Observation Status: Why It’s Important to You and Your Patient

Premier Pulse     June 2018

1114925682By Robert Morrison, MD, associate chief medical officer, Miami Valley Hospital, Premier Health physician advisor

The idea of placing patients in observation grew out of necessity—crowded emergency rooms and limited hospital beds, along with the pressure on emergency departments to discharge patients more quickly, led to the birth of observation units and other areas where patients can continue to have work-ups and testing until they receive a diagnosis or feel better and go home.

Hospitals quickly latched on to the concept of observation care when the Inpatient Prospective Payment System (IPPS) introduced in 1983 resulted in the implementation of DRGs. The evolution of observation care continues to this day, with most insurers and CMS paying fixed amounts or hourly rates for patients in observation status.

There are several things you should know about patients in the hospital in observation status:

They are outpatients

Though these patients are in a hospital bed, getting tests in the hospital, eating hospital food, wearing hospital gowns, and getting care from hospital nurses and doctors, they are not actually in the hospital. Many of these patients get sophisticated tests and even have surgery, but they are not inpatients. This is very confusing to everybody—patients, families, and providers alike.

The hospital is paid differently for observation care

Medicare pays for observation care under Part B as a Comprehensive Ambulatory Payment Classification, or C-APC. It is a bundled payment that costs one-half to two-thirds less than the corresponding DRG. This is OK for low-acuity patients that can be discharged in 24 to 48 hours, but causes more gray hairs on physician advisors’ heads when patients stay in the hospital for six, seven, eight days or more.

Medicare defines observation care in terms of the time spent in the hospital and medical necessity

If your patient spends two midnights or more in the hospital getting medically necessary care (see my article in last month’s Pulse for the definition of “medically necessary care”), then that patient is an inpatient. For any time less than two midnights, the patient is in observation status.

All other payers except Medicare use criteria for observation care

These criteria are derived from two sources—InterQual, published by the McKesson Company, and MCG, published by the Hearst Health Network. Both of these sources are evidence-based and used industry-wide to help determine whether a patient meets standard criteria to warrant observation or inpatient status. Gone are the days when we doctors could say, “I’m the doctor, and I’m putting this patient in the hospital to run some tests.” We have to have a reason to hospitalize our patients.

Observation hospital stays are measured in hours

The maximum time a patient should be in observation is 24 to 48 hours. After that, we need to fish or cut bait—admit the patient to inpatient status or send him home. The case manager on every nursing unit can help you manage these patients appropriately, and a physician advisor is always available for cases in which you feel the patient should be admitted.

It’s difficult to know whether observation care is more or less costly to your patient than a full inpatient admission due to the multitude of variables that go into such a calculation, including insurance plan contractual arrangements, deductibles, etc.

You can help both the patient and hospital best by managing your patient’s stay in the hospital efficiently with evidence-based care, evaluation, and treatment. Remember, too, that your documentation drives every bit of care in every health care setting—make sure your notes are complete and accurate, and reflect your up-to-the-moment clinical judgment and decision-making. No copy-pasted note has ever justified an extra day in the hospital.

Use observation care the way it was meant to be used—for observation

If you are unsure of the diagnosis; if you think you can get the patient out of the hospital quickly; if you have a patient you feel can’t quite be managed at home but doesn’t need a full admission, by all means put the patient in observation. Justify your decision with a good note; keep a high sense of urgency; review your patient’s clinical progress several times during the day; and admit your patient if, despite your initial efforts, he remains ill or he needs care that can only be given in the hospital.

If you have any questions, call your friendly case manager, the Center for Status Integrity, or your physician advisor—we are all here to help you.

A profound thank you for all you do for our patients,

Robert Morrison, MD

Dr. Morrison is the associate chief medical officer at Miami Valley Hospital and a physician advisor for Premier Health. He can be reached at (937) 208-2315 or (937) 203-6215, or by email

Back to the June 2018 issue of Premier Pulse

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