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With recent changes in Medicare rules making reimbursement even trickier for patients who aren’t well enough to be sent home quickly but aren’t sick enough to move to an inpatient bed, hospitalists are increasingly being tapped to set up observation units at medical centers around the country.

These patients, experts say, are the ones hospitals are most likely to lose money on. That’s because the Centers for Medicare and Medicaid Services (CMS) won’t pay unless a patient meets stringent guidelines for admission to the hospital. And while recently rewritten rules allow payment for 24 hours of observation, they also can also lead to denial of claims when patients aren’t considered sick enough to have been admitted.

We want our emergency department physicians to be able to focus on life-or-death issues and on the stabilization of very sick patients. These are things that ED physicians do spectacularly well. But when it gets down to management and reassessment of patients over time, we wanted a dedicated staff of hospitalists who were trained in internal medicine.


—Jason Napolitano, MD, medical director of the observation unit, University of California at Los Angeles Medical Center

When they’re well run, observation units can even help cover losses from emergency departments (ED) that have trouble collecting on bills because most of their patient population is uninsured or underinsured.

But the drive to create observation units isn’t just about money, says Frank W. Peacock, MD, vice chair of the emergency department at the Cleveland Clinic in Ohio. Studies have shown that death rates drop when hospitals add observation units, Dr. Peacock says.

Despite these clear benefits, experts estimate that a mere 20% of medical centers around the nation have observation units.

This may in part be because creating such a unit—also known as clinical decision unit—takes a lot of planning to start up, says William T. Ford, MD, medical director for Nashville, Tenn.-based Cogent Healthcare and chief of the section of hospital medicine at Temple University in Philadelphia. Without proper planning, observation units can fail to flourish—or just fail.

That’s what happened at Temple, Dr. Ford says. “The original observation unit got bogged down in its own infrastructure,” he explains. “It wasn’t cost effective.”

After that first attempt failed, Temple reached out to Cogent and Dr. Ford for help in developing an observation unit that would be financially viable.

The Economics

The price of not having an observation unit isn’t always obvious, experts say.

One place where hospitals without the units lose money is related to the way Medicare calculates reimbursements, says Sandra Sieck, a healthcare reform analyst at Sieck Healthcare Consulting in Mobile, Ala.

Medicare is always keeping track of how your patients are, Sieck says. If its analysts don’t think the patient was sick enough to be admitted to the hospital, you may not get reimbursed for the stay.

And even if Medicare agrees that the patient needed more than just an ED visit and pays the bills, the rate at which your institution gets reimbursed may drop if it’s determined that your patients are ones who could have been treated in an observation unit and then released after 24 hours.

So, Sieck says, even when you’re getting paid, there may be a long term—and more general—impact.

“When someone who is not very sick is put in with your patient mix, it drags down the aggregate,” she explains. “And that affects the base rate set by Medicare.”

How does Medicare determine how sick your patients are?

“They look at the documentation in the patient’s chart,” Sieck says. “For example, you might have a patient with a full-blown heart attack who had to go to the cath lab and then had two stents put in and then developed heart failure. And then if this patient has co-morbidities, such as diabetes, that will show up.”

Compare this to the patient who comes in with chest pain and then turns out only to have a gastrointestinal problem, Sieck says.

If both those patients are in the mix, that’s going to drag the average down, she adds.—LC

Observation Origins

Classically, Dr. Ford says, observation units were developed and staffed by emergency department physicians. But these days, the units are increasingly being designed and run by hospitalists, he says, adding that this change makes a lot of sense.

“Emergency department physicians don’t have the time or the resources to monitor patients for long periods of time,” Dr. Ford says. “That’s why I think some of the early ones failed—they didn’t work as efficiently and were staffed by the wrong people.”

Hospitalist Jason Napolitano, MD, agrees with the choice to staff observation units with hospitalists. “We want our emergency department physicians to be able to focus on life-or-death issues and on the stabilization of very sick patients,” says Dr. Napolitano, medical director of the observation unit at the University of California at Los Angeles Medical Center. “These are things that ED physicians do spectacularly well. But when it gets down to management and reassessment of patients over time, we wanted a dedicated staff of hospitalists who were trained in internal medicine.”

It made sense that many of the early observation units were staffed by ED doctors, says Mark Flitcraft, a nurse and unit director of nursing at UCLA. That’s because the units were originally adjuncts to the ED. These early units were initially seen as a way to take the pressure off overcrowded, overworked EDs, Flitcraft says. “They were a way for hospitals to avoid [diverting patients] as the beds in the ED started filing up,” he adds.

Avoiding such diversions is still one of the main justifications for adding an observation unit, Dr. Ford says. “The observation unit helps increase throughput time.”

Still, he says, if you’re going to create an observation unit staffed by hospitalists, “you need to make sure that the emergency department buys in to the concept. They should be your best friends. Go over and meet with them. If they don’t buy into the idea, then you’re going to have problems.”

