The history of observation medicine has paralleled the rise of emergency medicine over the past 50 years to meet the needs of patients, emergency departments, hospitals, and the US health care system. Just as emergency departments are the safety net of the health system, observation units are the safety net of emergency departments. The growth of observation medicine has been driven by innovations in health care, an ongoing shift of patients from inpatient to outpatient settings, and changes in health policy. These units have been shown to provide better outcomes than traditional care for selected patients.
Key points
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The history of observation medicine parallels the rise of emergency medicine over the past 50 years to meet the needs of patients, emergency departments (EDs), hospitals, and the US health care system.
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Type 1 protocol-driven observation units are best managed using 7 basic principles. These units have consistently been shown to provide better outcomes than traditional care for selected patients.
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The growth of observation medicine has been driven by innovations in health care, ongoing shift of patients from inpatient to outpatient settings, and changes in health policy.
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To fully understand observation medicine, it is important to understand observation services payment policy, history, and ramifications.
Leave nothing to chance, overlook nothing: combine contradictory observations and allow enough time…A great part, I believe, of the art is to be able to observe.
A brief clinical history of observation medicine
The act of observing patients is not unique to the present. Observation has been fundamental to the care of patients since the time of Hippocrates, when he argued that understanding the nature of the humans and disease processes was best achieved through the active observation of their condition. This new approach, recorded in the Hippocratic Corpus, became the foundation of medicine as it is known today.
Jumping forward more than 2 millennia to the 1960s, the creation of EDs addresses a public health need. It was recognized that patients were dying of time-sensitive conditions, such as trauma and cardiac arrest, because they could not reach lifesaving experts and equipment soon enough — such as trauma surgeons, emergency physicians, operating rooms, and defibrillators. This led to the creation of emergency medicine, a new specialty whose defining feature was time rather than an organ system, age, or technology. EDs and emergency physicians specialized in the management of time-sensitive conditions. Between 1955 and 1971, ED visits increased by 367%.
As EDs grew and became more differentiated, the first descriptions of observation beds appeared. In a 1965 edition of the journal, Hospital Forum , Lynn Boose, an administrative resident with the Bellflower California Kaiser Foundation Hospital, described “the use of observation beds in emergency service units” where it was recommended that an observation patient’s stay “should not exceed 24 hours” based on his review of 1094 cases.
Observation medicine research over the ensuing decades evolved along with innovations in health care. In the 1970s, studies focused broadly on the use of short-stay units in EDs. This focus continued in the 1980s with an increasing focus on specific conditions, in particular chest pain. Studies explored other clinical areas, such as pediatrics, geriatrics, trauma, asthma, and abdominal pain. The prevalence and scope of ED observation units (EDOUs) were described. The 1990s saw high-quality observation medicine research flourish with federally funded prospective randomized clinical trials. Chest pain research refined patient selection and diagnostic testing using the term, accelerated diagnostic protocols ( ADPs ). Chest pain protocols in dedicated units were reported to have better outcomes than inpatient admission in terms of shorter length of stays, lower costs, less diagnostic uncertainty, and improved patient satisfaction. Similar findings were reported in accelerated treatment protocols for asthma with shorter stays. In the new millennium, EDOU research addressed new conditions, including syncope, transient ischemic attack, and atrial fibrillation. Studies described the role of observation for pediatric conditions, the elderly, and hospital operations. In the second decade of the millennium, clinical research continued as health services research focused on the impact of observation medicine on hospitals, health systems, and health policy. Studies further defined which chest pain patients may not need observation or advanced cardiac imaging.
In parallel with these advances, clinical practice also evolved. The American College of Emergency Physicians formed an Observation Medicine Section and adopted policies for the management of observation units, stating, “(o)bservation of appropriate ED patients in a dedicated ED observation area, instead of a general inpatient bed or an acute care ED bed, is a ‘best practice’ that requires a commitment of staff and hospital resources.” In the early 1990s, chest pain centers, which usually included chest pain ADPs and dedicated beds, became more common. To represent this group, the Society of Chest Pain Centers was formed and has accredited more than 1000 hospitals nationally.
