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Facility Reporting of Observation Services


Observation services, which must be ordered by a professional provider, are eligible for reimbursement separate from the emergency room (ER) visit when treatment and/or evaluation requires eight or more hours. However, the reimbursement for the ER visit is inclusive of the first seven hours of observation care.

Observation services are indicated when, in the professional provider’s opinion, the individual's clinical condition is either unchanged or has not sufficiently improved to permit discharge, and additional monitoring and/or treatment is required until a disposition decision is rendered. A disposition decision is expected to be made within 24 hours.

The full observation length of stay may be eligible for reimbursement consideration when the individual is directly entered to observation without an ER visit.

The Company does not provide separate reimbursement for observation services for any of the following. (This list is not all-inclusive.)
  • Standing orders following outpatient surgery
  • Extended observation following a procedure
  • Services provided concurrently with chemotherapy
  • Routine preparation prior to, and recovery after, diagnostic testing
  • Routine recovery and post-operative care after same-day surgery
  • Awaiting transfer to another facility
  • Outpatient blood administration (e.g., blood transfusion)
Observation services begin at the time the professional provider writes the order for outpatient observation. If the observation stay results in an inpatient admission, the inpatient admission begins at the time of the admission for observation services. The inpatient claim should include all charges incurred during the stay. In this situation, observation services will not be considered for reimbursement.


The individual's medical record must reflect the medical necessity for the care provided. These medical records may include, but are not limited to, the following: records from the professional provider's office, hospital, nursing home, home health agencies, therapies, and test reports.

The Company may conduct reviews and audits of services to our members, regardless of the participation status of the provider. All documentation is to be available to the Company upon request. Failure to produce the requested information may result in a denial for the service.


The Company does not require authorization for observation services. It is expected that facilities adhere to the policy criteria when billing for observation services.​

This policy is consistent with Medicare's coverage determination. The Company's payment methodology may differ from Medicare.


Subject to the terms and conditions of the applicable Evidence of Coverage, observation services are covered under the medical benefits of the Company's Medicare Advantage products.


Observation services involve the use of a bed and periodic monitoring by the facility's nursing or other ancillary staff in order to evaluate and treat an individual's condition or determine the need for possible inpatient admission. Observation services are considered an outpatient service and generally do not exceed 24 hours. These services can be provided in any location within a facility, whether in a specific observation unit or on a hospital floor. Observation services should be patient-specific and are not part of the facility's standard operating procedure or protocol for a given diagnosis or service. Observation determinations made by protocol without consideration of the applicability to the specific patient are not clinically appropriate.

There are certain diagnoses and procedures that generally do not support an inpatient admission but may be appropriate for outpatient observation. However, the medical necessity determination for either admission or observation is always made on a case-by-case basis, depending on the severity of illness and intensity of service requirements. The Company uses InterQual® Guidelines, a nationally recognized source, to assist with medical necessity decision-making regarding observation services or admission criteria.


American College of Emergency Physicians (ACEP). Observation - Physician Coding FAQ. [ACEP Web site]. Available at: Accessed November 19, 2020.

American College of Emergency Physicians (ACEP). Observation Services Toolkit. [ACEP Web site]. Available at: Accessed November 19, 2020.

Centers for Medicare & Medicaid Services (CMS). Medicare Claims Processing Manual Chapter 4: Part B Hospital (Including Inpatient Hospital B and OPPS). [CMS Web site]. 12/22/2017. Available at: November 19, 2020.

Centers for Medicare & Medicaid Services (CMS). Medicare Benefit Policy Manual Chapter 6: Hospital Services Covered Under Part B. [CMS Web site]. 12/18/2015. Available at: November 19, 2020.

Centers for Medicare & Medicaid Services (CMS). Medicare Claims Processing Manual Chapter 12: Physicians/Nonphysicians practitioners. [CMS Web site]. 05/31/18. Available at: Accessed November 19, 2020.

Company Hospital Manuals.

Company Provider Manuals.

Novitas Solutions, Inc. Local Coverage Determination (LCD). A52985. Acute care: Inpatient, observation and treatment room services. [Novitas Solutions Web site]. Original: 10/01/2015. (Revised: 01/01/2018). Available at: Accessed November 19, 2020.


CPT Procedure Code Number(s)

ICD - 10 Procedure Code Number(s)

ICD - 10 Diagnosis Code Number(s)

HCPCS Level II Code Number(s)

Revenue Code Number(s)
0762: Specialty Services - Observation Hours

Coding and Billing Requirements

Policy History

Claim Payment Policy Bulletin
Medicare Advantage