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s-meyersonThe proper use of observation continues to challenge hospitals. Providers have difficulty determining precisely when to start it, and it can be just as challenging to know when to end it.

Nearly all hospitals use either InterQual or Milliman screening criteria (or both, in some cases) to identify those acutely ill patients who require inpatient admission. Although RACs and other auditors have been known to challenge the necessity for inpatient care even when those patients meet criteria, there is generally little controversy about admitting patients who satisfy admission screening requirements. For those patients who don’t, some will have relatively minor or self-limited problems and/or enough diagnostic uncertainty that outpatient observation services are clearly appropriate.

When Observation Ends

While a great deal of attention has been given to the admission decision and the distinction between inpatient and observation status, little has been written about when to end observation for those patients who require a longer hospital stay than is allowable under Medicare’s observation rules.

To address the question of when observation should end, it makes sense to begin with Medicare’s definition of “observation.” According to Chapter 6 of the Medicare Benefit Policy Manual, “observation is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment and reassessment, before a decision can be made regarding whether a patient will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”

This definition is troubling because it is unclear where and when this “well-defined set of specific, clinically appropriate services” ever was defined. In fact, there is no such set of services specified in the Medicare manuals or regulations, so this statement shall remain an enigma. The second part of the definition, however, makes it clear that the purpose of observation is to allow physicians additional time beyond when emergency services are rendered to continue a diagnostic workup or to attempt to resolve a minor or self-limiting clinical problem with short-term treatment. The implication is that, if this short-term treatment is ineffective or the clinical evaluation demonstrates that admission is required, the patient can and should be admitted as an inpatient. The decision the treating physician must make after a period of observation is this: Do I have to admit this patient, or is the patient able to be discharged from the hospital (stable)? Medicare offers no third choice.

The Medicare Benefit Policy Manual, Section 70.4.A, goes on to explain that “observation services are those services furnished by a hospital on the hospital’s premises, including use of a bed and periodic monitoring by a hospital’s nursing or other staff,which are reasonable and necessary to evaluate an outpatient’s condition or determine the need for a possible admission to the hospital as an inpatient.”

Once again, we are told that observation is to be used to evaluate patients who don’t require admission but need “periodic monitoring” that will allow for the evaluation of the patient’s condition or determination of the need for admission. (It isn’t clear why the authors chose to use the word “or,” since the purpose of the evaluation is to determine the need for admission. It would seem that “and” would better explain this goal.)

In the Federal Register (Nov. 30, 2001,, p. 5988), CMS once stated that “observation is an active treatment to determine if a patient’s condition is going to require that he or she be admitted as an inpatient, or if it resolves itself so that the patient may be discharged.” So again, there is a choice to be made: admit as an inpatient or discharge because the condition has “resolved itself.”

Conceptually, the period of observation may be thought of as an extension of the ED visit since, as in ED, the patient remains in outpatient status and is undergoing a workup to determine the need for admission. In fact, in many hospitals the ED physician maintains responsibility for the management of patients placed in observation. Dedicated observation units often are in or adjacent to the ED itself.

How Long in Observation?

So now that we have determined that observation is the proper status for certain patients (keeping in mind that observation is not a “status” at all, but a set of “nursing and other services” provided to appropriately chosen outpatients), the question arises: How long can a patient be kept in observation, and under what circumstances can the patient be admitted? Clearly, if the patient’s condition deteriorates or the workup reveals a serious clinical problem that requires an inpatient level of care, the patient should be admitted. In that case a decision has been made that the patient will not “be able to be discharged from the hospital” without an inpatient stay. However, what of the patient placed in observation who does not deteriorate or have a conclusive diagnostic workup?


Medicare gives uncharacteristically clear guidance on how long a patient can remain in an outpatient bed receiving observation services while undergoing an evaluation of the need for admission. In 1996, in response to hospitals’ overutilization of prolonged observation stays as a means of avoiding the limitations of the newly introduced DRG payment system, the Medicare Health Care Financing Administration (which subsequently became known as the Centers for Medicare & Medicaid Services, or CMS) stated in the Medicare Hospital Manual, Publication 10, that “due to evidence of abuse, such as beneficiaries being held in observation for days or weeks, observation services will be limited to a maximum of forty-eight (48) hours … (and) observing a patient for up to 24 hours should be adequate in most cases.” This policy was repeated and updated in the Medicare Hospital Manual (Chapter 6, Section 20.6.B, revised Dec. 29, 2011): “If a patient is retained on observation status for 48 hours without being admitted as an inpatient, further observation services will be denied as not reasonable and necessary for the diagnosis or treatment of illness or injury.”

