Observation vs. Inpatient: Choosing the Right Facility Status
A 67-year-old man with COPD presents to the hospital emergency department at 10 p.m. with worsening shortness of breath. He receives nebulizers and IV steroids in the ED and is improving. The admitting physician writes an order at 1 a.m. for 'admit to observation' and the patient is placed in an observation bed. He is monitored overnight and discharged the next afternoon, about 30 hours after the observation order. The hospital's utilization review nurse questions whether the stay should have been inpatient. The facility coder must assign the facility service for the encounter.
1. How should the facility code this encounter, and what documentation element controls the decision?
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The controlling element is the physician's written order for observation status, which is documented at 1 a.m. The facility reports an observation service for the encounter rather than an inpatient admission. The observation order - not the patient's location or the length of stay alone - establishes the status. Because the stay is under 48 hours and the patient improved with ED treatment, observation is clinically consistent with the order. The coder assigns the observation facility code set (including the observation E/M and any separately reportable services) rather than an inpatient DRG.
2. What if utilization review later determines inpatient criteria were met? How does that change the facility coding and the patient's financial liability?
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If the hospital's UR process concludes inpatient criteria were met, the hospital may change the status to inpatient (often retroactively through its UR/compliance process), and the facility would then code an inpatient admission with a DRG. The critical distinction is who bears the cost: under observation, the patient is responsible for outpatient cost-sharing (including potentially a Part B coinsurance and, for some payers, observation copays), whereas inpatient status shifts cost-sharing to the Part A deductible structure. The coder should not unilaterally flip the status; the change must come through the documented UR determination, and the coding must follow the final documented status.