Observation & Medical Necessity

Was on a conference call with my CDM Coordinators within my health system and involved in a lively discussion.  If there's no medical necessity for observation, what do you do with charges?  Our departments get productivity based on the charges posted.  We all agreed that the observation charges shouldn't be billed to the insurance but had different opinions on how it should be handled.

1.  A physician orders observation before the start of outpatient surgery and doesn't document any reasons why the patient needs to receive observation services.  The patient goes to the unit. 

2.  A physician likes to have his outpatient surgery patients stay overnight in the hospital. 

Do you post charges and write them off?

Do you post charges and list them in the non-covered column on the claim?

Do you not post charges but use tracking charges so the nursing unit gets the productivity?


  • The first question to ask is- was the service actually provided? There are many permutations. If a patient has an outpatient surgery and spends the night for normal recovery, the normal recovery period including nursing care and rooom and board on the surgical unit is included in the payment. So if the doctor orders Observation, with no justification or need for added care, then you would not bill it at all. The routine recovery covers the nursing so to also bill Obs would be double-billing. Now if they should go home in the afternoon but stay overnight due to poorly controlled pain or nausea, etc. and Obs is ordered then bill the hours since routine recovery ended and this is additional hours. 
    Same with pre-op Obs- is this a patient with cholecytitis who goes to the floor with surgery in several hours where the RN will assess pain, give meds, give fluids? If so, bill the hours but stop when the patient goes to the OR and don't resume Obs unless there is a delayed recovery post-op. But if the doc tells the routine mastectomy patient to come in the night prior to surgery, that's not necessary. 
    But one tenet I follow is to bill every service you provide. If it is not necessary, add the appropriate modifier, often -GZ, for outpatient, and span codes for inpatient or split billing
  • Is this for hospital billing?  We have UR/case management that will review and work to get correct orders from provider prior to discharge on OBS/Surgery combinations.  Like RHirsch said, it all depends on medical necessity and if the services were provided/documented/approved with an acute reason needing observation care.  A majority of the time the OBS is ordered in error, is updated to OP prior to discharge and we bill it as an OP claim.  That is my understanding, though I'm sure it is never this simple.

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