Updated on: October 17, 2018

Observing the Rules for Observation after Outpatient Surgery

Original story posted on: March 20, 2013

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***This article written before the advent of the CMS two-midnight rule, and as such, the content may not be applicable in the current climate. Watch this space for an update by Juliet Ugarte-Hopkins, MD.

The rules governing the use of observation for patients undergoing scheduled outpatient procedures are quite different from those that apply to patients coming in from the ED with undiagnosed symptoms or urgent conditions. Placement and billing errors are common, so it is worth reviewing the subject at this time.

Actually, it's quite simple: as a rule of thumb, the only time observation can be used for a patient having a scheduled outpatient surgery or procedure is when there is a postoperative complication that complicates and prolongs routine recovery. But like most things Medicare, it's never quite that simple – so read on.

According to the Medicare Claims Processing Manual (Chapter 4, Section 290.2.2), "hospitals should not report as observation care services that are part of another Part B service, such as postoperative monitoring during a standard recovery period (e.g., 4-6 hours)." While this section mentions "4 to 6 hours" as an example of a standard recovery period, it is important to note that this time frame only is used as an example ("e.g." means for example) and does not set an upper limit on the time permissible for recovery. In other words, it would be inappropriate to place a postoperative patient into recovery just because an arbitrary six-hour time period has elapsed. The Centers for Medicare & Medicaid Services (CMS) explains that a patient having an outpatient procedure may be expected to stay up to 24 hours: "When patients with known diagnoses enter a hospital for a specific minor surgical procedure or other treatment that is expected to keep them in the hospital for only a few hours (less than 24)," the agency has indicated, "they are considered outpatients for coverage purposes regardless of the hour they came to the hospital, whether they used a bed, and whether they remained in the hospital past midnight." (Medicare Benefit Policy Manual, Chapter 1.) In this case, "less than 24 " does define a time limit on an expected outpatient stay, and this clarifies that a patient's stay may be overnight in a hospital bed in outpatient status and still qualify as recovery.

On the other hand, the Florida fiscal intermediary in 2003 explained that "if the physician intends to keep the patient overnight, especially for 24 hours or more of care at an inpatient level of care (prolonged monitoring given co-morbidity, frequent laboratory studies, frequent IV therapy, etc.) then the physician should schedule an inpatient admission. Also, it is important that physicians document the indications for the procedure and the associated co-morbidities since the medical necessity of the procedure as well as the need for the overnight stay can be reviewed by the QIO." (Florida Medicare A Bulletin, third quarter of 2003.)

In the April 7, 2000 Final Outpatient Prospective Payment System (OPPS) Rule (65 FR 18455), in explaining the criteria for selection of procedures for the inpatient-only list, CMS noted that "the inpatient list specifies those services that are only paid when provided in an inpatient setting because of the nature of the procedure, the need for at least 24 hours of postoperative recovery time or monitoring before the patient can be safely discharged, or the underlying physical condition of the patient." Thus, one of the criteria that distinguish inpatient surgery from outpatient surgery is an expected length of stay of up to 24 hours for outpatient procedures and greater than 24 hours for inpatient. This offers additional evidence indicating that there is no need to change patient status for an overnight stay following uncomplicated outpatient surgery when the stay is expected to be less than 24 hours. Notice that in both cases, whether discussing the expected length of stay for a patient having outpatient surgery or one having an inpatient procedure, it's the physician's expectation at the time of admission that determines the proper level of care, not the actual length of stay as viewed in retrospect.

So if the patient can stay overnight in a hospital bed following outpatient tests or surgery without observation, when would observation be appropriate? WPS Medicare (LCD L32222) explained that when a patient has a significant adverse reaction (beyond the usual and expected response) as a result of the test that requires further monitoring, outpatient observation or inpatient hospital services may be reasonable and necessary.

TMF Health Quality Institute, the Texas Medicare QIO, in its Medicare Outpatient Observation Physician Guidelines Q&A answered the question, "Can a same-day surgery patient with no postoperative complications be admitted to observation?" TMF responded "No. There must be medical necessity of observation services documented in the medical record. Observation is not to be used as a substitute for recovery room services." Another question asked, "Can a patient be placed in observation status prior to outpatient surgery?" TMF's answer: "No. The need for observation care should be determined by the patient's condition during the postoperative recovery period, not prior to surgery."

