Observation Physician Coding FAQ

• Yes, observation services use the E/M Guidelines. Of note, unlike emergency medicine, observation codes are selected based on either Medical Decision Making (MDM) or the physician’s total time. Emergency Medicine E/M codes utilize MDM only.
• As with the other categories of E/M codes, observation services will not use history and physical exam as elements for code selection.
• See the 2023 E/M DG FAQ for an in-depth explanation of the MDM guidelines and refer to FAQ #20 below for details on utilizing Time for E/M coding.

• The inpatient E/M codes were revised in 2023 to include observation services. The new code set is entitled “Hospital Inpatient and Observation Care Services”.
• Hospital Inpatient and Observation Care Services E/M codes include:
  • Initial Hospital Inpatient or Observation Care - 99221-99223
  • Subsequent Hospital Inpatient or Observation Care - 99231-99233
  • Discharge from Hospital Inpatient or Observation Care - 99238-99239
  • Hospital Inpatient or Observation Care Services, Same Day Admission and Discharge - 99234-99236
• The Initial Observation Care codes 99218, 99219, and 99220, Subsequent Observation Care codes 99224, 99225, 99226, and Observation Discharge code 99217 were all deleted in 2023. 

• 99221 - Initial hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and straightforward or low level medical decision-making. When using total time on the date of the encounter for code selection, 40 minutes must be met or exceeded.
• 99222 - Initial hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and moderate level of medical decision-making. When using total time on the date of the encounter for code selection, 55 minutes must be met or exceeded.
• 99223 - Initial hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and high level of medical decision-making. When using total time on the date of the encounter for code selection, 75 minutes must be met or exceeded.

• 99231 - Subsequent hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and straightforward or low level of medical decision-making. When using total time on the date of the encounter for code selection, 25 minutes must be met or exceeded.
• 99232 - Subsequent hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and moderate level of medical decision-making. When using total time on the date of the encounter for code selection, 35 minutes must be met or exceeded.
• 99233 - Subsequent hospital inpatient or observation care, per day, for the evaluation and management of a patient, which requires a medically appropriate history and/or examination and high level of medical decision-making. When using total time on the date of the encounter for code selection, 50 minutes must be met or exceeded.

• 99234 - Hospital inpatient or observation care, for the evaluation and management of a patient including admission and discharge on the same date, which requires a medically appropriate history and/or examination and straightforward or low level of medical decision-making. When using total time on the date of the encounter for code selection, 45 minutes must be met or exceeded.
• 99235 - Hospital inpatient or observation care, for the evaluation and management of a patient including admission and discharge on the same date, which requires a medically appropriate history and/or examination and moderate level of medical decision-making. When using total time on the date of the encounter for code selection, 70 minutes must be met or exceeded.
• 99236 - Hospital inpatient or observation care, for the evaluation and management of a patient including admission and discharge on the same date, which requires a medically appropriate history and/or examination and high level of medical decision-making. When using total time on the date of the encounter for code selection, 85 minutes must be met or exceeded.

• Codes 99238 or 99239 should be reported by the physician/QHP responsible for discharge care provided on a day other than the day the patient was admitted to observation services. If the patient is discharged on the same day they were admitted to observation, see the same day admission and discharge service code set, 99234-99236. They are time-based codes, only.
• 99238 - Hospital inpatient or observation discharge day management; 30 minutes or less on the date of the encounter
• 99239 - Hospital inpatient or observation discharge day management; more than 30 minutes on the date of the encounter

Discharge codes 99238/99239 are to be used to report the total time spent by the physician/QHP for services rendered on the date the patient is discharged from Hospital Inpatient or Observation E/M services.

• The physician/QHP must have a face-to-face encounter with the patient on the discharge day.
• Time spent/reported by the physician/QHP does not have to be continuous.
• Discharge day services include (but do not require), as appropriate:
  • Final examination of the patient
  • Discussion of the hospital stay
  • Instructions for continuing care to all relevant caregivers
  • Preparation of discharge records, prescriptions, and referral forms

• Codes 99234-99236 require at least two physician/QHP face to face E/M encounters with the patient on the same date of service to report Same Day Admission and Discharge codes 99234-99236.
• CMS applies the “8 to 24 Hour Rule” when reporting Same Day Admission and Discharge codes 99234-99236. In 2024 CPT started to provide similar guidance. See FAQ #9 and #10 below.