So to recap, observation services may be ordered to allow a period of time to evaluate a patient who meets the standard for inpatient admission if there is a question about whether inpatient care is required. This period should last no more than 48 hours.

Is this 48-hour limit set in stone? Well, no; even though Medicare has said that observation beyond 48 hours is not “reasonable and necessary,” it does allow hospitals to bill for more than 48 hours of observation (although “a hospital that believes exceptional circumstances in a particular case justify approval of additional time in outpatient observation status may request an exception to the denial of services from their fiscal intermediary.”)

The statute goes on to state that “HCFA expects such cases to be rare, and is currently unable to envision any scenario in which a hospital’s retaining a patient in outpatient observation status for more than 48 hours without admitting him or her as an inpatient would be appropriate. However, because unforeseeable circumstances could arise, HCFA is providing for the possibility of exceptions.  A hospital that believes exceptional circumstances in a particular case justify approval of additional time in outpatient observation status may request an exception to the denial of further observation services at the time of billing.”

Considering all the qualifications in this paragraph and the statement that the HCFA (CMS) can’t even envision when this might be necessary indicates how unlikely it is that a period of observation beyond 48 hours would be deemed medically necessary.

It is not uncommon for patients to remain in observation for 48 hours and neither deteriorate, receive a definitive diagnosis requiring admission, nor become stable for discharge. It makes no sense to apply admission screening criteria at this point; if the patient didn’t meet InterQual or Milliman criteria at the onset, barring deterioration or development of a new problem, he or she is not likely to meet screening criteria after one to two days of outpatient hospital care. Yet the regulations state that the purpose of observation is to determine whether the patient can be discharged or requires admission, and the hospital (actually, the physician) has a maximum of 48 hours to make this determination. At this point, the treating physician, ideally with the support of a case manager and a physician advisor trained in Medicare regulations, must determine whether the patient has “failed observation” – meaning that the outpatient evaluation has not been definitive, but the patient has not improved sufficiently to be released. If the inability to discharge safely is due to the patient’s clinical condition (not due to hospital or physician delays), and a physician’s risk assessment determines that the severity of illness and need for continued hospital care makes it impossible or unsafe to complete the outpatient treatment and testing in a home environment, the physician should document the medical necessity clearly and admit.

Possible Approach

Following this approach will reduce the number of “extended observation” stays and help ensure compliance with the Medicare guidelines cited above. It may cause some discomfort to case managers and physicians accustomed to applying admission screening criteria appropriate for new admissions, but once a patient has been in an observation bed for 48 hours and is still “too sick to go home,” extending the observation stay is both non-productive and inappropriate. Under such a scenario, the physician has used the observation period to determine that the patient requires inpatient hospital care. As always, this is a case-by-case decision based on the patient’s clinical condition and the documented risk assessment.

Will the RACs and other auditors accept this argument? It remains to be seen. But after review of the various definitions and restrictions cited in this article, admission from observation often would seem to be more appropriate than extending the observation period beyond 48 hours – something Medicare has told us is very rarely reasonable and necessary.

About the Author

Steven J. Meyerson, MD, is Vice President of Regulations and Education for Accretive PAS®. He is Board Certified in Internal Medicine and Geriatrics. He has recently been the medical director of care management and a compliance leader of a large multi hospital system in Florida. He has distinguished himself by creating innovative service lines and managing education for Accretive PAS®.

Contact the Author


To comment on this article please go to editor@racmonitor.com


Steven J. Meyerson, MD, CHCQM-PHYADV

Steven Meyerson, MD, CHCQM-PHYADV, is the founder of Steven Meyerson Consulting. Dr. Meyerson is a nationally recognized expert and consultant in the physician advisor role, case management, and hospital Medicare compliance. He is board certified in internal medicine and geriatrics and serves on the board of the American College of Physician Advisors (ACPA). He edits and writes for the ACPA online blog.

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