Knowledge Base Article

If you are involved at all with issues relating to the Hospital Outpatient Prospective Payment Rule (OPPS), you likely already know that payment for observation services changed from a composite payment to a comprehensive payment for 2016. But what does this really mean for hospitals?   Whether you are paid more or less than last year for a particular claim depends on the number and types of services being performed. As Medicare intends when creating payment bundles, there are “winners” and “losers” when looking at individual claims – that is, some claims will receive higher reimbursement and some lesser than the previous year.

That said, I still thought it would be interesting to look at some individual observation claims and the differences in Medicare payment amounts from 2015 to 2016. First, a review of the rules for observation services:

The purpose of observation services has not changed in many years. As stated in the Medicare Benefits Policy Manual, Chapter 2, section 60.1 – “Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.” In simpler language – the patient is too sick to be sent home and not sick enough to expect a two-midnight hospital stay (inpatient admission), so they are kept in a hospital bed for treatment and tests to determine if they need to be admitted or may safely be sent home. Under the two-midnight rule, patients receiving necessary hospital care that will pass a second midnight should be admitted as inpatients. A physician’s order is required for a patient to receive observation services.

Observation services are billed per hour with HCPCS code G0378. In order to receive separate payment for observation services, the following criteria must be met:

• The patient must receive 8 or more hours of observation services,
• Observation hours must be billed on the day of or the day after certain visit codes:
• An ED visit, type A or type B (CPT codes 99281-99285 or HCPCS codes G0380-G0384) – this requirement was changed for 2016 to include all ED visit levels; previously only high level ED visits qualified for observation payment.
• Critical care services (CPT 99291)
• A clinic visit (HCPCS code G0463)
• A direct referral to observation (HCPCS code G0379) on the same day as observation hours
• There must be no other services on the claim that have an OPPS status indicator (SI) of “J1” (services paid under comprehensive APCs).
• There must be no other services on the claim that have an OPPS status indicator (SI) of “T” (surgical services) – another change from previous years where observation was not paid if there was a T status procedure on the day of or the day before observation hours. For 2016 the observation payment will not be made if there is a T status procedure on any day on the claim.

As a Comprehensive APC, observation now has a status indicator of “J2” and the Medicare unadjusted comprehensive observation payment amount is $2,174.14. Since it is a comprehensive APC, the payment for all adjunctive services is bundled into the observation payment with only a few exceptions. This means for a claim that contains observation services that meets the above criteria, your hospital will receive one payment of approximately $2,174 for the entire claim. Other services on the claim will not be paid separately. As stated above, this is the Medicare national unadjusted payment rate; most hospitals will receive less based on their wage index and a portion of the adjusted payment (around $430) is the patient’s co-pay. Let’s look at some examples.

These are just some general examples about observation payments. These examples do not include discussion of services that were packaged in 2015, such as labs and routine, lower-cost ancillary services since this has not changed in 2016. All references to payment are based on the Medicare unadjusted fee schedules for 2015 and 2016.

Example 1: A level 4 ED visit with an ensuing 17 hours of observation services. Patient received a CTA of the lower extremity and two IV push injections. Total Medicare unadjusted payment for 2015 equals " $1657. 2016 Comprehensive Observation payment " $2,174. Increase for 2016 of $517.

Example 2: A level 5 ED visit with an ensuing 35 hours of observation services. Patient received two CTs (with contrast), a chest x-ray, a vaccine injection, an EEG, an IV infusion and an IV push. Total Medicare unadjusted payment for 2015 equals " $2,044. 2016 Comprehensive Observation payment " $2,174. Increase for 2016 of $130.

Example 3: A level 3 ED visit with an ensuing 10 hours of observation services. Patient received a CTA of the heart, a chest x-ray, and an hour of hydration. Remember that in 2015 a Level 3 ED visit did not qualify for an observation composite payment. Total Medicare unadjusted payment for 2015 equals " $582. 2016 Comprehensive Observation payment " $2,174. Increase for 2016 of $1592.

Example 4: A level 5 ED visit with an ensuing 18 hours of observation services. Patient received a CTA of the chest, a chest x-ray, an IV push, an hour of hydration, a myocardial SPECT study, and an Echo. Total Medicare unadjusted payment for 2015 equals " $3,280. 2016 Comprehensive Observation payment " $2,174. Decrease for 2016 of $1106.

Example 5: A level 5 ED visit with an ensuing 26 hours of observation services. Patient received several MRAs and MRIs without contrast, three hours of hydration, an Echo, a Duplex scan of extracranial arteries, and a CNS visual evoked potential. Total Medicare unadjusted payment for 2015 equals " $2,787. 2016 Comprehensive Observation payment " $2,174. Decrease for 2016 of $613.

So what is a hospital to make of this and are there actions that need to be taken? First, hospitals simply need to be aware of this change in payment structure. The only actions hospitals can take concerning comprehensive observation payments, increased packaging in general, the overall shift to prospective payment systems, and the transition to value-based payments instead of fee-for-service is to operate more effectively and efficiently. Focus on the best outcomes for the least amount of cost. Control utilization of services – do the necessary things that affect patient outcomes, but don’t overdo testing or treatments that are not necessary. Make sure you are treating and testing the patient in the appropriate setting – don’t perform tests that could and should be provided as outpatient services on an observation patient or an inpatient. The healthcare world is changing rapidly and only those providers who rise to the challenge of better outcomes in a cost-effective manner will survive. There will be winners and losers…