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Observation is a service, not a status.

As we have all seen in recent events on television, choice of words matters.

That’s particularly true in the utilization review world. And one word that matters an awful lot is “observation.” I am sure you have all heard this a million times before, but it bears repeating: Observation is a service, not a status.

Observation is exactly what it sounds like: it is the physical act of the patient’s condition being observed with all our senses, and increasingly with electronic means, while the patient undergoes testing with various modalities, as indicated. Payment for observation services also includes the cost of the facilities needed to provide that service, also known as room and board. Most observation services are provided by nurses under the supervision of a physician or other non-physician practitioner.

The most common use of observation is for the patient who presents to the emergency department (ED) and requires a period of monitoring after an ED evaluation and period of treatment to determine if they have a life-threatening problem that requires further hospital care, or if they can be safely discharged.

That patient will usually be moved from the ED to a bed in an observation unit (or any other location in the hospital) to receive observation services. (And before anyone tries to correct me, observation services can also be provided in the ED.) Observation will continue until the patient is determined to require inpatient admission or is deemed safe to be discharged.

Most of us are guilty of misusing the word “observation” to represent a status rather than a service. We talk about the patient with chest pain who gets placed in observation. In fact, many electronic health record (EHR) systems have as an option for a status designated as “place in observation.” That, of course, means that the patient is in outpatient status and will receive observation services. If you read publications from Medicare and their many contractors, you can find the same error. Of course, just because the authorities do it does not make it right, but getting every doctor to write “place in outpatient status with observation services” and getting every electronic health record (EHR) changed will never happen, nor would it be worth the time or effort. So for now, whenever you see “observation,” think “outpatient with observation services.”

On the other hand, what we all should stop saying is “admit to observation.” “Admit” and “observation” should never be used in the same sentence unless you are giving a physician the option between admitting a patient and observing the patient. Those words do matter, and their meanings are so different that we must keep them separate.

Observation is also a word that the finance people at hospitals generally don’t like hearing. Observation generally pays less than inpatient admission (or maybe it doesn’t, but we can discuss that in the future), and for some reason that I cannot comprehend, patients receiving observation do not count toward nurse productivity measurements (whatever those are). I will not address the benchmark observation rate besides saying once again that there is no such thing, and don’t let any so-called expert tell you there is. I will also not discuss how observation hours are counted, nor how to bill non-medically necessary observation provided to a patient without necessity for hospital care, since today’s topic is words and not numbers.

But let me remind you that observation is a service that requires an order. Like many things in medical billing, if there is no order for observation, the service should not be billed. Likewise, an order for observation (or any service) cannot be retroactive. One also cannot bill for observation if it is ordered and then the service is not provided.

And that leads me to the incident that actually inspired this article. A physician advisor recently inquired about the proper status for a patient having an elective shoulder replacement. The patient was insured by a Blue Cross plan and had no comorbid conditions. The surgeon had pre-certified the surgery, but status was not addressed. Since shoulder replacement surgery is on the Medicare inpatient-only list and all prior shoulder replacements on Blue Cross patients at the hospital were performed as inpatient, the hospital obtained an inpatient admission order and submitted an inpatient claim.

Blue Cross denied the claim. As many of you know, the Medicare inpatient-only list does not apply to commercially insured patients. In fact, many might be shocked to learn that Humana allows its Medicare Advantage enrollees to have shoulder replacement surgery at ambulatory surgery centers.

But then things went off the rails. The medical director indicated that the hospital could bill the surgery “as observation.” Blue Cross sent a letter to the hospital and the surgeon stating that “the medical director has reviewed the medical information provided regarding this case. Based on the information provided, the services referenced above have been determined to be medically appropriate for observation and will be reimbursed accordingly. The hospital admission has been identified as a total admission denial because it is expected that a total shoulder arthroplasty can be performed, and the patient can be evaluated, treated, and stabilized within the observation time frame. Therefore, the request for an acute inpatient admission (at a future date) will not be reimbursed as requested.”

What? The patient underwent surgery, the post-operative course was uneventful, and the patient was discharged. How could the hospital possibly bill observation when there was no order for observation, observation was not provided, and there was no indication for observation?

I have discussed in the past the medical patient who is inappropriately admitted as inpatient and then on post-discharge review, the insurer instructs the hospital to bill for observation. Although the insurer is suggesting billing for a service that was not ordered, at least the patient would have qualified for observation services if the right status was chosen at the outset. Furthermore, the nurse did monitor the patient throughout the hospital stay, and that service is not included as part of any other billable service.

Allowing billing for observation without an order under the direction of the payer is, in my mind, allowable, even though billing for a service without an order is not generally a good practice.

But surgery is different. Payment for most outpatient surgery includes the pre-surgical services on the day of surgery, the surgery itself, and the routine recovery period. That routine recovery period includes all the monitoring that is deemed to be needed by the surgeon if the surgery goes as planned, the patent recovers as expected, and the patient is discharged at the appropriate time. If a complication develops or the patient’s recovery is delayed, then ordering observation (or inpatient admission) would be appropriate.

What that Blue Cross medical director is telling the hospital and the surgeon is that the hospital can bill for the surgery, which includes payment for room and board and nursing monitoring in the post-operative period, and can also separately bill for “observation,” which of course is room and board and nursing monitoring in the postoperative period. Now, I doubt there is a finance person out there that would not like to be paid double for room and board, and the nurse to monitor the patient. But is that what the medical director really means, and what Blue Cross really intends to pay? I doubt it.

I may have singled out Blue Cross in this article, but their medical directors are not the only ones who have made this mistake. And every time they do, their credibility is tarnished.

Words matter. It is past time for Blue Cross and all payors to properly educate their staff on the terminology they use every day.


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Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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