The Observation Unit

by Webmaster
Published on May 23, 2016

There are two compelling arguments for using observation status: improved clinical decision making and the potential for increased profitability. But with new admission regulations and a C-APC bundled payment, both require a radical shift in medical practice. Payment parameters should not dictate clinical management. But neither should clinical resources be used indiscriminately. At the end of the day, focus must be centered on providing the right care to all patients in the right place at the right time.


Many hospital executives are reporting increased observation rates and they are not happy about its impact on the bottom line. But in the 3 years since the introduction of the 2 midnight rule and the presence of medical documentation to support the need for 2 midnights, the increase in patients being held in observation does not come unexpectedly.  

The use of observation status and the clinical utility of a clinical decision unit (CDU) was first established around the care for patients with chest pain.   Asthma, kidney stones, skin infections and allergic reactions were soon recognized to be suitable for the CDU and over the last two decades, numerous research studies have been published showing safe and effective care for a wide range of conditions that are CDU-appropriate. Although the origin of the CDUs dates back to the 1960s, more formal guidelines regarding their use were not established until the American College of Emergency Physicians (ACEP) formalized the scope of observation medicine by creating the first Observation Unit Guidelines in 1988 followed by the creation of the ACEP Section for Observation Medicine in 1991.  The CDUs were meant to augment the capacity of the ED and allow the ED physician more time to conduct diagnostic or therapeutic interventions before making a disposition decision.

The growth of the CDU has been fueled by the acknowledgement that the ED physicians should not be forced into a discharge to home or inpatient admission decision especially as patients become more medically complex. In 2003, CMS recognized the observation unit as a distinct entity and offered payments for the three most common observation diagnoses: chest pain, congestive heart failure and asthma. As the use of observation expanded, CMS payment options changed and now a fixed-rate, comprehensive ambulatory procedure code (C-APC) 8011 is used to claim payment for all services provided while the patient is being 'observed.'

Several changes over the years have caused the panic in the C-suite.  When the observation patient was located adjacent to the ED, the patient was being medically managed by the ED physician whose focus was on rendering a treatment decision: discharge or admit.  However, the success of the CDU prompted expansion and the need for more space.  The geography of the CDU changed and from being a small unit contiguous with the ED, observation patients are either scattered all over the hospital or sent to a large CDU area distant from the ED.  With the change of location, medical management transitioned to the hospitalist. Lacking the focus of the ED physician, the hospitalist often orders additional 'work-ups' which contributed to the rise in the costs of observation care and extended length of stay.  The mini bundled C-APC payment of  approximately $2275 doesn't begin to cover the costs and with each hospitalist-prescribed intervention, costs increase with no additional revenue.  

In addition, consider that many hospitals have taken a robust position about gate-keeping in order to combat the volume of denials, rework and fixes that otherwise result on the back end.  Highly skilled and assertive utilization review specialists are quickly becoming part of the Access Management team and medical documentation of every potential inpatient admission and outpatient observation case is carefully reviewed to make sure it will withstand the scrutiny of the MACs, the RACs, the QIOs and the commercial payers which are now watching over the front door of every hospital. These highly proficient UR specialists, working in collaboration with the admitting physician and their physician advisor, and supported by the Board and Executive team are charged with making sure that the decision to admit a patient to hospital level of care is backed by sound medical judgment as documented in the medical record.  

So what's an executive to do?  First of all, make sure the team of UR specialists and the physician advisor are recommending an accurate level of care. Conduct inter-rater reliability studies periodically.  Second, consider returning the medical management of the observation patient to the ED physician. Explore options that are compliant with federal constraints and hospital by-laws.  Third, promote the use of medical staff endorsed protocols and algorithms to curb wasteful, excessive and potentially harmful interventions that have little bearing on the patients HPI.  Fourth, position assertive care managers to work with the physicians caring for observation patients to pro-actively drive the progression of care and influence appropriate resurce utilization.  And finally, if the inter-rater reliability studies confirm that patients are being appropriately 'statused,' congratulate the utilization review specialists for a job well-done and stop whining about high observation rates.  

As hospitals are preparing to make the leap from fee for service to fee for value, its time that execs acknowledge that the decreases they are experiencing in inpatient volume and the increases they are seeing in outpatient observation volume will continue. Get over it and start budgeting accordingly.