CMS Pub. 100-04, ch. 4, § 290.1

Observation care is a well-defined set of specific, clinically appropriate services, which

include ongoing short term treatment, assessment, and reassessment, that are furnished

while a decision is being made regarding whether patients will require further treatment

as hospital inpatients or if they are able to be discharged from the hospital. Observation

services are commonly ordered for patients who present to the emergency department and

who then require a significant period of treatment or monitoring in order to make a

decision concerning their admission or discharge. Observation services are covered only

when provided by the order of a physician or another individual authorized by State

licensure law and hospital staff bylaws to admit patients to the hospital or to order

outpatient services.

Observation services must also be reasonable and necessary to be covered by Medicare.

In only rare and exceptional cases do reasonable and necessary outpatient observation

services span more than 48 hours. In the majority of cases, the decision whether to

discharge a patient from the hospital following resolution of the reason for the

observation care or to admit the patient as an inpatient can be made in less than 48 hours,

usually in less than 24 hours.