A brief clinical history of observation medicine
The act of observing patients is not unique to the present. Observation has been fundamental to the care of patients since the time of Hippocrates, when he argued that understanding the nature of the humans and disease processes was best achieved through the active observation of their condition. This new approach, recorded in the Hippocratic Corpus, became the foundation of medicine as it is known today.
Jumping forward more than 2 millennia to the 1960s, the creation of EDs addresses a public health need. It was recognized that patients were dying of time-sensitive conditions, such as trauma and cardiac arrest, because they could not reach lifesaving experts and equipment soon enough — such as trauma surgeons, emergency physicians, operating rooms, and defibrillators. This led to the creation of emergency medicine, a new specialty whose defining feature was time rather than an organ system, age, or technology. EDs and emergency physicians specialized in the management of time-sensitive conditions. Between 1955 and 1971, ED visits increased by 367%.
As EDs grew and became more differentiated, the first descriptions of observation beds appeared. In a 1965 edition of the journal, Hospital Forum , Lynn Boose, an administrative resident with the Bellflower California Kaiser Foundation Hospital, described “the use of observation beds in emergency service units” where it was recommended that an observation patient’s stay “should not exceed 24 hours” based on his review of 1094 cases.
Observation medicine research over the ensuing decades evolved along with innovations in health care. In the 1970s, studies focused broadly on the use of short-stay units in EDs. This focus continued in the 1980s with an increasing focus on specific conditions, in particular chest pain. Studies explored other clinical areas, such as pediatrics, geriatrics, trauma, asthma, and abdominal pain. The prevalence and scope of ED observation units (EDOUs) were described. The 1990s saw high-quality observation medicine research flourish with federally funded prospective randomized clinical trials. Chest pain research refined patient selection and diagnostic testing using the term, accelerated diagnostic protocols ( ADPs ). Chest pain protocols in dedicated units were reported to have better outcomes than inpatient admission in terms of shorter length of stays, lower costs, less diagnostic uncertainty, and improved patient satisfaction. Similar findings were reported in accelerated treatment protocols for asthma with shorter stays. In the new millennium, EDOU research addressed new conditions, including syncope, transient ischemic attack, and atrial fibrillation. Studies described the role of observation for pediatric conditions, the elderly, and hospital operations. In the second decade of the millennium, clinical research continued as health services research focused on the impact of observation medicine on hospitals, health systems, and health policy. Studies further defined which chest pain patients may not need observation or advanced cardiac imaging.
In parallel with these advances, clinical practice also evolved. The American College of Emergency Physicians formed an Observation Medicine Section and adopted policies for the management of observation units, stating, “(o)bservation of appropriate ED patients in a dedicated ED observation area, instead of a general inpatient bed or an acute care ED bed, is a ‘best practice’ that requires a commitment of staff and hospital resources.” In the early 1990s, chest pain centers, which usually included chest pain ADPs and dedicated beds, became more common. To represent this group, the Society of Chest Pain Centers was formed and has accredited more than 1000 hospitals nationally.
Principles of observation medicine
Observation care, like emergency care, is defined by time. Most ED visits occur in less than 6 hours, whereas the national average inpatient length of stay is approximately 4.5 days. Hospitals are often penalized for patients whose inpatient length of stay is less than 24 hours. These parameters defines a group of patients whose health care needs exceed what can realistically be achieved in less than 6 hours in the ED but if managed actively requires less than 24 hours of hospitalization. Left with an admit or discharge only model, they become orphans of the system and are either admitted unnecessarily or discharged inappropriately. These 6-hour to 24-hour patients have care that falls between the ED and inpatient settings and is best provided in a dedicated observation unit, otherwise known as a type 1 setting ( Table 1 ). The principles of observation medicine describe how to best manage these 6-hour to 24-hour patients based on clinical research and national policies ( Box 1 ).
| Observation Settings | Description | Comments |
|---|---|---|
| Type 1 | Protocol driven Observation unit | Highest level of evidence for favorable outcomes Care typically directed by ED |
| Type 2 | Discretionary care Observation unit | Care directed by a variety of specialists Unit typically based in ED |
| Type 3 | Protocol driven Hospital bed anywhere | Often called a virtual observation unit |
| Type 4 | Discretionary care Hospital bed anywhere | Most common practice Unstructured care Poor alignment of resources with patients’ needs |
- 1.
