Medicolegal Issues

Observation and Discharge Codes


1. When should the observation code be used? Do the provider and facility need to use the same codes in order to be reimbursed for observation? What are the restrictions, if any, on what diagnoses may be used to bill for observation?

Observation status is an “outpatient status” even if the patient is located in an inpatient bed. The purpose of observation is to allow the physician time to make a decision about whether the patient should be admitted, and then rapidly move the patient to the most appropriate setting—i.e., the patient should either be admitted as an inpatient or sent home.

Therefore, only the physician who writes the order that places the patient in “observation status” and is responsible for the patient during his or her stay should use the observation codes. Always date and time the “admitting order,” because this information is needed to meet the minimum 8-hours rule if the patient is admitted and discharged on the same calendar date.

If a patient is both admitted and discharged on the same calendar date, the code range of 99234-99236 are used; however, the following criteria must be met:

  1. The patient must be in observation for a minimum of 8 hours.
  2. The billing physician must be present and show active involvement by charting condition updates, orders, etc.
  3. Both the admission and discharge notes are written by the billing physician (or may be billed by 2 physicians within the same group practice).

The specific CPT observation codes (99218-99220 and 99234-99236) do not have to match those used by the facility, because the physician codes are based on the physician E&M criteria (i.e., extent of history, exam, and decision making). The facility’s use of these codes is based on facility-specific criteria that measure the resources used by the facility’s employees and does not relate to the physician’s evaluation.

There are diagnosis/condition restrictions for separate payment to facilities for observation under the Outpatient Prospective Payment System (OPPS) reimbursement program (i.e., payment is based on Ambulatory Patient Classification [APC]). Even though separate payments for observation charges are made only for chest pain, asthma, and congestive heart failure, the facilities still code and report charges for all patients admitted to observation status. Note, however, that there are no such restrictions for the physician professional services billed. Only hospital facilities are subject to the diagnosis restrictions because of APC payment rules.

2. How should a change in status from observation to full admission affect coding (i.e., when this occurs, what should the appropriate coding be for the initial hospital day or for the second hospital day)?

The best way to answer this question is with some scenarios.

Scenario #1:

The patient is admitted to observation status after being evaluated in the ED. The attending physician writes an order “admit to observation status;” writes an admit note, which includes the intent of observation; and writes orders to help determine if the patient is to be admitted or sent home. After test results return, the physician decides to admit the patient on the same calendar date:

Code: Initial Hospital Care code (99221-99223) that incorporates all services (observation and admission note) provided and documented that day.

Scenario #2:

The patient is admitted in the evening (Day 1) to observation status, tests are performed, and results are pending. The following morning (Day 2), based on the results of tests, the physician evaluates the patient and decides to admit (writes admit order). On Day 3 the patient is evaluated and discharged home.


Day 1: Initial Observation Care (99218-99220)

Day 2: Initial Hospital Care (99221-99223)

Day 3: Discharge Management (99238 or 99239)

3. Is it acceptable to bill for a d/c day if the patient is not examined that day, but activities such as d/c planning and dictation occur?

Discharge management codes do require the face-to-face evaluation/examination of the patient. Also included is the time spent on instructions to the patient/family, coordination of care with other providers, preparation of discharge records, prescriptions, referrals and/or certification forms, etc. The dictation of discharge summary is not typically included in this definition, because it is usually considered a hospital requirement as opposed to something needed for the patient’s care.

4. How frequently should discharge code 99239 be used? What elements of the d/c process can/should actually be used toward the “greater than 30 minutes” definition? (e.g., do filling out the d/c paperwork, dictating d/c summary, phone time arranging f/u, etc., count?)

There is not a specific “frequency” for any code, although most payers will compare utilization of codes to “peers” of the same specialty. While this helps them identify outliers, it does not necessarily mean someone is coding incorrectly. It does mean that high utilization by a physician will probably result in some sort of “audit” or request for supporting documentation. For instance, if a physician has a high volume of patients who go to nursing homes requiring a lot of coordination of care, referral forms, etc., it may be expected that the physician may have a higher frequency of 99239 discharge management codes. For patients who are going home with great family support and are relatively healthy, it may not seem as “reasonable and necessary” to have greater than 30 minutes of discharge management, especially if every chart is documented with the same “35 minutes.” Therefore, try to keep track of the time devoted to these services as accurately as you can, and document the actual time and sufficient information to support the use of 99239.

Dr. Pfeiffer can be contacted at

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