Understanding Observation Codes

CMS and many insurance payers are analyzing medical necessity of a one-day length of stay for inpatient admissions to hospitals versus observation. I have personally experienced these disagreements and denials with payers and providers. There is chaos in proper documentation, correct codes, and making sure everyone is on the same page for billing to avoid revenue consequences for hospitals and physicians.

There are two sets of observation codes:

99218 – 99220: Hospital Observation Services, where the patient is considered an outpatient. The facility does not need a designated observation area and patients are admitted to observation because their condition does not meet the status for admission. These codes are used for patients in observation over a calendar day. There are some eight-hour rules that are used and will be discussed later in this article. The terms "24-hour" or "short-stay" have not been used in many years.

If the patient is admitted to the hospital on the same date as observation admission, observation codes 99218 – 99220 would not be billed and hospital admit codes of 99221 – 99223 would be used.

If the patient is admitted to the hospital on the subsequent day of observation admission, observation codes 99218 – 99220 would be used for the first day and initial hospital admit codes 99221 – 99223 used on the second day.

Also, observation codes cannot be used for post-op if services provided are part of the global surgical package. Keep in mind as well that any services provided in the office, emergency department, etc., are included in observation and cannot be charged separately.

Subsequent observation care codes are 99224 – 99226.

99217 is used for discharge from Hospital Observation Services and cannot be charged if the patient is admitted to inpatient status. You cannot use initial observation care codes 99218 – 99220 or subsequent observation care codes of 99224 – 99226 with discharge code 99217 on the same calendar day. This code of 99217 cannot be used with observation codes 99234 – 99236.

Observation Care Services of 99234 – 99236 are utilized for services provided to patients admitted and discharged on the same date of service. The same rules apply if a patient is admitted to the hospital, only hospital admit codes of 99221- 99223 would be used. Discharge code of 99217 is not used with 99234 – 99236.

There are some eight-hour rules that also factor into these observation codes.

If the observation lasts for less than 8 hours on the same calendar day – 99218 – 99220, you cannot charge discharge code 99217.

For observations lasting a minimum of 8 hours but less than 24 hours on same calendar day –99234 – 99236, you cannot charge discharge code 99217.

Admitted to Inpatient – less than 8 hours, use codes – 99221-99223. No discharge code of 99238-99239 can be used.

I highly recommend auditing observation visits on a regular basis to prevent revenue consequences. If the medical record documentation or the patient condition appears to fail to meet standardized admission criteria you could be a target for a RAC audit and could risk repayments to Medicare.

Melody S. Irvine, CPC, CPMA, CEMC, CFPC, CPC-I, CCS-P, CMRS, has over 30 years of experience in the medical profession. She specializes in physician auditing, education, curriculum development, and consulting services. She is the CEO and founder of Career Coders online medical billing and coding school. Irvine is an approved Professional Medical Coding Curriculum (PMCC) instructor with AAPC. She is also a member of the AAPC’s National Advisory Board. E-mail her here.