Focused patient care goals — a well-defined condition-specific patient care goal defined at the time of initiating observation services. Condition-specific guidelines specify patient selection for the observation unit, interventions, and criteria for discharge or admission from the EDOU.
- 2.
Limited duration and intensity of service — the average length of stay of observation patients is 15 hours to 18 hours. Patients requiring a higher intensity of service are generally admitted.
- 3.
Appropriate hospital setting — optimal clinical, operational, and economic outcomes occur in a type 1 setting, as proximate to the ED as possible.
- 4.
Appropriate staffing — appropriate staffing levels of nurses, ancillary, associate providers, and physicians is essential, as is administrative oversight.
- 5.
Providing ongoing care in an outpatient setting — clinical guidelines, care pathways, and protocols fall under 2 broad categories: ADPs (eg, chest pain) and accelerated treatment protocols (eg, asthma).
- 6.
Intensive review — critical metrics must be collected to assure that benchmark targets are being achieved, for example, discharge rates (70%–90%), length of stay (15–18 hours), and financial metrics. These targets are tracked for the whole EDOU and for specific clinical conditions.
- 7.
Economical service — to be successful, an EDOU must be cost-effective and equitable for all involved. Equitability should include the hospital, the physician, and those paying for these services.
Medicare observation services — hospital payment policy history
To understand observation services, it is important to understand past and present Medicare observation policy. To put this in context, in 2014 the United States spent approximately $3 trillion on health care, with the largest portion (32%) spent on hospital care. The largest individual payer of health care was the Centers for Medicare & Medicaid Services (CMS), which covered 36% of health insurance payments. Control of escalating hospital costs has been a central issue for Medicare for decades. Medicare policy is developed at CMS headquarters in Baltimore, Maryland, and then administered via 10 regional offices located throughout the United States. Medicare has 4 parts, which were developed in chronologic order to meet societal needs: Medicare Part A covers inpatient admissions and skilled nursing facility (SNF) care after admission; Part B covers outpatient visits, such as clinic, ED, or observation visits as well as physician services; Part C covers Medicare Managed Care (or Advantage) plans; and Part D covers prescription drug plans. Observation services fall under Medicare Part B.
To control rising hospitalization costs, in 1983 Medicare launched an inpatient prospective payment system, which adopted a payment methodology called diagnosis-related groups (DRGs). Under this model, inpatient hospitalization is only paid for specific conditions with corresponding DRG codes and payment rates. Shortly thereafter, it was realized that this created a population of patients who were “too sick to go home, but not sick enough to be admitted” as inpatients. A policy correction was needed. To address this issue, Medicare introduced observation services, where a patient could be managed as an outpatient in a bed anywhere in a hospital for up to 24 hours to determine the need for inpatient admission. This definition, with minor modifications, remains:
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 made regarding whether patients 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 ED and who then require a significant period of treatment or monitoring 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 a majority of cases, the decision whether to discharge a patient from the hospital after resolution of the reason for observation care or to admit the patient as an inpatient can be made in less than 48 hours, usually in less than 24 hours.
Initial ambiguity with the definition of observation led to misuse of observation services. The 2 most common examples were misuse of observation for scheduled elective outpatient procedures and prolonged observation stays. For outpatient procedures, standard recovery periods after those procedures were allowed. In rare and unusual cases, a patient might require a few additional hours for recovery due to unforeseen complications. Initially, Medicare allowed hospitals to bill these rare and unanticipated additional hours of recovery using the observation codes. For various reasons Medicare was frequently double-billed for both the procedure and observation time, often from the time patients first arrived in the hospital. In other cases, patients were held in inpatient beds as observation outpatients for several days to weeks. Both examples increased costs to Medicare, with prolonged stays increasing patient out-of-pocket costs. Neither of these examples was relevant to EDOUs, but they drove policies that influenced observation unit funding.
