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The rules say that plans must pay for a medical service or item if regular Medicare would pay for it in this case. 
You can find this rule at 42 Code of Federal Regulations (CFR) Section 422.101. 
 
Medicare guidance says, in this Manual, many policies are described using the term physician. Unless 
otherwise indicated, the use of this term does not restrict the application of policies to physicians only. 
Rather, the policies apply to all practitioners, hospitals, providers, or suppliers eligible to bill the relevant 
HCPCS/CPT codes pursuant to applicable portions of the Social Security Act (SSA) of 1965, the Code 
of Federal Regulations (CFR), and Medicare rules. 
 
Providers reporting services under Medicares hospital Outpatient Prospective Payment System (OPPS) 
shall report all services in accordance with appropriate Medicare "Internet-only Manual (IOM)" instructions. 
You can find this guidance in the National Correct Coding Initiative Policy Manual, Chapter I  General 
Correct Coding Policies, Section A. Introduction.  
 
Medicare guidance says, this integrated OCE (IOCE) program processes claims for outpatient institutional 
providers including hospitals that are subject to the Outpatient Prospective Payment System (OPPS) as well as 
hospitals that are not (Non-OPPS). The Medicare Administrative Contractor (MAC) identify the claim as 
OPPS or Non-OPPS by passing a flag to the IOCE in the claim record, 1=OPPS, 2=Non-OPPS; a blank, 
zero, or any other value is defaulted to 1. The IOCE not only identifies individual errors but also indicates what 
actions should be taken and the reasons why these actions are necessary. In order to accommodate this 
functionality, the IOCE is structured to return lists of edit numbers. This structure facilitates the linkage 
between the actions being taken, the reasons for the actions and the information on the claim (e.g., a specific 
diagnosis) that caused the action. 3. HCPCS G0378 is reported once with 8 or more service units. If a period of 
observation spans more than 1 calendar day, all the hours for the entire period of observation must be included 
on a single line and the date of service for that line is the date that observation care begins. If subsequent lines 
of G0378 are reported, edit 51 is applied (RTP) and the units associated with the subsequent G0378 line are not 
evaluated for C-APC assignment. Note: If a LIAF of 2, 3, or 4 is present, the line is ignored from processing 
and edit 51 is not applied.  As specified in the introduction to the IOCE, one of the three major functions provided by the IOCE is the 
application of edit(s) to identify errors.  
 
Each edit is unique, as it directly links the reason the edit is returned, any related information at the line or 
claim level, and the action required indicated by the edit disposition. For example, an edit can cause a line item 
rejection or return the claim to the provider. It is mpossible for a claim to have one or more edits in all 6 
dispositions. The table below lists and describes each edit disposition. Disposition  Claim Return to Provider 
(RTP), Description  There are one or more edits present that cause the whole claim to be returned to the 
provider. A claim returned to the provider means that the provider can resubmit the claim once the problems 
are corrected. Disposition  Line Item Rejection (LIR), Description - There are one or more edits present that 
cause one or more individual line items to be rejected. A line item rejection means that the claim can be 
processed for payment with some line items rejected for payment. The line item can be corrected and 
resubmitted but cannot be appealed. Edit 51, Edit Description  Observation code G0378 not allowed to be 
reported more than once per claim, Reason for Edit Generation  HCPCS code G0378 is reported more than 
once on a 13x or 85x claim/bill type. The edit is applicable to the subsequent lines of G0378 only. Edit 51 is 
bypassed if the subsequent G0378 line(s) has a line item action flag of 2, 3, or 4., Disposition  RTP. You can 
find this guidance on the Medicare web site, CMS.gov, OCE Quarterly Release Files, Integrated OCE (IOCE) 
CMS Specifications V22.2 Effective July 01, 2021, Section 3 Introduction to the IOCE, Section 3.1 IOCE 
Processing, Section 5.6.4.1 Comprehensive Observation APC Assignment Criteria, Section 6 Edit Application 
within the IOCE, Section 6.1 Introduction to Edits, Section 6.1.1 Edit Dispositions Table and Section 6.2 Edit 
Descriptions and Reason for Edit Generation Table. Medicare guidance says, Section 1833(t) of the Social 
Security Act (the Act) as amended by Section 4533 of the Balanced Budget Act (BBA) of 1997, authorizes 
CMS to implement a Medicare PPS for: Hospital outpatient services, including partial hospitalization services. 
The Outpatient Prospective Payment System (OPPS) applies to all hospital outpatient departments except for 
hospitals that provide Part B only services to their inpatients; Critical Access Hospitals (CAHs); Indian Health 
Service hospitals; hospitals located in American Samoa, Guam, and Saipan; hospitals located in the Virgin 
Islands; and effective January 1, 2017, non-excepted off-campus provider- based departments of a hospital. The 
OPPS also applies to partial hospitalization services furnished by Community Mental Health Centers 
(CMHCs). 
 
Effective for claims with dates of service July 1, 2007, and after, the non-Outpatient Prospective Payment 
System (OPPS) Outpatient Code Editor (OCE) will be integrated into the OPPS OCE. This integration will 
result in the routing of all institutional outpatient claims, including non-OPPS hospital claims, through a single 
integrated OCE eliminating the need to update two separate OCE software packages on a quarterly basis. The 
integrated OCE does not change the current logic that is applied to outpatient bill types that already pass 
through the OPPS OCE software. It merely expands the software usage to include non-OPPS hospitals. This 
new software product will be referred to as the Integrated OCE (I/OCE). The I/OCE instructions and 
specifications are provided via Recurring Update Notifications. They are also posted on the Web at the 
following address: http://www.cms.hhs.gov/OutpatientCodeEdit/02_OCEQtrReleaseSpecs.asp#TopOfPage. 
 
The following bill types are subject to OPPS: All outpatient hospital Part B bills (bill types 12X, 13X with 
condition code 41 14X and 13X without condition code 41) with the exception of bills from hospitals in 
Maryland, Indian Health Service, CAHs, hospitals located in Saipan, American Samoa, the Virgin Islands and 
Guam; and hospitals that provide Part B only services to their inpatients. Effective 4/1/06 the 14X type of bill 
is for non-patient laboratory specimens and is no longer applicable for partial hospitalization billing. 
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. Observation services should not be billed concurrently with diagnostic or 
therapeutic services for which active monitoring is a part of the procedure (e.g., colonoscopy, chemotherapy). 
In situations where such a procedure interrupts observation services, hospitals may determine the most 
appropriate way to account for this time. For example, a hospital may record for each period of observation 
services the beginning and ending times during the hospital outpatient encounter and add the length of time for 
the periods of observation services together to reach the total number of units reported on the claim for the 
hourly observation services HCPCS code G0378 (Hospital observation service, per hour). A hospital may also 
deduct the average length of time of the interrupting procedure, from the total duration of time that the patient 
receives observation services. If a period of observation spans more than 1 calendar day, all of the hours for the 
entire period of observation must be included on a single line and the date of service for that line is the date that 
observation care begins. You can find this guidance in the Medicare Claims Processing Manual, Chapter 4  
Part B Hospital (Including Inpatient Hospital Part B and OPPS), Section 10  Hospital Outpatient Prospective 
Payment System (OPPS), Section 10.1  Background, Section 40.1  Integrated OCE (July 2007 and Later), 
Section 120.1  Bill Types Subject to OPPS, Section 290  Outpatient Observation Services and Section 290.1 
 Observation Services Overview, Section 290.2.2  Reporting Hours of Observation. 
 
If you want to read these Medicare rules, you can go to this website www.medicareappeal.com.