The Challenges of Billing Observation Correctly


Observation, outpatient outlier payments, and the Inpatient-only List: Getting it right is not always easy.

On this week’s Monitor Mondays we had a robust discussion about Condition Code 44. And on June 9, I will be presenting a webinar on the nebulous concept of “outpatient” service in a bed.

Both of these have one thing in common: the billing of observation. Observation is confusing for so many reasons. First, many call it a “status,” but it’s not; it’s a service. And of course, like any other service, it requires an order from a qualified provider. And then there is the use of observation by non-Medicare payers who set different requirements, often based on the use of commercial or proprietary criteria.

As many know, Medicare pays for observation as a comprehensive Ambulatory Payment Classification (APC), meaning that they pay the hospital one fixed price for the patient who receives eight or more hours of observation, no matter what else is done to or for the patient, and no matter how many hours of observation are provided. But there are caveats to that payment.

First, for reasons that are still unclear to me, Medicare won’t pay that observation APC if the patient has another procedure that is assigned a status indicator of T or J1. For example, if a Medicare patient presented to the ED after a syncopal episode with a head laceration that the ED doctor repaired, and the patient was then placed in observation for 30 hours, then discharged, if that laceration repair coded as an intermediate repair, that small status T procedure would negate any eligibility for the observation APC. It just makes no sense…

Second, even though observation is generally paid as a fixed payment, it is not uncommon for Medicare outpatient claims to result in an outlier payment. Although we look at an observation claim as a unique entity, it is simply an outpatient claim. In fact, in a U.S. Department of Health and Human Services Office of Inspector General (HHS OIG) audit released last week, they reported that Vanderbilt University Medical Center received over $6 million in outpatient outlier payments in 2018, and over 10 percent of that was found to be improper. And while much of it was related to improper billing of replacement devices and payments for other improperly billed services, the billing of observation services was included in the list of errors. That means that just like all other services, you better be sure your billing of observation hours is compliant. As I will discuss in my webinar, observation is defined as a set of clinically appropriate services, so if you are observing your patient but it is not clinically appropriate to be doing it, then the service you are providing is actually not observation, and you need to bill it in some other way.

Likewise, with Condition Code 44, if you make the change from inpatient to outpatient with observation, you start counting observation hours from when the order for observation is written; you cannot count the hours prior to that order as observation – and once again, you must figure out a different way of billing them. It’s complicated.

Although unrelated to observation, there was one other finding of interest in this report. The OIG reported that “seven outpatient claims were billed for inpatient-only procedures, which resulted in improper outlier payments of $65,400.”

What? The hospital submitted an outpatient claim that included a CPT code that is on the inpatient-only list, and the Medicare Administrative Contractor (MAC) paid that outpatient claim? That should never happen. Aside from the fact that the hospital’s billing software should have flagged an inpatient-only CPT® code on an outpatient claim, it is difficult to envision how the MAC did not catch this. A status indicator C CPT or HCPCS code on an outpatient claim should immediately be returned to the provider.

Where are the consequences for the MAC for violating a payment rule that is listed in Medicare 101? Perhaps instead of requiring a refund of the overpayment, Vanderbilt should actually be getting a reward for exposing a flaw in their MAC’s payment processing that has been apparently unknown until now.

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