TMF further described other situations in which observation would not be appropriate for surgical patients, such as:

  • Routine stays following late surgery
  • Outpatient therapy/procedures (unless there is documentation that the patient's condition is unstable)
  • Normal postoperative recovery time following surgery
  • Stays for the convenience of the patient, family or doctor
  • Stays prior to an outpatient surgery procedure

TMF even supplied a list of typical postoperative problems that warrant observation:

  • Persistent nausea/vomiting
  • Fluid/electrolyte imbalance
  • Uncontrolled pain
  • Dysrhythmias
  • Excessive/uncontrolled bleeding
  • Psychotic behavior
  • Unstable level of consciousness
  • Deficit in mobility/coordination

(Read the entire TMF publication online at http://hpmp.tmfhqi.net/LinkClick.aspx?fileticket=Tgsvof7uV3c%3D&tabid=522&mid=1248).

So what should a surgeon or proceduralist do if no adverse event has occurred, but the physician wants to extend monitoring because the patient is at risk for complications or may not recover as expected due to age, frailty or comorbidities? The proper approach would be to use overnight recovery in an outpatient bed. There would be no need to order observation because an adverse event did not occur; the physician may order observation only after such an event, and the medical record must indicate clearly the reason that observation was medically necessary. A surgeon concerned about the risk of complications properly would order extended recovery, monitor the patient overnight (as an outpatient in a bed or OPIB) and either release the patient the next day or order observation (or admission) if a complication does occur.


It's ironic, and somewhat illogical, that a patient may be admitted to the hospital as an inpatient prior to surgery for what ordinarily would be an outpatient procedure if the surgeon is concerned about a high risk of complications due to the patient's clinical condition or past history, but the surgeon would not order observation based on a similar risk assessment after the operation or procedure.

Some surgeons are uncomfortable placing a patient in an outpatient bed overnight following surgery without ordering observation. They should be reassured that this is not a quality or safety issue. The same monitoring and treatment may be ordered for a patient in overnight recovery as for a similar patient who has observation services ordered. Some also are concerned about the financial implications, and feel that if they order observation, "at least the hospital gets paid." Unfortunately, this is not the case. Contrary to CMS policy which provides for payment to the hospital for observation services for a patient placed into observation from the ED or from a physician's office, "if a hospital provides a service with status indicator 'T' on the same date of service, or one day earlier than the date of service associated with HCPCS code G0378 (used to denote observation hours), the composite APC 8003 (used to bill the observation stay for patients placed into observation from the ED) would not apply ... HCPCS code G0378 will continue to be assigned status indicator 'N,' signifying that its payment is always packaged." In other words, if a patient has an outpatient procedure (status indicator "T" on CMS Addendum B) the hospital does not receive any additional payment for observation. It is "packaged" into the APC payment for the procedure whether observation is ordered or not for that particular patient. (OPPS Final Rule, Nov. 1, 2007, CMS-1392-FC.)

Notice that the TMF list of situations in which observation would not be appropriate includes "stays prior to an outpatient surgery procedure." It follows that observation cannot be used for a prep of any kind, including, for example, preoperative hydration or cardiac assessment, bowel prep or "renal protection protocol." Nor can observation be based on time spent in recovery. Observation is properly used only if an intra- or post-op procedure complication actually occurs.

If surgery or a procedure interrupts observation and the patient returns to the observation bed for continued evaluation or short-term treatment and there is still a question of whether the patient will have to be admitted, observation would continue – but the time the patient was under "active monitoring" in the operative suite (including routine recovery in PACU) would be carved out for billing purposes.

So far, RAC auditors have not paid a lot of attention to the use of observation. With respect to postoperative observation, since there is no additional payment, there would be no incentive for an auditor paid on a contingency fee basis to bother auditing these records. However, there is reason to be concerned about proper use of observation for surgical patients, since Medicare requires accurate billing even if there is no payment rendered. In its 2012 and 2013 Work Plans, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) outlines a focus on "observation services during outpatient visits."

"We will review Medicare payments for observation services provided by hospital outpatient departments to assess the appropriateness of the services and their effect on Medicare beneficiaries' out-of-pocket expenses for health care services," the precise language reads. So even though there is no significant effect on Medicare beneficiaries' out-of-pocket expenses for post-operative observation, if the OIG investigates a hospital's use of observation due to an excessive number of such claims filed as compared to peers, the hospital could face a compliance challenge if the review reveals inappropriate and/or excessive use of observation.

Considering the limited circumstances under which postoperative observation is appropriate, and the lack of reimbursement for the service, hospitals would be wise to monitor the use of observation in these patients and ensure that when observation is billed there are documented postoperative complications – and that observation is not used for preoperative preparation or for routine postoperative recovery.

About the Author

Steven J. Meyerson, MD, is vice president of the Regulations and Education Group ("the REGs group") for AccretivePAS®. He is Board Certified in Internal Medicine and Geriatrics. Before joining Accretive Physician Advisory Services in 2010 he served as the medical director of care management at Baptist Hospital in Miami, Florida. He has distinguished himself by contributing to the development of innovative service lines and managing education on Medicare regulatory compliance for AccretivePAS®.

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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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