What is Your Real Observation Rate? What Should It Be?

By Steven Meyerson, MD

Hospital CFOs are often concerned about their hospital’s observation rate. This is a reasonable consideration because there is generally a significant revenue difference between inpatient and outpatient observation reimbursement (in favor of inpatient, as we all know.) Although hospitals may find that in some cases managed care plans pay the same or more for observation (depending on their contracts), this is certainly not the case for original Medicare.

So if more patients are admitted as inpatients, the CFO reasons, it will add to their facility’s bottom line. Of course case management and physician advisors are quick to remind over-eager CFOs that they can only admit when patients qualify for admission in compliance with federal program regulations and managed care contracts, where each plan has its own admission rules.

Measuring and monitoring observation rate can be a useful metric.

The CFO may not realize it, but what he’s interested in is the status decisions made on medical patients who are hospitalized from the ED, what I’ll call the “ED observation rate” –the target population being those ED patients who are hospitalized and could be either placed in observation or admitted. For completeness, the small number of patients placed directly into observation without going through the ED can be considered as well. These are the patients who are “eligible for observation”. It’s up to the physician, case manager, and physician advisor to determine if they should be placed in observation or admitted.

Although hospitals would like to know what their observation rate should be, there is no benchmark for observation. Factors like patient socioeconomic characteristics, demographics, payer mix, and local physician culture can all influence the observation rate. It’s worthwhile to look at overall observation rate, but since admission rules and payment policies vary so much by payer, the hospital must dig deeper to differentiate Medicare, Medicaid, Medicare Advantage, and other payers. 

How should a hospital calculate observation rate?

The simplest (and least useful) way to define observation rate – and the one that seems to be most commonly used – is to divide the number of patients released from observation (the numerator) by the total number of inpatient plus observation discharges (the denominator) for all patients, or for selected payers. But using this common approach can result in comparing apples to pears. For one thing, inpatient discharges include, in addition to inpatient ED admissions, direct admissions from a physician’s office, preplanned admissions, patients having inpatient only surgery, outpatient surgery patients admitted due to complications, and observation patients converted to inpatient.

Enlarging the value of the denominator will not only make it harder to document changes in observation rate over time but including all of these factors in the denominator obscures the most important utilization metric a hospital is concerned about: the effectiveness of the initial status determination for emergency admissions by physicians, case managers, and physician advisors. These are the patients for whom a lack of consistent case management can cost the hospital revenue and threaten its compliance.

To calculate the ED observation rate, then, in the numerator count observation patients who were released from observation (identified by hourly charges for HCPCS code G0378) and have ED charges on their bill plus those patients who were placed directly into observation (HCPCS codes G0379 + G0378). In the denominator place those same observation cases plus inpatient medical discharges with ED charges or HCPCS code G0379. Exclude inpatient surgical admissions and direct admissions to inpatient – because they never have observation – and outpatient surgical cases admitted due to post op complications.

This is your observation rate for those patients eligible for observation.

To focus even more closely on ED case management, exclude from the denominator inpatient discharges originating in the ED who began in observation and add them to the numerator. Now you’re laser focused on your ED status determinations and you will have an effective tool for analyzing your hospital’s case management performance.

“What should our observation rate be?”

Sorry, but there is no benchmark for observation.

As we have seen, a fundamental barrier to benchmarking is that observation rate is not a standardized measure; it is defined by whoever is measuring it. As a result one facility can’t compare its rate to others unless they know they are using the same data. Hospitals that calculate it differently can’t compare their numbers.

But if you calculate, track, and trend your observation rate in a consistent manner you can monitor the effects of any changes in policies, procedures, and staffing. You will have a window into the outcome of your case management process and can drill down to better understand and improve your consistency and compliance. This should make your CFO happy.