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Observation "Services" and Observation "Care"- One Word Can Mean a World of Difference

Observation care, observation status, and observation stays have recently become the focus of considerable policy, provider, and patient attention. A key component of this public debate has focused on whether hospitals are shifting costs onto patients by admitting Medicare beneficiaries under “observation status” to avoid readmission penalties or CMS Recovery Audit Contractor claim denials (Baugh and Schuur 2013). Absent from this discussion has been the opportunity to step back and distinguish important nuances amid the confusing terminology and assess the role for hospital observation across the nation.

In this issue of Health Services Research, Dr. Wright and colleagues identify patient, hospital, and geographic predictors of hospital observation service use in a 100 percent Medicare administrative claims file. They found observation utilization varied at the patient level according to race and age and at the hospital level according to location, bed size, and ownership type.

Throughout, the authors are careful to use the term “observation stay,” and not necessarily “observation care,” let alone “care within a dedicated observation unit,” because a hospital bill provides no additional detail as to what the term means. Ross et al. (2013) recently proposed categorizing observation stays along a continuum ranging from Type 1, which best describes “observation care,” to Type 4, which refers to discretionary care that is billed as observation services. In this typology, Type 1 observation services are based on specific clinical protocols and delivered in a dedicated observation unit—these services most closely parallel the past two decades of research showing that observation care can be more efficient and effective than inpatient hospitalization for clinical conditions such as chest pain, asthma, and atrial fibrillation. Type II observation services, like Type I, are delivered in a dedicated observation unit but do not follow a predefined clinical protocol and tend to be used for conditions such as mild dehydration or for elderly patients who suffer a fall without major injury. Type III observation services use specific clinical protocols that are unlikely to be different from Type I observation services; however, they are not delivered in a dedicated unit and therefore may carry some of the operational inefficiencies of traditional inpatient care. Finally, Type IV services are neither protocol-based or delivered in a dedicated unit and most likely represent hospital care delivered in parallel to traditional inpatient hospital care for patients who do not meet institutional or policy-driven criteria for inpatient reimbursement. Unlike intensive care unit services, which are distinctly reflected in administrative claims data, observation care delivered in a dedicated unit is billed identically to discretionary observation services delivered in any hospital bed. Current proposals by the Centers for Medicare and Medicaid Services seek to modify hospital reimbursement for observation and inpatient hospitalizations; however, no proposal to date is designed to expand the number of or increase the granularity of existing billing codes to enable researchers or policy makers to distinguish between each type of observation service.

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