The Medicare “8 to 24 Hour Rule” is a policy that determines when to report a Hospital Inpatient or Observation E/M service Same Day Admission and Discharge service. It also determines when to report an Hospital Initial Inpatient or Observation service alone, or with a discharge service. Medicare guidance is as follows:

• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the same calendar day and the observation time is less than 8 hours.
  • The physician/QHP should only report the Initial Inpt/Obs care codes 99221-99223.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the same calendar day and the observation time is more than 8 hours.
  • The physician/QHP should only report the Inpt/Obs Same Day Admission and Discharge codes 99234-99236.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the next calendar day and the observation time is less than 8 hours.
  • The physician/QHP should only report the Initial Inpt/Obs care codes 99221-99223
  • Observation that is continuous before and through midnight is a single service and is reported on the initial calendar date.
• If a patient is admitted to Hospital Inpatient or Observation E/M services and discharged on the next calendar day, the observation time is more than 8 hours.
  • The physician/QHP should report the Initial Inpt/Obs care codes 99221-99223 for the first day as the date of service
  • The physician/QHP should report Inpt/Obs Discharge code 99238 or 99239 for the total time spent by the physician/QHP on the discharge date.

The 2023 Medicare Physician Final Rule offers this table to explain how to use the 8-24 hour rule to report observation services.

The “8 to 24 Hour Rule” is a CMS policy; other payers may set their own payment policies. Of course, providers must follow the policies of only those payers with whom the provider must comply because of statute, regulation, or contract. In the absence of any contrary policy, CPT coding principles pertain. In 2024 CPT published similar guidance which is as follows (unchanged for 2025):

Private payers may have their own guidelines. Providers should refer to local payers for guidance.

• There are two basic circumstances when observation is appropriate:
  • Lack of diagnostic certainty, where further evaluation or testing, or treatment would help inform the decision for admission or discharge, or
  • Therapeutic intensity, where additional therapy can reasonably abate the need for admission.

A patient presents to the emergency department with nausea, vomiting, and diarrhea. After a medically appropriate history and examination, preliminary impressions of gastroenteritis and dehydration are made. The patient has an IV started, and an antiemetic was given. The patient is hydrated intravenously. When appropriate PO fluids are trialed. The patient continues to be observed until their symptoms improve and they have demonstrated the ability to hold down liquids. After discharge instructions are given, the patient is discharged to follow up with their PCP in a few days or return to the emergency department if symptoms recur.

Other examples of patients who may qualify for Observation services in the ED include:

• Intoxicated head injury patient observed to r/o significant injury.
• Questionable overdose observed to r/o significant toxicity.
• Chest pain with repeat testing to rule out ischemia.
• Dehydrated patient observed to administer fluids and ability to retain oral liquids.
• Kidney stone observed for adequate pain and emesis control
• Asthmatic requiring repeat or continuous nebulizer treatment to determine response to treatment.
• Headache patients requiring repeat treatment to determine if they improve with treatment.
• Abdominal pain patients requiring repeat assessment to determine the appropriate disposition
• Behavioral health patients requiring ongoing evaluation or treatment

Examples of cases where coding Observation services would generally not be indicated:

• Patient awaiting a ride home.
• Lengthy procedures (laceration repair, reductions, etc.).
• Broken CT/MRI/Ultrasound/… equipment.
• Busy emergency department and delay in assessments due to volume or staffing.
• For additional treatment when disposition of discharge is already established (e.g., finishing infusion)

• When documenting and coding for Inpatient/Observation services, it is essential to understand the differences between CPT and Medicare coding guidelines.
• CPT MDM/Time requirements are identified in Questions 5-7.
• General documentation requirements would involve an order of the time the patient is placed in Observation, the discharge time, and for Inpatient/Observation Admit/Discharge on the same date service (99234-99236) at least two face-to-face patient E/M encounters.

• Observation is a "patient status" rather than a place. Observation services may take place in a regular bed in the ED, in a special observation area of the ED, a formal observation unit, or even in a hospital bed.
• Per CPT 2025, page 21, “For patients designated/admitted as “observation status” in a hospital, it is not necessary that the patient be located in an observation area designated by the hospital.”

CPT policy has been revised starting in 2023.  Per CPT, “When the patient is admitted to the hospital as an inpatient or to observation status in the course of an encounter in another site of service (e.g., hospital emergency department, office, nursing facility), the services in the initial site may be separately reported. Modifier 25 may be added to the other evaluation and management service to indicate a significant, separately identifiable service by the same physician or other qualified health care professional was performed on the same date.”

However, while the CPT policy has changed, the CMS policy has not.  Per CMS, “We also propose, however, to retain our current policy that when a patient is admitted to outpatient observation or as a hospital inpatient via another site of service (such as hospital ED, physician’s office, nursing facility), all services provided by the physician in conjunction with that admission are considered part of the initial hospital inpatient or observation care when performed on the same date as the admission. (Refer to the Medicare Claims Processing Manual, IOM 100-04, Chapter 12, 30.6.9.1.A.) This policy differs somewhat from the instructions provided in the 2023 CPT Codebook.”

