, and Part D for outpatient prescription drugs.) The Medicare Benefit Policy Manual defines observation as a:

“well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”

Two key parts of this definition are the assessments and decision. Medicare mentions assessments and reassessments, presumably to emphasize the active period of care leading to the decision to discharge the patient or admit him or her as an inpatient. Once a decision has been made regarding the patient’s disposition, the care no longer meets this definition of observation, which becomes especially important if the decision has been made to discharge the patient to an alternate, lower level of care that is not available. In these cases, the continued care at a lower level, in lieu of discharge, does not meet the definition of observation because the decision to discharge the patient has been made.

Documentation requirements

Observation services can be ordered by physicians and other providers authorized by state law and hospital bylaws to admit patients or order outpatient tests. Physicians (e.g., emergency department [ED] physicians) who can order outpatient tests may order observation services even though they may not be authorized under hospital bylaws to admit patients for inpatient status. This allows some flexibility for placement of patients in observation. Note that standing orders for observation after surgery are not accepted. Orders for observation must be specific to the patient’s need for continued monitoring in response to clinical factors.

In addition to the order for observation, documentation must reflect that the patient is in the care of a physician. The Medicare Claims Processing Manual requires notes at the time of registration and discharge as well as other appropriate progress notes to be “timed, written, and signed by the physician.” The manual’s emphasis on the physician writing the progress notes aligns with the requirement for assessment and reassessment in the definition for observation. Assessing and reassessing a patient in observation ensures the patient is receiving active care and not simply a lower, custodial level of care.

Like other services covered by Medicare, observation must be reasonable and necessary or, in other words, medically necessary. The physician must document that he or she assessed patient risk to determine that the patient would benefit from observation services. Documentation should describe:

• what risks are present that prevent the patient from being safely discharged home or to a lower level of care
• how the patient would benefit from further observation at the hospital

Documentation of this assessment provides the basis of the medical necessity of the observation services.

Editor’s Note: This article was originally published in Patient Status Training Toolkit for Utilization Review.