Last November, the Centers for Medicare & Medicaid Services (CMS) published its 2016 final rule for the Outpatient Prospective Payment System (OPPS). Because observation care is considered an outpatient service, the new rule included important changes to observation billing. Most notably, it retired facility payment observation code APC 8009 and introduced C-APC 8011—the first “C” stands for “comprehensive.”¹ Payment increased from $1,234 to $2,174, which is reflective of the new bundled payment for most facility charges previously paid separately (ie, diagnostic imaging, stress testing, and medication infusions). Updates to the professional evaluation and management codes (CPT) for observation care were minor, as illustrated in Table 1.

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Table 1. 2015 and 2016 Observation Professional Total Relative Value Unit (RVU) Values

This major change to bundled facility payments will provide incentives to hospitals to minimize diagnostics and lengths of stay, which favors protocol-driven care and early discharge, features of most emergency medicine–run observation units. For example, in 2007, Ross and colleagues showed that for ED patients with transient ischemic attack randomized to an ED-run observation unit or an inpatient neurology team, the observation unit followed its protocol 97 percent of the time versus 91 percent for the neurology team, with the former having less than half the hospital length of stay and a greater rate of reaching a defined clinical endpoint.² A 2013 study by Pena and colleagues also found shorter lengths of stay with an ED-run unit versus an open unit run by various services.³ Of note, the new rule does not address long-standing observation-related issues, including lack of coverage for self-administered medications and the vexing requirement for three inpatient nights in the hospital to qualify for a skilled nursing facility benefit.

Table 2 compares payments for an observation stay with a short inpatient admission for a patient with traditional Medicare and no second payer, which is the most straightforward example. In this scenario, an elderly patient presents to the ED with syncope and is deemed at intermediate risk. Assuming the patient’s actual hospital visit spanned exactly two midnights, out-of-pocket costs for the observation stay would be around half of the inpatient costs ($640.65 versus $1,398.21), driven largely by the Medicare Part A deductible, a patient expense for inpatient care that should be strongly considered when comparing the expense of observation care to alternatives. Additionally, even in the scenario where a patient begins hospitalization as an observation patient and transitions to inpatient care (an expected outcome in about 20 percent of cases), the facility charges roll into Part A and the observation facility coinsurance liability disappears.⁴ The only additional costs to the patient would be the self-administered medication costs and professional fee coinsurance during the brief observation stay, which is typically a small fraction of the facility payment.