In keeping with existing Medicare policy, if both physicians are of the same specialty, in the same group, generally either an ED service 99281-99285 or observation may be billed, but not both.

Private payers may have their own guidelines. Providers should refer to local payers for guidance.

If the patient is evaluated in the ED and placed in Observation after midnight, it might be proper to code both in some circumstances.

• The code for the procedure performed in the ED may be assigned in addition to the observation code. A -25 modifier may be appended to the Observation code when appropriate to indicate a distinct, separately identifiable service.
• There are no procedure codes that CPT considers bundled into Observation. As an example, the observation stay for the head injury evaluation (with a -25 modifier as appropriate) and the laceration repair procedure (performed in the ED) could both be submitted.

Yes, the Inpt/Obs E/M codes have time as part of the code descriptor.  The E/M code can be assigned based on Medical Decision-Making or Time. To report Inpt/Obs E/M codes based on time, the physician/QHP must document their total time and satisfy the times specified in the code descriptors to report the E/M code. Of note Inpt/Obs discharge codes 99238, 99239 are based on time, only.

Time included is the total time on the date of the encounter. It includes both the face-to-face and non-face-to-face time personally spent by the physician on the day of the encounter (includes time in activities that require the physician and does not include time in activities customarily performed by clinical staff).

Calculating the physician’s time, when time is used to report E/M services, includes the following activities, when performed (CPT 2025, page 13-14):

• preparing to see the patient (e.g., review of tests)
• obtaining and/or reviewing separately obtained history
• performing a medically appropriate examination and/or evaluation
• counseling and educating the patient/family/caregiver.
• ordering medications, tests, or procedures
• referring and communicating with other health care professionals (when not separately reported)
• documenting clinical information in the electronic or other health records
• independently interpreting results (not separately reported) and communicating results to the patient/family/caregiver.
• care coordination (not separately reported)

Time spent performing separately billed services, travel time, and teaching that is general and not limited to discussion required for the management of a patient is not counted toward the time used to select the E/M code.

• Yes, code 99418 is used to report prolonged total time (i.e., combined time with and without direct patient contact) provided by the physician or other qualified health care professional on the date of an Inpt/Obs E/M service (i.e., 99223, 99233, and 99239, 99236).
• 99418 are only used when the primary service has been selected using time alone as the basis and only after the time required to report the highest-level service has been exceeded by 15 minutes.
• The first 15 minutes after the time in the code descriptor is bundled post-service time and not reportable. Prolonged total time starts when the time required to report the highest-level primary service has been exceeded by 15 minutes.
  • For example, report 99418 for an Initial Observation encounter (99223) when the physician’s/QHP’s total time on the date of the encounter reaches 90 minutes (75 minutes for 99223 + 15 minutes).

Time spent performing separately reported services other than the primary E/M service and prolonged E/M service is not counted toward the primary E/M and prolonged services time.

• CMS disagrees with the CPT instructions regarding prolonged services. For Medicare patients, prolonged Inpt/Obs E/M services are reported with G0316 instead of CPT code 99418.
  • G0316 - Prolonged hospital inpatient or observation care evaluation and management service(s) beyond the total time for the primary service (when the primary service has been selected using time on the date of the primary service); each additional 15 minutes by the physician or qualified healthcare professional, with or without direct patient contact. (Do not report G0316 on the same date of service as other prolonged services for evaluation and management 99358, 99359, 993X0). (Do not report G0316 for any time unit less than 15 minutes).
• CPT instructions indicate that the prolonged code is reportable at the beginning of the prolonged time, i.e., 90 minutes for 99223 (75 minutes + 15 minutes).
• CMS policy says that the prolonged code is reportable when the entire 15-minute increment of prolonged service has been provided. i.e., 105 minutes for 99223 (75 minutes + 15 minutes + 15 minutes).
• G0316 can be reported for each complete 15-minute increment of prolonged service.  Partial increments are not reportable

On October 30, 2015, CMS (Medicare) released the final rule for facility OPPS updates to the "Two-Midnight" rule for physicians to use in determining patient admission status for inpatient or outpatient care under the Inpatient Prospective Payment System for hospitals. CMS stipulates that when a physician anticipates the patient will require care that crosses two midnights and orders inpatient admission based upon that expectation, inpatient status is generally appropriate. At this writing, time spent in Observation or other Outpatient status via an Emergency Department encounter may be retroactively combined with inpatient status to reach the two-midnight Inpatient threshold.   

Yes, see the FAQ on “Mental Health” for more information.

To better appreciate the characteristics distinguishing facility coding from physician coding for Medicare Observation services, see ACEP's FAQs on OPPS/APCs and the Facility Observation FAQ.