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While both of these Q&As provide significant guidance, the guidance comes at the lowest level of formality. Because any Q&A on the CMS Web site can disappear just as fast as it appears, be certain to download and save these for possible future reference.

Q&A No. 9973 addresses a rather thorny issue involving the correct use of Condition Code 44 on the UB-04 claim form. Because this is an involved issue, a little background is necessary to understand the guidance. Note that this guidance may be different from interim information you may have received from your fiscal intermediary or Medicare Administrative Contractor (MAC). During recent months there has been conflicting opinions expressed at different levels by different sources.


Condition Code 44

Condition Code 44 is a data element used on the UB-04 and is part of a standard code set administered by the National Uniform Billing Committee, or NUBC. Thus, in theory, the NUBC is the official source for the definition and use of this data element. The NUBC definition is relatively brief:

For use on outpatient claims only, when the physician ordered inpatient services, but upon internal utilization review performed before the claim was originally submitted, the hospital determined that the services did not meet its inpatient criteria.

The NUBC’s definition for this condition code appears to indicate that, if the hospital determines that service rendered via an inpatient admission should have been performed via outpatient observation, the hospital can use Condition Code 44 to so indicate and then file the claim as an outpatient observation service. Note that such a determination must be made before the claim is filed. Also, the physician involved does not have to agree or even be involved in the decision and associated process.

Note: many private third-party payers routinely request that short-stay inpatient admissions be changed to observation in order to reduce the payments to the hospital. Additionally, this often happens after the original claim has been filed.

Medicare has altered the requirements for the use of Condition Code 44 significantly. While CMS has updated §290.2.2 to Chapter 4 of Publication 100-04, the Medicare Claims Processing Manual, the main requirements for using Condition Code 44 are the following:


  • The change in patient status from inpatient to outpatient is to be made prior to discharge or release, while the beneficiary is still a patient of the hospital;
  • The hospital is not to have submitted a claim to Medicare for the inpatient admission;
  • A physician must concur with the utilization review committee’s decision; and
  • The physician’s concurrence with the utilization review committee’s decision must be documented in the patient’s medical record.

An Example

A physician admitted Sarah, an elderly patient, through the Apex Medical Center’s ED as an inpatient because of an electrolytic imbalance. Sarah now is doing quite well 28 hours into her stay. Utilization review has been checking the documentation and has asked to meet with the physician. A conference is held and it is determined that Sarah should have been an outpatient observation patient. The physician writes an order for observation care and Sarah is discharged six hours later.

For billing purposes it appears that observation should be billed as 28 + 6 = 34 hours – that is, 34 units of G0378. This basically takes us back to the beginning of the outpatient service, now changed from inpatient service. Presuming there is an appropriate ED visit level, APCs (Ambulatory Payment Classifications) will pay a composite amount. BUT we now have further guidance from Medicare in the form of Q&A No.9973:

Question: How should the hospital report observation services when the patient’s status is changed from inpatient to outpatient using Condition Code 44? May the hospital report observation services from the beginning of the hospital outpatient encounter?

While the answer is a bit long, here is what CMS has to say:

Answer: The use of Condition Code 44 pertains to the entire patient encounter, the patient’s status, and the hospital bill type submitted. Medicare does not recognize a separate patient status called “observation;” all hospital patients are either inpatients (if they are admitted as inpatients on the order of a physician) or outpatients (registered by the hospital as outpatients). When Condition Code 44 is appropriately used, the hospital reports on the outpatient bill the services that were ordered and provided to the patient for the entire patient encounter. Reporting of individual HCPCS codes on an outpatient claim must be consistent with all applicable instructions and CMS guidance.

However, in accordance with the general Medicare requirements for services furnished to beneficiaries and billed to Medicare, even in Condition Code 44 situations, the hospital cannot report hours of observation services using HCPCS code G0378 (Hospital observation service, per hour) for the time period during the hospital encounter prior to a physician’s order for observation services. Medicare does not permit retroactive orders or the inference of physician orders. Like all hospital outpatient services, observation services must be ordered by a physician and the reporting requirements specific to observation services are discussed in detail in the Medicare Claims Processing Manual (Pub. 100-04), Chapter 4, Section 290.2.2. The clock time begins at the time that observation services are initiated in accordance with a physician’s order.

 While hospitals may not report observation services under HCPCS code G0378 for the time period during the hospital encounter prior to a physician’s order for observation services, in Condition Code 44 situations, as for all other hospital outpatient encounters, hospitals may include charges on the outpatient claim for the costs of all hospital resources utilized in the care of the patient during the entire encounter.

What’s Important?

While a complete discussion of this answer would require us to parse it carefully and look at the individual pieces, there are two points of particular importance.

1.   The hospital can, and apparently should, charge for all outpatient services provided during the time period between the start of the episode of care and the end of the care.

2.   Charges for and reporting of observation with G0378 only can include the time after the physician orders the observation services.

For our little case study, it appears that Apex can charge for six hours of observation service – for which there will be no payment, however, because there is an eight-hour minimum in order to receive payment. Of course, the ED services can be coded and billed as outpatient services.

