Identifying Observation Stays in the Medicare Fee-For-Service Claims Data

Purpose

Medicare-paid observation stays may be found in the Medicare Outpatient, Inpatient, or MedPAR files. This article describes how to identify observation stays that appear in each as defined by CMS billing guidance.

Current Version Date:
11/19/2020

Observation stays are used in hospitals for the treatment or monitoring of a patient while a decision is being made to admit the patient for further treatment or to discharge the patient from the hospital. Observation stays typically span less than 24 hours although may extend up to 48 hours. Observation stays can lead to an inpatient admission or a discharge to home.  The claims and location of information will vary depending on the outcome of the stay.

Observation stays NOT resulting in inpatient admission

Medicare-paid observation stays that do not result in an inpatient admission will be found in the Medicare Outpatient file.

Resource: CMS IOM Publication 100-04, Claims Processing Manual, Chapter 4, Section 290

Observation stays resulting in inpatient admission

Most charges for observation stays that result in an inpatient admission within 3 days of the observation period will be billed on the inpatient claim.  Researchers may observe these stays using the Inpatient file or the MedPAR file. (Related document: Inpatient vs MedPAR)

Two exceptions are described in the CMS Medicare Claims Processing Manual, section 40.3.B. These include critical access hospitals (CAHs) and hospitals not subject to the Inpatient Prospective Payment System (IPPS). If the hospital is not subject to IPPS, observation stay charges are only rolled into the inpatient charges if the observation occurred within one day of admission. In these cases, observation stays are not rolled into inpatient charges and will instead appear in the Outpatient file. To fully understand whether an observation stay in the outpatient file resulted in an inpatient admission, the Inpatient file must also be used.

Resource: CMS IOM Publication 100-04, Claims Processing Manual, Chapter 3, Section 40.3

Inpatient file

Observation stays that resulted in admission and are included in the inpatient claim are identified using revenue center code 0762 in the inpatient revenue center file.

MedPAR file

Individual revenue centers are not included in the MedPAR data. In 2011 the “MedPAR Observation Switch” was added to the MedPAR making it possible to identify observation care (billed with revenue center 0762) received immediately prior to an admission. Prior to 2011, observation revenue centers were grouped with many other codes in the "MedPAR Other Service Charge Amount" (OTHRAMT).  The Inpatient file is the only method to identify observation stays that were rolled into an inpatient admission prior to 2011.

The MedPAR and Inpatient files both allow the identification of these observation stays from 2011 onward.

Outpatient file

Medicare-paid observation stays that do not result in an inpatient admission will be found in the Medicare Outpatient revenue center file using revenue center code 0762.

Calculating observation time

Observation time is reported by hospitals in hours. Using the Inpatient or Outpatient file, hours spent in observation can be found in the Revenue Center Unit Count for the revenue center code 0762. Observation time cannot be determined from the MedPAR.

Resource: CMS IOM Publication 100-04, Claims Processing Manual, Chapter 4, Section 290

Analysis

In 2017, 11% of ED claims found in the 5% Outpatient file included an observation component (96,000 visits).  That same year, 17.6% of claims in the inpatient file had an outpatient observation component (100,000 visits). This illustrates the importance of using both Inpatient and Outpatient files if one wishes to identify all claims with an observation component (see Table 1 below).

Claims with an observation component
Inpatient claims 100,000 47% of observation stays
Outpatient claims 115,000 53% of observation stays
Total 215,000
Table 1. Observation stays in the 5% Inpatient and Outpatient files in 2017, as a proportion of total observation stays.

In summary, to find observation stays:

  • Requires understanding of Medicare billing rules
  • A full accounting of all observation stays will require both the Inpatient and Outpatient files using revenue center codes.
    • Outpatient files:  Revenue Center Code 0762
    • Inpatient files:  Revenue Center Code 0762
    • Inpatient MedPAR (2011 or later): MedPAR Observation Switch > $0
  • Time in observation can be determined from hours reported in the Revenue Center Unit Count next to the Revenue Center Code 0762 in the Inpatient or Outpatient file.