Inpatient Practice

If Your Hospital Length Of Stay Is Too Long, Look At Your Observation Rate

Hospitals are under enormous pressure to reduce length of stay. Since the hospital is paid by the diagnosis and not by the number of days a patient spends in the hospital, the shorter the length of stay, the higher the financial margin. In addition, if the hospital is frequently full to capacity, it is far cheaper to reduce length of stay than to build additional hospital rooms and hire additional nurses. In a previous post, I listed ways that the hospital can decrease its length of stay (or length of stay index which is the length of stay adjusted for the severity of the patients’ medical conditions). One often overlooked contribution to an excessively long length of stay is an excessive number of patients in observation status.

Observation status is for patients who are anticipated to require less than “2 midnights” in the hospital. It was designed for those patients who present to the emergency department with uncertain symptoms and the doctors just need a day or so to determine if the symptoms are something serious or something that could have been treated as an outpatient. However, observation status has evolved into something altogether different. Now, insurance companies and Medicare increasingly look at observation status as patients with illnesses that you can fix in the hospital in less than 2 days. In other words, patients that absolutely need to be in the hospital but that can turn around quickly and be discharged in < 3 days.

The top 3 diagnoses of patients in observation status are chest pain, abdominal pain, and syncope. However, I have had insurance companies deny patients who are admitted to the ICU in respiratory failure requiring intubation and mechanical ventilation if the doctors were able to treat that patient and get them off of the ventilator in < 1 day and out of the hospital in 3 days.

The number of patients in observation status is increasing: in 2011, Medicare spent $690 million on observation status care but by 2016, that number had grown to $3.1 billion. CMS likes observation status because it saves Medicare money – patients are treated as outpatients, therefore they have to pay a 20% co-pay for the hospital stay and they have to pay for their pharmacy charges, thus saving Medicare from having to pay these charges. However, the net effect of this is to transfer much of the costs to the patients and to the hospitals. Therefore, hospitals can lose money on observation status patients, particularly those in the hospital for medical (as opposed to surgical) conditions.

Palmetto (a Medicare administration contractor) uses the following definition for determining observation time:

“Observation time begins at the clock time documented in the patient’s medical record, which coincides with the time the patient is placed in a bed for the purpose of initiating observation care in accordance with a physician’s order. Hospitals should round to the nearest hour. “

This is generally interpreted as the time the patient is placed in a bed in the emergency department. On the other hand, inpatient length of stay begins at the time that an admission order is written and this time can be considerably later than when the patient was first placed in an emergency department bed. Therefore, when thinking about observation versus regular admission:

  1. Observation: the clock starts when a patient is placed in an emergency room bed
  2. Inpatient admission: the clock starts when an admission order is written

The percentage of hospitalized patients in observation status has been steadily increasing over the past decade, to the point that now, many hospitals will have > 30% of hospitalized patients in observation status. But too high of a percentage of observation patients can adversely affect your inpatient length of stay index (as well as the hospital’s financial margin).

There are some clinical situations when it is very clear that a patient should be in observation status. For example, a patient who comes in with new chest pain and you are not sure if it is angina or just a strained chest muscle and so you put the patient in observation status for the night so you can do a stress test in the morning – if the stress test is negative, the patient remains in observation status and goes home and if the stress tests is positive, the patient is converted to inpatient status to get the heart worked up further. However, frequently it is not clear on the surface whether the patient should be in observation status or be an inpatient. So, hospitals frequently uses proprietary decision-making support tools such as the Milliman criteria. Additionally, hospitals will often employ “physician advisors” to help in the decision about whether or not a given patient should be in observation status, particularly when the admitting physician disagrees with the decision support tool recommendation.

Putting a patient in observation status is safe and does not expose the hospital to a risk of audit by Medicare. However, an excessively conservative approach to observation status could result in many patients who would have a low inpatient length of stay being classified as observation status and thus inflating the inpatient length of stay.

Therefore, to keep the inpatient length of stay down, the hospital must use observation status correctly. In other words, over use of observation status will result in an increase in the inpatient length of stay. If the hospital’s length of stay is high, then check the percentage of patients who are in observation status and determine if some of those observation patients could be more correctly classified as inpatients.

March 12, 2019

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital