Over the last few years one day hospital stays have been a focal point for medical management efforts to convert these to observation stays. In addition the 2014 Medicare’s Inpatient Prospective Payment System’s final rule on inpatient admission defines an “appropriate” inpatient admission as one that in the judgment of the admitting physician requires a hospital stay of at least two midnights or in medical management terms, a two day length of stay (LOS). Patients not meeting this criteria but needing inpatient hospital care lasting past one midnight but less than two will be classified as observation cases. The combination of these and other factors is leading to an increase in utilization for observation. So is this a positive outcome from a cost management perspective or is it problematic? This is becoming an important question for population management and one that does not have a simple answer.
A not uncommon situation is one where the reimbursement levels for inpatient hospital admissions and observation stays are not rationale. By this I mean that observations stays are paid more than if the patient were admitted as a regular inpatient admission. Avoiding an admission through the use of observation may be the right thing to do in this situation from a resource efficiency perspective but may actually cost a payer more than the hospital admission that is being avoided. Regardless, the overall trend is to move patients to observation status when this is appropriate clinically.
So how should observation status utilization be measured and what benchmarks should be used to monitor results? If we see an increase in observation utilization is it a desired outcome or should we be concerned? The typical practice of measuring billed units may not be the best approach since observation stays are billed using different units depending on how payer hospital contracts are designed so some observation services may be billed in hourly increments in some settings, in 24 hour increments in others and as a generic per observation episode in others. Our recommendation is to use “observation episodes” as the unit for measuring utilization. An observation episode is measured using the same logic as an inpatient stay, each midnight occurring during an observation stay counts as 1 observation unit with a minimum value of 1 for observation stay not spanning midnight. As examples, an observation stay starting at 4 AM and ending at 8 PM would be 1 observation unit, a stay starting at 4 AM and ending at 1 AM would also be 1 observation unit and finally a stay starting at 4 AM and ending at 1 AM after two midnight would be 2 observation units. This allows us to directly compare observation unit utilization with inpatient hospital utilization and one goal for directing patients towards observation is to reduce inpatient utilization.
Now for the question of how do we determine if our rate for observation utilization is positive or a problem we need to address. Since observation is a substitute for short stay hospital admissions we need to look both at observation utilization and short stay hospital utilization. We recommend combining observation episode with 1 day LOS hospital admissions to produce a combined utilization rate and then comparing this to either a historical target or a benchmark from a source such as Milliman. An example taken from a Milliman analytic tool (MedInsight Guideline Analytics) is shown below.
Using this example the target utilization is the “combined Obs + 1 Day LOS” or 27.7/1000. Our actual is 28.3 or a bit higher than we would like. In addition, our 1 Day LOS utilization is higher than the benchmark while our Obs utilization is less meaning we should have opportunity to shift more 1 day admits cases to Obs without causes excess utilization.