ABA Health eSource
July 2009 Volume 5 Number 11

Changes to the “Status” Quo:
CMS Issues Clarifications Regarding Observation Services and Condition Code 44

By William Chaltraw, Jr., Fishman, Larsen, Goldring and Zeitler, Partner, Fresno, CA, and
Claire Castles, J.D., LL.M., Law Offices of Dennis M. Lynch, Attorney, Visalia, CA

AuthorFor years hospitals and physicians have struggled with properly determining and documenting a patient’s status as either an inpatient admission or an outpatient observation. Although some may consider patient status merely a billing characterization and not a reflection on a patient’s medical condition, failing to properly distinguish between the two in a timely manner can have a significant impact on a provider’s reimbursement. CMS continues to focus on one-day length of stay issues and medical necessity for inpatient admissions. During the period of the Recovery Audit Contractor pilot program, one-day length of stay admissions were a priority in the demonstration states. CMS continues to provide clarification to assist providers in better understanding its expectations regarding such short stay admissions.  

CMS Edits ‘Admission’ and ‘Status’ From Observation Services   Most recently, CMS published Transmittal 1745 providing the July 2009 quarterly update of the Hospital Outpatient Prospective Payment System (“OPPS”). 1 Included in this transmittal are significant revisions to both the Claim Processing Manual and the Benefit Policy Manual regarding the terms “observation status” and “observation services” as well as changes and new instructions related to the use of Condition Code 44. The National Uniform Billing Committee (NUBC) issued Condition Code 44 effective April 1, 2004 for those cases where a physician may order a Medicare beneficiary to be admitted as an inpatient, but upon subsequent review by the hospital’s utilization review committee, it is determined that an inpatient level of care does not meet the hospital’s admission criteria. Condition Code 44 has been generally understood as changing a patient’s status from “inpatient” to “outpatient.” CMS states that the revisions are “editorial” in nature, simply removing references to “admission” and “status” when referencing outpatient observation services. As such, the transmittal identifies revisions to Medicare Claims Processing Manual, chapter 4, section 290 2 and clarification to MLN Matters article SE0622, published March, 2006. 3  

Although the revisions effective July 1, 2009 are intended to clarify issues regarding observation services and Condition Code 44, a careful review of the modifications may leave providers with more questions than answers. What is clear from the Transmittal 1745 is providers must be diligent in application and documentation of both Condition Code 44 and observation services. Significantly, Transmittal 1745 removes references to “admission” and “status” regarding outpatient observation services; however, it continues to reference “status” as it relates to use of Condition Code 44. Additionally, the transmittal provides considerable new provisions of agency interpretation and expectation in Medicare Claims Processing Manual, chapter 1, sections 50.3.1, Background, and 50.3.2, Policy and Billing Instructions for Condition Code 44. 4 Simply, if a physician orders an inpatient admission for a patient and the subsequent review by the hospital’s internal utilization review determines that the services did not meet the criteria for an inpatient admission and the admitting physician agrees, then a change in “status” from inpatient to outpatient may occur. Most importantly, changing a patient’s status from an inpatient admission to a registered outpatient does not mean that the patient was receiving observation services from the time of the inpatient admission order since observation service as clarified in Transmittal 1745 is a separate and independent outpatient service – now clearly distinct from any confusion that such a service was a “payment status.”  

A change in an inpatient’s status under Condition Code 44 requires the following:  

  1. The change in status is made prior to patient’s discharge or release and the beneficiary is still a patient of the hospital;
  2. The hospital has not submitted a claim for inpatient admission;
  3. A physician concurs with the hospital’s utilization review committee’s decision; and,
  4. The physician’s concurrence is documented in the medical record. 5  

Again, when the conditions described above are met and appropriately documented the “entire episode of care” should be billed as outpatient services.  

CMS is now clear that the change in status engendered in Condition Code 44 does not mean that upon status change, an outpatient is receiving observation services. Observation services include a specific set of clinically appropriate outpatient services furnished to patients only after a direct referral or order for observation services. Those providers that may have interpreted outpatient observation services as a payment status equating the revision of status under Condition Code 44 as indicating the provision of observation services should carefully review this transmittal and internal policies and procedures for use of Condition Code 44 and application of outpatient observation services.  

Given the current editorial changes and clarification, claims for observation services as an outpatient service must independently satisfy the requirements of Medicare Claims Processing Manual, chapter 4, section 290 which clearly states that such services are covered only when provided by the order of a physician or other individual appropriately authorized to order outpatient services. 6 Absent a physician assessment of the patient and order for observation services at the time of concurrence with a hospital’s utilization review committee, the change in patient status does not automatically indicate the provision of observation services was ordered for the patient. Observation time begins at the clock time documented in the patient’s medical record, which coincides with the time that observation care is initiated in accordance with the physician’s order. It is unlikely that a general standing order for observation services upon change of status consistent with Condition Code 44 will be recognized as appropriate since Medicare Claims Processing Manual, chapter 4, section 290.2.2 states that “general standing orders for observation services following all outpatient surgery are not recognized.” Such an interpretation is consistent with the stated expectation of CMS that a physician assesses and evaluates the patient for observation care. This means hospitals should take care in reviewing policies regarding use of Condition Code 44 and observation services to ensure that appropriate documentation exists for both and are completed in a timely manner.  

Possible RAC Audits for Providers  

Most importantly, CMS provides clear language regarding its expectations that use of Condition Code 44 should be rare. That said hospitals should be carefully monitoring use and practice of Condition Code 44 as well as ensuring appropriate documentation in the medical record for observation services. CMS expresses concern that hospitals may elect to use the condition code as a solution to address shortages in case management staffing or as an alternative approach instead of providing necessary education to physicians and hospital staff. As the recovery audit contractor program prepares to launch nationally, this is an area that providers may fairly expect to be easily audited as a complex medical record review given the objective documentation requirement and CMS’s concern regarding excessive use. Providers should consider internal audits of previous cases and charts to determine whether current practices, policies and procedures are sufficient to meet the criteria for CMS and other payors, as well as recovery audit contractors. The clarification and editorial revisions in Transmittal 1745 are likely an indicator of the recovery audit recoupment agenda regarding one-day length of stay admissions and Condition Code 44.

1 http://www.cms.hhs.gov/Transmittals/Downloads/R1745CP.pdf


3 http://www.cms.hhs.gov/MLNMattersArticles/downloads/SE0622.pdf
4 http://www.cms.hhs.gov/manuals/downloads/clm104c01.pdf
5 http://www.cms.hhs.gov/transmittals/downloads/R299CP.pdf http://www.cms.hhs.gov/Transmittals/Downloads/R1745CP.pdf
6 http://www.cms.hhs.gov/manuals/downloads/clm104c04.pdf

The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.