To address these issues, in 2000 when Medicare launched its outpatient version of the DRG program, called ambulatory payment classifications (APCs), it stopped paying separately for observation services. Observation payments were added to the associated ED or clinic visits payments, leading to a slight increase in payment for those visits but no identifiable separate payment for observation. This created a powerful incentive for hospitals to admit most, if not all, observation patients as short-stay inpatients. This policy change likely contributed to a significant rise in short-stay inpatient admissions, which later became a target of the recovery audit contractors (RACs). Based on provider input, in 2002 Medicare began paying again for observation services but with several stipulations for 3 specific conditions: chest pain, asthma, and heart failure. In 2005, most stipulations were lifted; then in 2008, Medicare began paying for all conditions.
In parallel with these events, in 2006 a Medicare demonstration project, called the RAC, collected more than $900 million in overpayments made by Medicare to hospitals. The largest collection category was for short inpatient admissions that should have been billed as outpatient. In 2010 this program was expanded to the entire country. In a 2014 report to Congress, the RAC program reported that it had collected $2.3 billion in Medicare overpayments to hospitals for inpatient services. One of its largest overpayment collection categories was for patients admitted as inpatients whose medical records indicated that they “could have safely and effectively been treated as an outpatient.” This finding encouraged hospitals to admit patients only if they were certain that they would meet inpatient criteria, which was becoming increasingly vague.
Not surprisingly, between 2007 and 2009 there was a 34% increase in the ratio of observation visits relative to inpatient admissions for Medicare patients. Observation stays increased from 26 hours to 28 hours, with 40% of stays lasting more than 24 hours and 10% more than 48 hours. This increase in observation relative to inpatient was due to both an increase in observation stays and a decrease in inpatient admissions. The increase in observation volumes was likely due to several factors: a return to baseline when Medicare resumed payment for observation services in 2008, hospital fears of being targeted by RAC auditors for inappropriate inpatient admission, a lack of clarity regarding the definition of an inpatient, and medical innovations shifting care from inpatient to outpatient settings.
Three Medicare observation policy issues
Observation Visits and Hospital Readmissions
In recent years, there has been a decline in hospital readmission rates, driven in part by Medicare inpatient readmission penalties. This decline raised concerns that hospitals were keeping inpatient readmission rates down by keeping patients in outpatient observation status to avoid these penalties. Zuckerman and colleageus found that between 2007 and 2015, for Medicare patients with acute myocardial infarction, heart failure, and pneumonia, inpatient readmission decreased more (21.5% to 17.8%) than the increases in observation visit (2.6% to 4.7%). More importantly, they found no patient-level association between inpatient readmissions and observation stays. Venkatesh and colleagues found that for these targeted conditions, observation bed days represented less than 2.5% of visits.
Patient Out-of-Pocket Costs for Observation Care
Concerns have been raised that observation care leads to higher patient out-of-pocket costs than inpatient admission, prompting some patients to demand that they be admitted rather than observed. The best way to avoid higher out-of-pocket costs is to manage them in a type 1 setting. Hockenberry and colleagues reported that observation stays of less than 24 hours were associated with costs that were lower than the Medicare Part A deductible. Patients treated in a protocol-driven observation unit had fewer visits with a length of stay beyond 24 hours (10.4%) compared with local state (44%) and national (29%) data. Unfortunately, between 66% and 80% of US hospitals do not have an observation unit. Not surprisingly, Wright and colleagues found that hospital, patient, and health system characteristics were associated with the duration of observation services.
Medicare patients are likely to pay less out of pocket as observation patients than as inpatients. Patient out-of-pocket costs are different for inpatient (Medicare Part A) and outpatient (Medicare Part B) services. In 2016, Medicare patients admitted as inpatients paid a $1288 deductible for that admission, which covers all hospital and SNF costs and associated readmissions within 60 days of discharge. Patients managed as outpatients (clinic, ED visits, and observation visits) paid a 20% copayment of Medicare-negotiated charges. Additionally, self-administered medications are not covered, and outpatient time does not qualify toward the inpatient 3-day minimum to establish an SNF benefit. An analysis of all 2012 Medicare claims found that 94% of patient out-of-pocket costs were lower with observation care than with inpatient care. Average out-of-pocket costs for inpatient care were almost twice those of observation: $725 versus $401. When the costs of self-administered medications ($127) were added, out-of-pocket costs for observation care were still less than those for inpatient 2016 observation policy adjustments (discussed later) have made observation savings even less likely to exceed the inpatient deductible. 1.6% of Medicare observation patients have more than 1 observation visits within 60 days, with the potential for higher costs. A majority of Medicare patients, however, have supplemental insurance to cover these deductibles, making the likelihood of higher out-of-pocket costs even less.
