The Medicare program currently reimburses physicians for services rendered during an observation stay at a hospital. Observations are defined as a period of time in which the patient is not formally admitted to the hospital but still under the care of hospital personnel, typically 24 hours or less.
Under current regulations, hospitals may bill for observation stays by submitting claims with billing codes that have been assigned to them specifically for this purpose. The Centers for Medicare and Medicaid Services (CMS) has also clarified that observation charges should be submitted on separate lines from other types of charges submitted by hospitals so they can be tracked separately and accurately reported as such. Observations are reimbursed differently than traditional admission-based stays because there is no formal discharge diagnosis associated with these stays.
For this reason, CMS provides a separate payment for observation services that is based only on the resources used during the time period of an observation stay – such as room and board costs. In general, Medicare reimburses hospitals at least 60% of their total charges for observations in comparison to traditional admissions where reimbursement rates are closer to 80%.
This lower rate may be attributed primarily due to the fact that there is no formal discharge diagnosis associated with these stays which typically takes place after 24 hours or longer. Furthermore, because hospitals often provide more high-cost care when they admit patients through emergency departments rather than through other channels like walk-ins or physician offices, it’s possible that some providers will take advantage of outlier payments by charging higher
