What is observation care? Clearing up common misperceptions

To treat observation care as simply a loophole that allows hospitals to avoid the Medicare penalties from readmissions — as Brad Wright, an assistant professor of health management and policy at the University of Iowa did earlier this month — is to take a short-sighted approach to a complex health issue.

Observation care in fact aims to address several of healthcare’s thorniest challenges head on. In the process, a well-run observation unit can not only help reduce hospital readmission rates, but it can reduce crowding and speed throughput in the ER, save patients an extended first hospital admission (let alone a re-admission), and perhaps most importantly, improve patient outcomes.

To see how, and to clear any misconceptions some like Wright could have about observation care, it might be helpful to do some Q&A.

How long are patients usually held in observation care?

Medicare defines observation as 23 hours or less, so if a patient stays longer than that, the hospital likely won’t be reimbursed for the cost. Medical Emergency Professionals runs two observation care units, one at Western Maryland Health System in Cumberland, MD, the other at Shady Grove Adventist Hospital in Rockville, MD. Patients at these two units average a stay of 20 hours and 16 hours, respectively.

That is not to say that some other hospitals don’t keep patients in “observation” for days, or even weeks. One example might be a homeless person with a serious foot infection. A physician can prescribe antibiotics, but with no insurance and no way to follow up with the patient, they may not meet the criteria for a safe discharge. The patient doesn’t require an inpatient level of care, but the hospital can’t find an alternative environment for them to go that is considered safe. So the hospital will likely get reimbursed for the first two days of stay under observation status, but anything beyond that the hospital would swallow the cost. Furthermore, the hospital can’t get reimbursement by admitting the patient because the level of care required wouldn’t justify in-patient care. Given the situation, it’s hardly fair to say the hospital is simply exploiting a loophole. More accurately, the hospital is doing the best it can while swallowing the cost of uncompensated care that is the inevitable result of a broken healthcare system and greater societal problems.

Does observation compromise the quality of care received?

Just the opposite, in fact. Observation care seeks to treat patients whose condition doesn’t justify a hospital admissions, but may still need follow-up, testing, or a little bit of “wait and see.” For example, a patient who shows up in the ER with abdominal pain may just be constipated, or they may have appendicitis. Observation care provides the focused, rapid medical evaluations to determine the level of care needed. If further testing is needed, observation care aims to speed test results.

The reason observation care results in better patient outcomes is largely because both hospitals and emergency rooms have been historically poor at dealing with these types of patients. In both environments, resources tend to gravitate elsewhere, whether to the gunshot victim who needs immediate attention, or to the patient with the sore throat who can be treated easily and sent home right away.

Another reason is that observation care doesn’t just help reduce re-admissions, it helps prevent admissions in the first place. The longer someone is in the hospital, the greater the change they will contract a hospital-acquired illness or infection. As a recent study in Annals ofInternal Medicine showed, hospitals that reduce the length of stay also see reduced mortality and readmission rates. This risk may be worth it for patients who truly demand in-patient care, but those who don’t, keeping them out of the hospital in the first place should be a priority.

Is it more expensive for the patient to be in observation care?

Unfortunately, yes. Observation care is generally considered out-patient, and most insurance plans ask its customers to pay a greater percentage of out-patient costs. On the other hand, what patient wouldn’t want to avoid a multi-day hospital stay?

Still, this is an area where the regulatory environment is way ahead of the insurance market. Our policies have shifted toward encouraging out-patient care, because it’s cheaper and often more effective, but the rate structures of insurance plans still encourage patients to choose in-patient care. That needs to change in the future.

Is observation care a loophole for hospitals to exploit?

By now, the obvious answer to this question should be “no.” But in case it’s not clear, here is a prediction: hospitals will get eventually get penalized for re-admissions to observation units as well as in-patient services. In fact, we’ve already heard anecdotally of one hospital getting penalized for a re-admissions to observation, and all signs point toward that trend continuing.

Is there another way for hospitals to avoid the Medicare penalty?