Time Is of the Essence

For an observation unit to work well, the staff needs to think about time in a different way, Flitcraft says.

“It’s more of an outpatient designation from a Medicare standpoint,” he explains. “The focus has to be hours rather than days. You really need to know that the clock is ticking and work on rapid turnaround.” Take discharge, for example, Flitcraft says. Normally a hospitalist would wait for morning to send a patient home. “But there are patients we might discharge at 10 p.m.,” he says. “When they are stable they go home.”

In the observation unit, staff members always have the end in sight, agrees Robin J. Trupp, a grad student at Ohio State University, expert on observation units, and president of The American Association of Heart Failure Nurses. “You know what your goal is,” she adds. “There’s a 24-hour clock and it’s always ticking. At the end of 24 hours you have to make a treatment decision: admit the patient or send him home.”

Because observation units are generally limited to treating a select group of medical conditions, they can be more efficient. Some observation units are limited to only one or two diagnoses (e.g., chest pain and heart failure). Others see a slightly broader spectrum of illnesses, including asthma, stomach pain, and pneumonia.

One byproduct of limiting the number of conditions treated in the unit is ending up with a staff that can become specialized in treating those ailments, experts say.

“In the observation unit you’re not looking at urinary tract infections or doing stitches,” Trupp says. “You’re just working on this population. You become an expert on how it’s treated and managed.”

And that offers another advantage: the possibility of doing more patient education.

She points to the example of a unit dedicated to treating heart failure patients.

“You can take advantage of the fact that at this moment, the patient can clearly see cause and effect and maybe you’ll have a chance at getting some behavior changes,” Trupp says. “It’s the case of having put their hand in the fire and feeling and having learned it’s hot; they’ll learn not to do it again. They might learn that the symptoms that landed them in the ED came from excess salt load due to eating Chinese food or chips and salsa.”

Ultimately, for certain conditions, observation units can provide better care. Studies have shown that in the three months following a visit to the hospital, heart failure patients are far less likely to return if they’ve been seen in the observation unit rather than being treated as inpatients.

And if that weren’t enough of an inducement to administrators to create observation units, Dr. Peacock offers one other: The units can do more than pay for themselves.

“We are in an urban environment, and our patient population is not well insured,” he says. “There are years when the ED loses money. The observation unit never loses money. In fact, it’s saved us a few times. That was a pleasant surprise.” TH

Linda Carroll is a medical writer based in New Jersey.

UCLA’s Example

Although there had been talk of creating an observation unit at UCLA for years, it wasn’t until December 2006 that the unit became a reality.

“There were a lot of challenges to getting the infrastructure in place,” says Jason Napolitano MD, medical director of the observation unit at the University of California at Los Angeles Medical Center. “It took a lot of time and momentum to get the right pieces in place.”

First and foremost, Dr. Napolitano says, you need to get the right people involved. For UCLA, that also meant having a dedicated staff. “Some observation units use staff from other departments,” he explains. “We wanted the unit to be its own entity. So we interviewed and hired a staff that would work only in the observation unit. We wanted a staff that would become expert in the conditions treated in the unit so patients would be treated efficiently and accurately.”

And it wasn’t just physicians and nurses who needed to be hired. The reimbursement for observation units can be tricky, Dr. Napolitano says. And the bills are generated and submitted differently than those from other areas of the hospital, he adds.

“There’s a fine line to walk and there are many rules and regulations,” he explains. “You need to have good support staff to do the billing and to do case reviews to make sure you’re getting reimbursed for the care you’re providing. We needed to have the right staff in place before we could open the unit.”

At UCLA, Dr. Napolitano and his colleagues came up with order sets that laid out every aspect of care, from algorithms that determine whether a patient should be sent to the observation unit to lists of drugs determined to be optimal for treating the various medical conditions seen in the unit. “We took a long time to research the best drugs,” Dr. Napolitano says.

One advantage to the order sets: They help standardize decisions as to which patients will end up in the observation unit. “For example, a patient with asthma will be sent to the observation unit or to intensive care depending on the severity of his attack,”

Dr. Napolitano says.

The order sets make the process more automated and more objective.

In the case of the hypothetical asthma patient, tests of pulmonary function are used to determine where the patient ends up. “We have specific peak flow cut points,” Dr. Napolitano says.

With a dedicated staff for the UCLA observation unit, the end result is a team of healthcare providers who work together like a well-oiled machine.

Some people have suggested that the approach used at UCLA may be too automated, too impersonal. “It’s a matter of opinion whether this is damaging to the ‘art’ of medicine,” Dr. Napolitano says. “But there’s still a lot of leeway for physicians and nurses to connect with patients, asking how they feel and in counseling and educating them.”

Besides, Flitcraft says, this standardization “allows everyone—including patients— know what the outcomes are. It lets patients know what we are looking for and how long they can expect to be in the hospital.”

In the end, all the planning paid off: The unit is running almost to capacity six days a week.—LC

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