Observation documentation requires a medical record that contains nursing notes, physician progress notes and discharge summary outlining the outcome of the observation care services, including patient discharge information, transition to admission, or in the condition code 44 circumstance, when the reason for downgrading a patient from admission to observation. Accurately managing observation length of stay time assists determination for advancing a patient’s care to admission or discharging to the community. Calculating length of stay, determining whether a patient has crossed two-midnights are important considerations for determining a patient’s medically necessary condition for hospital admission. Additionally, documentation of the patient’s severity of illness, potential adverse outcomes if the patient is discharge precipitously, and the intensity of services are important characteristics of observation care documentation.

Utilization review of medical records providing guidance for disposition determination as an inpatient or observation level of care based upon the medically necessary conditions of care requires complex clinical decision making by clinicians. With numerous regulatory programs monitoring physician and hospital compliance; Medicare Administrative Contractors (MACs), Recovery Audit Contractors (RACs), Comprehensive Error Rate Testing (CERT), Office of Inspector General (OIG), The Hospital Payment Monitoring Program (HPMP), Program for Evaluating Payment Patters Electronic Report (PEPPER), are a few where familiarity with these programs is vitally important for a successful patient care and clinical practice.

General Medicare observation reimbursement guidelines for hospital (facility) services are reviewed. Tables on the Medicare observation Healthcare Common Procedure Coding System (HCPCS) codes, Current Procedural Terminology (CPT) private payer observation codes, Typical Medicare facility reimbursement rates, Medicare observation composite Ambulatory Payment Classifications (APCs) and reimbursement are included. This chapter contains a walk-through of the Centers for Medicare and Medicaid (CMS) requirements related to registration, documentation, charging, coding, and billing of facility observation services. Facility observation reimbursement, compliance oversight for observation services and condition code 44 are discussed. The scrutiny by Recovery Audit Contractors (RACs) focusing on one-day inpatient and observation stays is discussed.