Yes: by providing better care. Hospitals that simply move some numbers around, re-classify patients one way or another, cook the statistics a bit, calculate something differently, or otherwise try to game the system will find themselves left behind. That’s what we’ve been doing in healthcare for years, and it won’t work any more.

The future of healthcare is about providing better, more efficient care, leading to better patient outcomes. Observation care pushes hospitals to change their view of healthcare delivery, to do it in a timely fashion, and slowly but surely move them to a different reimbursement structure. That’s a good thing for hospitals, and for the U.S. healthcare system.

Robbin Dick is Observation Medicine Services Director, Medical Emergency Professionals. He also blogs at the EmergencyDocs Blog.

Comments are moderated before they are published. Please read the comment policy.

  • ninguem

    The patient is in the same hospital, in the same bed, breathing the same air, eating the same food, cared for by the same nurse. One is called “admission” one is called “observation”.

    Nobody is questioning the need for that patient to be in the hospital in that bed, breathing that air and all that.

    The only difference is out of what pocket are services paid? Then docs are asked to divine the combination of services provided, or not provided, and why. Then one patient is called “admission” another is called “observation”.

    It is unfortunate that we have to waste energy, trying to figure out how to classify the service that no one argues is needed for that patient. That energy equals money; money that could have been better spent caring for more patients.

    I mean, you didn’t create the system, not did I.

  • http://www.facebook.com/people/Steven-Reznick/100000549195050 Steven Reznick

    My 86 year old modestly cognitively impaired dad was taken to the main hospital in Hollywood , Florida with a diverticular bleed. He required a blood transfusion, bleeding scan and fiberoptic exam before he was sent home on Day #4. He was sent home on a limited diet, without having demonstrated that he could ambulate due to deconditioning from lying in bed for four days. His personal physician was unavailable and out of town so he was assigned to the hospital employed Hospitalist service. Despite not being able to walk yet and not yet having a solid bowel movement , he was sent home not to a SNF for rehab. The hospital billed the first two days as observational status. Without three full inpatient hospital days he did not qualify for home health care including nursing and or physical therapy.
    The decision to make him observational status was made by a non physician non health care provider case manager. The case manager was using a document called Interqual prepared and written by McKesson hospital supply company and commissioned by CMS ( Medicare) . While CMS still allegedly holds the admitting physician responsible for making the decision as to what type of admission ( inpatient or observation) is used, most hospital bylaws have been changed to allow hospital administration to make that decision on the doctor’s behalf. Whether the admitting physician still has the right and duty under the law to make that decision is something that hospital administrations do not address when asked. When the physician caring for the patient receives their paycheck and evaluation from the hospital they do not question whether the patient is billed as an observation patient or inpatient.
    There is no data to suggest that observation status improves care or saves the system money. It is a new billing technique used by facilities to bill at a higher outpatient rate where every charge is ala carte and not necessarily covered at all or partially by existing patient health insurance. If the author would like to open his financial records to show how he and his firm collect for billing observation status as opposed to inpatient status I am sure the reading public would learn the truth themselves.
    The homeless person he uses in his article requires medical care. It is unreimbursed charitable pro bono care whether billed as an inpatient, outpatient or any other way. Providing the care is what civilized , humane societies do. The Affordable Care Act was passed to address that situation not to maximize reimbursement to hospitals and private health care delivery firms.

  • http://www.caduceusblog.com/ Deep Ramachandran

    Most patients who I see in the office tell me they were in the hospital, they have not the foggiest clue as to what the “status” was, at least not until they get the bill and wonder why it was so high. To my mind it truly is just an administrative loop hole, an artificial creation.

    I also disagree with Brad Wright’s article but for a different reason. I think he missed the point about observation, the purpose is not only to reduce readmission rates, it is also to reduce money lost during insurance audits. Hospitals would rather take the lower reimbursement of observation status, rather than admitting people who do not meet strict qualifications of inpatient admission established by insurance companies. In doing this, they make less up front but have less risk of losing millions of dollars in a chart audit by an insurance company down the road. Insurance companies know this, but don’t mind because it saves them money. Its a game between insurance and hospitals, patients are stuck in the middle.

Most Popular