During the Spring of 2002, the Office of Inspector General (OIG) for the Department of Health and Human Services issued a number of audit reports focusing on the use and billing to Medicare of hospital observation beds. The number of OIG reports on this issue and the findings may raise a concern with how your hospital uses and bills Medicare for observation beds. This article will review the points raised by the OIG audit reports and will also summarize the change in reimbursement for observation beds under Medicare’s new Hospital Outpatient Prospective Payment System (HOPPS).

Medicare Reimbursement for Observation Beds Under Cost Based System

Outpatient observation services are defined as services furnished by a hospital on its premises to evaluate an outpatient’s condition or to determine the need for possible admission as an inpatient. Until August 1, 2000, hospital outpatient services were reimbursed on a reasonable cost basis. Observation services were separately reimbursable using a revenue code and billed on a time basis by the hour, with the first observation hour beginning when the patient was placed in the observation bed and rounded to the nearest hour. Observation services are allowable (i.e., reimbursed by Medicare) only when ordered by a physician or other licensed individual authorized to admit patients or to order outpatient tests.1 Observation services are not allowable if ordered as part of a standing order for observation following outpatient surgery or if not reasonable and necessary for the diagnosis or treatment of the patient.

Observation services have been routinely used by hospitals to observe patients following an emergency room visit or following an outpatient medical procedure, such as minor surgery, to determine whether an inpatient admission was necessary. The OIG had become increasingly concerned that reimbursement claims to Medicare for observation beds were not meeting Medicare criteria, and consequently, conducted a series of audits. The OIG found during its audits that observation services billed by a number of hospitals failed to meet the Medicare reimbursement criteria (and were therefore unallowable) because:

• a physician’s order for observation services was not documented in the medical records;
• the medical records contained a standing order for observation services following an outpatient procedure;
• the medical records contained orders for an inpatient admission, but the observation services were billed as outpatient services instead;
• following a treatment or procedure with no complications, an inappropriately high number of observation bed hours were billed (i.e., the services were not reasonable and necessary);
• time spent prior to a scheduled procedure or during the outpatient procedure or in the recovery unit cannot be simultaneously billed as observation services; and
• costs associated with time spent by a patient in recovery from a Part B diagnostic or therapeutic procedure are included in the payment for that diagnostic or therapeutic service.

Recent OIG Reports on Observation Beds

The OIG issued four audit reports in the Spring of 2002 related to the use of hospital observation beds. Specifically, the OIG conducted the following audits:

1. February 12, 2002 Report: St. Francis Hospital - Tulsa, OK Dates of Review Period: July 1, 1996 to June 30, 2000 Findings: Estimated Medicare overpayment of $298,549 (errors in 80 of 100 sampled claims)

2. April 26, 2002 Report: Baptist Health System - San Antonio, TX Dates of Review Period: September 1, 1995 to August 31, 1999 Findings: Estimated Medicare overpayment of $3,000,000 (errors in 63 of 120 sampled claims)

3. May 24, 2002 Report: St. John’s Regional Health Center - Springfield, MO Dates of Review Period: July 1, 1998 to June 30, 1999 Findings: Estimated Medicare overpayment of $197,773 (from a universe of $971,242 in observation bed payments)

4. June 10, 2002 Report: Presbyterian Hospital - Dallas, TX Dates of Review Period: October 1, 1996 to September 30, 1999.

Findings: Estimated Medicare overpayment of $361,832 (errors in 35 of 100 sampled claims).
The findings in the audit reports listed above were remarkably similar. Consequently, one can reasonably conclude that many other hospitals face similar historical concerns related to their observation bed billings to Medicare. Whether fiscal intermediaries will conduct their own audits of observation services billed in the past remains to be seen. Using the OIG reports as a tool, hospitals can conduct their own review of past Medicare claims for observation services if they have reason to believe the services were inappropriately billed. Of course, if Medicare overpayments are identified, the hospital has a legal obligation to refund the money to the Medicare program, and so any such reviews should be conducted with care and precision.

Observation Services Under HOPPS

Following the transition to hospital outpatient prospective payment system, observation services were no longer separately reimbursable, but rather were included in the HOPPS payment for outpatient services for surgical procedures, emergency services, and most clinic visits. However, as of April 1, 2002, Medicare began to pay separately under a new ambulatory payment classification for observation services limited to three medical conditions: (1) chest pain; (2) asthma; and (3) congestive heart failure.2 Separate payment for observation services is now subject to a number of billing requirements and conditions, including that (a) an emergency department visit or a clinic visit is billed in conjunction with each bill for observation services; (b) observation care is billed hourly for a minimum of eight hours with no separate payment beyond 24 hours; (c) observation time begins at the clock time appearing on the nurse’s observation admission note and ends at the clock time documented in the physician’s discharge orders, or, in the absence of such a documented time, the clock time when the nurse or other appropriate person signs off on the physician’s discharge order; (d) the beneficiary is under the care of a physician during the period of observation, as documented in the medical record by admission, discharge, and other appropriate progress notes, timed, written, and signed by the physician; (e) the medical record includes documentation that the physician used risk stratification criteria to determine that the beneficiary would benefit from observation care; and (f) the hospital furnishes certain other diagnostic services along with observation services to ensure that separate payment is made only for those beneficiaries truly requiring observation care.

OIG Reports - Lessons Learned

In light of the fact that asthma, chest pain, and congestive heart failure account for a substantial number of emergency room visits, hospitals will likely continue to bill Medicare separately for observation services. Therefore, the findings in the recent OIG audit reports on observation beds, although they focused on services billed under the former reasonable cost system, continue to be instructive to hospitals.

Several major lessons a hospital can learn from the recent OIG reports on observation beds include the need to document carefully the medical necessity of the observation services in the medical records and to educate physicians that standing orders for observation services following outpatient procedures are inappropriate. Thus, diagnostic testing or procedures conducted in connection with outpatient treatment for asthma, chest pain, or congestive heart failure should be followed by an individualized determination by a physician or other appropriately licensed clinician that observation services are necessary for that patient. In fact, the new payment requirements for observation services under HOPPS APC 0339 mandate such documentation. Another major lesson-train not only physicians on criteria for allowable observation services, but the entire outpatient staff along with pertinent billing personnel.

If you have any questions or if you would like more information, please contact:

Connie A. Raffa
212.484.3926
raffa.connie@arentfox.com

1. CMS Hospital Manual section 230.6(A).
2. 2. 66 Federal Register 59856, 59879 (November 30, 2001) - creating APC 0339 for observation services.