Ask the Experts: Observation Services

With their wealth of knowledge in process improvement initiatives, Value-based Purchasing, and Recovery Audit Contractor (RAC) compliance, our team of accreditation specialists are frequently called upon to provide insight into CMS rules and regulations on observation medicine. Their contributions on the topic have been included in CV publications such as Critical Pathways in Cardiology, American Journal of Cardiology, and Contemporary Cardiology. Below are answers to some of the questions they frequently receive when discussing Observation Services.

Q: What are some proven strategies to develop observations units?

A: We encourage facilities to approach the development of a dedicated observation unit just as they would a new service line. The facility needs to gather a team, develop a business plan, and write scope of service. We encourage facilities to do extensive research to understand current benchmark statistics and to help drive operational decisions. Team members need to include:

  • finance
  • pharmacy
  • information systems
  • case management
  • staff members
  • other departments that may affect throughput such as the laboratory

Q: Is it immportant to have a finance expert on the team - and if so, why?
A: Billing for observation services is different than billing for inpatient stays. Observation services are billed under Medicare part B. It is an outpatient service. The reimbursement model is totally different. In my travels across the country, I hear finance folks remark that observation services is not a profit center. Facilities must look at observation as a cost-avoidance model. The key to a profit margin with observation services is throughput. The "benchmark" length of stay for an observation patient is 15 hours. As Medicare and private insurance companies seek opportunities to reduce reimbursements, the hospital is challenged with decreasing cost. Facilities must find cost savings by placing the patient in the most cost-efficient environment that can provide the needed level of care. In addition, placing low acuity patients in an inpatient status will decrease a facility's case mix index, which will have an effect on reimbursement. It is essential for the finance department to have an expert on staff that is well versed in observation services reimbursement and billing.

Q: How does the 30-day readmission penalty play into observation services?
A: Yes, indirectly. Currently, facilities are penalized for 30-day readmissions for diagnoses. If patients are admitted as an inpatient and then return within the 30 days and can be appropriately treated in an observation environment, the facility will not be penalized. For 2018, CMS has proposed penalties for AMI and HF patients if they return to the ED or Observation within 30 days in addition to the inpatient stay.

Q: How critical is getting buy-in from senior management?
A: Essential. Management needs to understand the rationale for observation services. Observation is a cost avoidance model — decreasing the potential for audit exposure for short, one-day inpatient stays and 30-day readmits. It also improves emergency department throughput. In addition, it gives the physician time to make a clinical decision regarding whether a patient needs to be admitted or discharged, which potentially decreases liability to the physician and the hospital.

Q: Observation is frequently defined as process, not a billing status. Why is that?
A: Observation medicine is a complicated, multi-dimensional service that has generated much confusion. It is designed to provide the best possible patient care in a value-based purchasing environment where quality, cost, and patient satisfaction must continually be addressed. Observation medicine is a service, not a status. Therefore, patients are admitted to the service as outpatients regardless of whether they are placed in a virtual or dedicated observation unit. The key to a successful observation program is to determine how to maximize efficiencies.