Risk of Losing Medicare Skilled Nursing Facility Benefits due to Observation Services
Medicare allows inpatients requiring a prolonged inpatient convalescence after the acute phase of their inpatient illness to be moved to a SNF. Under this provision, the SNF stay is covered by the inpatient DRG payment. To qualify, patients must have spent at least 3 midnights as inpatients, with the inpatient clock starting when the inpatient order is written. Time in the ED or observation does not qualify. An analysis of 2009 Medicare data by Feng and colleagues found that only 0.75% of Medicare observation patients were at risk of losing SNF payment due to time spent in observation. A subsequent government analysis of all 2012 Medicare claims data found that 0.6% of Medicare observation patients were at risk of losing their SNF coverage. Based on an analysis of Medicare Advantage claims, where the 3-day rule is not used, Grebla and colleagues proposed that CMS consider waiving the 3-day rule because it seems to increase hospital length of stays. For these plans, the absence of the 3-day rule was associated with average hospitals stays that were 0.7 days shorter with no increase in the use of SNFs. By decreasing observation length of stays, observation units can minimize patient risks of losing their SNF benefits due to time spent in observation.
Medicare policy changes to discourage prolonged observation care
Beyond Medicare policy, which specifies that observation should rarely extend beyond 24 to 48 hours, Medicare has introduced 3 policy changes that discourage prolonged observation services.
Two-Midnight Rule
To decrease RAC pressures and prolonged observation stays and provide greater clarity regarding the definition of an inpatient, CMS launched the two-midnight rule in October 1, 2013. This is relevant to observation services since the objective of observation is to determine the need for inpatient admission. The hospital setting where patients are most likely to comply with this policy is an EDOU. The two-midnight rule states that
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Inpatient admissions generally are payable under Part A if the admitting practitioner expects a patient to require a hospital stay that crosses 2 midnights and the medical record supports that reasonable expectation.
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Medicare Part A payment is generally not appropriate for hospital stays not expected to span at least 2 midnights.
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All treatment decisions for beneficiaries are based on the medical judgment of physicians and other qualified practitioners.
The Notice of Observation Treatment and Implication for Care Eligibility Act
Responding to pressures from patient advocacy groups, Congress passed a bill called the Notice of Observation Treatment and Implication for Care Eligibility (NOTICE) Act (HR 876). Hospitals are required to notify Medicare patients whose observation stay has exceeded 24 hours, both verbally and in writing, why they are still under observation status and what the financial consequences of this will be. The standardized notice letter is called the Medicare Outpatient Observation Notice. Requirements of the NOTICE Act are for hospitals:
To give each individual who receives observation services as an outpatient for more than 24 hours an adequate oral and written notification within 36 hours after beginning to receive them, which
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Explains an individual’s status as an outpatient and not as an inpatient and the reasons why
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Explains the implications of that status on services furnished (including those furnished as an inpatient), the implications for cost-sharing requirements, and subsequent coverage eligibility for services furnished by an SNF
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Includes appropriate additional information
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Is written and formatted using plain language and made available in appropriate languages and is signed by the individual or a person acting on the individual’s behalf (representative) to acknowledge receipt of the notification; or, if the individual or representative refuses to sign, the written notification is signed by the hospital staff who presented it
The Comprehensive Observation Services Ambulatory Payment Classification 8011
In 2016 Medicare packaged a majority of costs associated with an observation visit into a single payment called a comprehensive APC (C-APC 8011). This includes payment for all services associated with an observation visit, such as the ED visit, diagnostic tests (such as stress tests), imaging, laboratory tests, treatments, and intravenous medications — making it unlikely that observation outpatient out-of-pocket costs exceed the inpatient deductible. This APC, however, does not include self-administered medications and does not count time in observation toward the 3-day SNF rule. To qualify for this APC, there cannot be an associated major or T status procedure. Examples of T status procedures include a cardiac catheterization, endoscopy, or an appendectomy. This prevents double-billing observation time with procedures, discussed previously. The 2017 payment for C-APC 8011 is $2222 ( Box 2 ).
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