Q&A: Observation charges without medical necessity

Wednesday, May 15, 2019

Q: I was on a conference call with the CDM coordinators within my health system and we got involved in a lively discussion. If there's no medical necessity for observation, what do you do with charges? Our departments get productivity based on the charges posted. We all agreed that the observation charges shouldn't be billed to the insurance but had different opinions on how it should be handled.


  1. A physician orders observation before the start of outpatient surgery and doesn't document any reasons why the patient needs to receive observation services. The patient goes to the unit.
  2. A physician likes to have his outpatient surgery patients stay overnight in the hospital.

Do you post charges and write them off? Do you post charges and list them in the non-covered column on the claim? Do you not post charges but use tracking charges so the nursing unit gets the productivity?

A: The first question to ask is was the service actually provided? There are many permutations. If a patient has an outpatient surgery and spends the night for normal recovery, the normal recovery period including nursing care and room and board on the surgical unit is included in the payment. So, if the doctor orders observation, with no justification or need for added care, then you would not bill it at all. The routine recovery covers the nursing, so to also bill observation would be double billing. Now, if they should go home in the afternoon but stay overnight due to poorly controlled pain or nausea, etc., and observation is ordered, then bill the hours since routine recovery ended and these are additional hours.

The same goes for pre-op observation. Is this a patient with cholecystitis who goes to the floor with surgery in several hours where the RN will assess pain, give meds, give fluids? If so, bill the hours but stop when the patient goes to the OR, and don't resume observation unless there is a delayed recovery post-op. But if the doctor tells the routine mastectomy patient to come in the night prior to surgery, that's not necessary.

But one tenet I follow is to bill every service you provide. If it is not necessary, add the appropriate modifier, often –GZ, for outpatient, and span codes for inpatient or split billing.

Editor's note: This question can be found in the Billing and Claims category on the NAHRI Forums where you can find answers to questions on a variety of topics from billing and claims to compliance to reimbursement. Question answered by NAHRI Advisory Board member Ron Hirsh, MD, FACP, CHCQM.