While there are many possible variations on this case study, let us stop and ask whether the RACs could become involved in this type of situation. The decision to use Condition Code 44 typically occurs at the end of a stay. The new physician order also probably will occur at the end of the stay.  Thus, all of the hours that the patient is in a hospital bed cannot be counted toward observation.  Thus, it is distinctly possible that a hospital may be paid inappropriately for observation services due to incorrect counting of hours.

Note: the guidance that CMS is providing is not really new, nor is it even a change. The concept of being able to report services only after services have been ordered by a qualified physician or practitioner has been around for some time. Thus, this is clarifying guidance, and it can be applied retroactively.

Bottom Line:
Depending on how a hospital codes and bills for observation services using Condition Code 44, there is some possibility of incorrect payments. Whether this truly will become a RAC issue will have to wait the test of time. Hospital compliance personnel should try to determine if this is indeed a problem for their hospital. At the very least, new billing and coding policies and procedures should be developed and implemented.

The second Q&A, No.9974, is simpler but nonetheless disconcerting:

Question: May a hospital report drug administration services, such as therapeutic infusions, hydration services, or intravenous injections, furnished during the time period when observation services are being reported?

The question basically involves the counting of hours for observation services. When diagnostic and therapeutic services are provided during an observation stay, hospitals must consider when to stop counting hours in lieu of services. Obviously, if the patient leaves the observation bed, observation hours should stop. But what if the patient receives services in the observation bed?

Answer: The Medicare Claims Processing Manual (Pub 100-4), Chapter 6, Section 290.2.2 states that “observation” services should not be billed concurrently with diagnostic or therapeutic services for which active monitoring is a part of the procedure (e.g. colonoscopy, chemotherapy).” In situations where such a procedure interrupts observation services and results in two or more distinct periods of observation services, hospitals should record for each period of observation services the beginning and ending times during the hospital outpatient encounter. Hospitals should add the lengths of time for the periods of observation services together to determine the total number of units reported on the claim for the hourly observation services under HCPCS Code G0378 (Hospital observation service, per hour).

The hospital must determine if active monitoring is a part of all or a portion of the time for the particular drug administration services received by the patient. Whether active monitoring is a part of the drug administration service may depend on the type of drug administration service furnished, the specific drug administered, or the needs of the patient. For example, a complex drug infusion titration to achieve a specified therapeutic response that is reported with HCPCS codes for a therapeutic infusion may require constant active monitoring by hospital staff. On the other hand, the routine infusion of an antibiotic, which may be reported with the same HCPCS codes for a therapeutic infusion, may not require significant active monitoring. For concerns about specific clinical situations, hospitals should check with their Medicare contractors for further information.

If the hospital determines that active monitoring is part of a drug administration service furnished to a particular patient and separately reported, then observation services should not be reported with HCPCS G0378 for that portion of the drug administration time when active monitoring is provided.

Active Monitoring

The real questions are what involves active monitoring and then how to keep track of time. Writing a policy for the active monitoring is not that difficult. The basic measure is whether the nurse stays with the patient, and for how long. The real question is this -, when does active monitoring meet the threshold of needing to be counted and subtracted from observation time? Consider a simple case study:

During her observation stay Sarah received a slow IV push. The push was provided for about five minutes. The nurse remained with Sarah for another five minutes to see if there was any adverse reaction.

Here we have service provided with active monitoring, but it was only for a total of 10 minutes. Do we need to have nursing staff document such short time periods? Does someone have to go into the record and count the time intervals? Should there be at least a half-hour threshold?

Bottom Line

This probably will not become a RAC issue. The potential for overpayment is rather minimal. Even if there were intervening services for which observation should not be counted, the impact on the total hours would be minimal unless you get close to the six-hour minimum or the 48-hour maximum. However, as a general coding and billing compliance issue, care should be taken to have policies and procedures in place to address the proper counting of observation hours.

Parts of this article were taken from the Medical Reimbursement Newsletter, Volume 22, Number 2, February 2010, published by Abbey & Abbey Consultants, Inc.

About the Author

Duane Abbey, PhD., CFP

Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is President of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa.

Dr. Abbey earned his graduate degrees at the University of Notre

Dame and Iowa State University.


Contact the Author 


See https://questions.cms.hhs.gov/.

See http://www.nubc.org.

See the NUBC Official UB-04 Data Specifications Manual.

For those of you with a legal bent, you might think about how Medicare, as a third-party payer, can alter the definition of a data element for which the NUBC is apparently the official source for proper use under the HIPAA TSC (Transaction Standard/Standard Code Set) Rule.

See Transmittal 1803, August 28, 2009 to Publication 100-04.

Dr. Abbey uses a fictitious community with various healthcare providers in developing case studies for illustrative and educational purposes.

Note the rather esoteric distinction that CMS makes between charging and reporting.  Charging simply means that a dollar amount is indicated (with or without a code).  Reporting or separately reporting implies that there is a CPT or HCPCS code present along with the charge.

A one-half hour time period must be attained to count the last hour.  While this is a policy decision, see the concept of the half-time unit rule used in other time unit counting

These criteria reflect vast differences from the NUBC’s definition. The patient still must be in the hospital at the time the decision is made to switch from inpatient to outpatient. Additionally, the physician must agree to the change and so indicate in writing. To illustrate how this process sometimes works, let us consider a simple case study from the fictitious Apex Medical Center:


Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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