Observation codes: When to use initial vs subsequent

Q: We are a private practice that has several physicians who follow their patients in the hospital. There are times that the patient is in observation, and they are called to help decide whether to admit them or not. Should our physicians bill initial and subsequent observation codes for these visits?

A: As with many scenarios in coding, the answer is:  It depends. Unfortunately, the CPT and Medicare guidelines vary when it comes to billing for services provided by those physicians and  non-physician providers (NPPs) who didn’t place the patient in observation status (e.g., ordering physician or NPP.)

Observation care services are specifically for new or established patients who need to be observed in order to distinguish if the patient’s problem(s) will resolve and the patient can be discharged, or if the patient needs to be admitted as an inpatient.

If more than half of the visit time was spent counseling and/or coordinating care for the patient, the code can be billed based on the time instead of the history, exam and medical decision making (MDM) components. As with inpatient care codes, the time at the patient’s bedside or on the floor working for that patient can be counted.

Since observation codes are infrequently billed, we sometimes need a refresher in order to remember all of the nuances involved. As I mentioned earlier, Medicare and the CPT codebook have different instructions as to how non-ordering physicians should bill.

The CPT codebook specifically states:

“For observation encounters by other physicians, see office or other outpatient consultation codes (99241-99245) or subsequent observation care codes (99224-99226) as appropriate.”

Additionally, “For observation care services on other than the initial or discharge date, see subsequent observation services codes (99224-99226).”

Medicare Claims Processing Manual, Chapter 12, Section 30.6.8(A) states: “For example, if an internist orders observation services and asks another physician to additionally evaluate the patient, only the internist may bill the initial and subsequent observation care codes. The other physician who evaluates the patient must bill the new or established office or other outpatient visit codes.”

So the bottom line is that consultations should be billed with outpatient consultation codes (99241-99245) for all insurance payers. However, Medicare requires office codes (99201-99215) while CPT’s instructions are to use subsequent observation care codes (99224-99226).  

Since each payer could adopt CPT or Medicare rules, you should check with each to ensure you are billing correctly. Also,  physicians and NPPs should not be expected to remember these types of billing rules when choosing their CPT codes. So they should be educated to bill these services with one set of codes or the other, depending on a majority of their patient population. If there is an instance where the code needs to be changed, it should be done by your billing staff.

Keep in mind that observation status is considered outpatient, with Place of Service codes:

22  On Campus-Outpatient Hospital:
A portion of a hospital’s main campus which provides diagnostic, therapeutic (both surgical and nonsurgical), and rehabilitation services to sick or injured persons who do not require hospitalization or institutionalization; and

19  Off Campus-Outpatient Hospital:
A portion of an off-campus hospital provider based department which provides diagnostic, therapeutic (both surgical and nonsurgical), and rehabilitation services to sick or injured persons who do not require hospitalization or institutionalization.