Observation Services Form

Page 1 of 4 Observation Services Policy Last Reviewed / Revised: 5/22/2025 (date to be updated, as appropriate) ALOHACARE Policy Number: CL-09

Policy Name: Observation Services

Line of Business: MA, Quest Integration (Medicaid)

Original Effective Date: 07/23/2025

Review/Revision Dates:

Attachment(s): No

I. PURPOSE
The purpose of this policy is to outline the criteria and limitations for coverage of observation services, ensuring appropriate use of healthcare resources while supporting timely, cost-effective care for members and clear guidance for providers.

II. DESCRIPTION
Observation services are clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment prior to making a determination on whether patients will require further treatment as hospital inpatients or if they can be discharged from the hospital. Observation services are appropriate for patients who require a significant period of treatment or monitoring before a decision can be made regarding their admission or discharge.
In most cases, the decision either to discharge a patient from the hospital following resolution of the reason for the observation service or to admit the patient as an inpatient can be made within 48 hours, often within 24 hours. On occasion, it may be reasonable and necessary for outpatient services to span more than 48 hours.

III. POLICY CRITERIA

A. Observation services are covered (subject to Limitations and Administrative Guidelines) when all the following are met:

Page 2 of 4 Observation Services Policy Last Reviewed / Revised: 5/22/2025 (date to be updated, as appropriate)

1. The patient's status meets nationally recognized review criteria for observation services.
2. Observation services are clinically appropriate.

3. There is a clear event or decision point that marks the beginning of the observation periods, such as observation services are billed in association with other outpatient services (Emergency Department evaluation or Ambulatory Surgery Center procedure).

   IV. LIMITATIONS

   A. Observation services are not covered for any of the following reasons:

4. Retaining a patient for socioeconomic factors (e.g., lack of personal transportation, inability to perform activities of daily living, or homeless status).
5. Retaining a patient for physician, facility or member convenience (e.g., when there is a schedule conflict for the physician or the patient is scheduled for inpatient surgery the next day but does not have a medical reason to be inpatient).
6. Custodial care.
7. Routine recovery room services, which generally takes less than 12 hours.
8. Routine preparation before a scheduled outpatient diagnostic test that is invasive in nature and the immediate recovery period following the test.
9. Stays resulting from delays in obtaining diagnostic services (e.g., lab, x-rays).
10. Stays exceeding 72 hours. B. Brief observation stays following emergency department (ED) evaluation are not covered if those services are rendered within the emergency visit time frame (generally 4 hours after the evaluation) and the need for an inpatient admission can be determined within this specific period.

11. Observation services billed with revenue codes 0762, 0720 and/or 0710 will be reimbursed at only one room rate per confinement (e.g. if revenue code 0720 is billed with 0762, then only the revenue code 0720 room rate will be paid). Note: the room rate eligible will not be subject to the lesser of rate or billed charges. C. Per Medicaid guidelines, the Observation room is not paid separately for QUEST Age, Blind, or Disabled (ABD) members. Only the ancillary observation lines will be reimbursed at the appropriate Medicaid fee.

    V. ADMINISTRATIVE GUIDELINES

    A. Hospitals may bill observation services for patients who are direct admissions. A direct admission refers to an event in which a physician refers a patient to the hospital, bypassing the emergency department.

Page 3 of 4 Observation Services Policy Last Reviewed / Revised: 5/22/2025 (date to be updated, as appropriate) B. If a patient's initial designation of observation service is subsequently changed to inpatient and documentation meets nationally recognized review criteria for the admission, the inpatient reimbursement methodology will apply. Payment for observation services is included in the inpatient reimbursement. C. If AlohaCare determines on concurrent or retrospective review that observation services are appropriate based on nationally recognized review criteria for a patient without ED or ASC services, payment for observation services will be allowed. D. If a patient, who is admitted to acute inpatient status, is found to meet both inpatient and observation level of care criteria, then observation level of care is covered, provided that an AlohaCare medical director determines that it is the most clinically appropriate level of care for the services rendered. E. For Medicare Advantage members, facilities must also follow Medicare reimbursement and policy guidelines. F. For QUEST ABD members, the observation room line revenue codes 0762, 0720, and 0710 will not be reimbursed separately. G. AlohaCare may request medical records for the determination of medical appropriateness. H. Observation stays between 48-72 hours will be pended and subject to medical necessity review.

VI. IMPORTANT REMINDER The purpose of this policy is to provide a guide to coverage. This policy is not intended to dictate to providers how to practice medicine. Nothing in this policy is intended to discourage or prohibit providing other medical advice or treatment deemed appropriate by the treating physician. Benefit determinations are subject to applicable member contract language. To the extent there are any conflicts between these guidelines and the contract language, the contract language will control. This policy has been developed through consideration of the medical necessity criteria under Hawaii’s Patients’ Bill of Rights and Responsibilities Act (Hawaii Revised Statutes §432E- 1.4) or for QUEST members under Hawaii Administrative Rules (HAR 1700.1-42), generally accepted standards of medical practice and review of medical literature and government approval status. AlohaCare has determined that services not covered under this policy will not be medically necessary under Hawaii law in most cases. If a treating physician disagrees with AlohaCare’s determination as to medical necessity in a given case, the physician may request that AlohaCare reconsider the application of the medical necessity criteria to the case at issue in light of any supporting documentation.

Page 4 of 4 Observation Services Policy Last Reviewed / Revised: 5/22/2025 (date to be updated, as appropriate) VII. REFERENCES AND RESOURCE DOCUMENTS A. Administrative Consultant Service, Inc. Medicare Observation Service Reference. Volume 1, Issue XIII, September 1, 2009.
B. American Medical Association. Current Procedural Terminology (CPT) 2008. Pages 10- 11 3. Department of Health and Human Services, Center for Medicare & Medicaid Services. Federal Register, Part II. Volume 78, No. 160. C. Department of Health & Human Services and Centers for Medicare & Medicaid Services (CMS). Medicare Claims Processing Manual. Section 290, Chapter 4 – Part B Hospital. January 25, 2024. D. Department of Health & Human Services and Centers for Medicare & Medicaid Services (CMS). Medicare Benefit Policy Manual. Section 20.6, Chapter 6 – Hospital Services Covered Under Part B. December 21, 2023.