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September 27, 2012

How one unit could save your hospital millions of dollars a year

Daily Briefing

A hospital could save up to $4.6 million per year by adding an observation unit that provides a viable alternative to inpatient admissions for ED patients who cannot yet be safely discharged, according to a new study in Health Affairs.

Observation units provide dedicated spaces for patients to receive care after an ED visit, generally for up to 24 hours. Despite evidence that observation units would improve resource use, facilitate patient flow, and reduce cost, only about one in three U.S. hospitals has an observation unit.

To assess the impact of more widespread observation unit use, researchers from Brigham and Women's Hospital, Northwestern University, and Yale University reviewed data in 16 studies to determine the average cost savings per observation unit visit. They determined that each observation unit visit saves $1,572 compared to an inpatient admission.

They then created a simulation model to estimate the number of inpatient admissions that would be avoided and the amount of money that would be saved through observation unit use.

The researchers found that maximizing observation units in an average hospital with enough volume to justify an observation unit would:

  • Avoid 3,600 inpatient admissions per year; and
  • Save $4.6 million per year.

In addition, the researchers found that maximizing observation units nationwide would:

  • Avoid 2.4 million inpatient admissions per year; and
  • Save $3.1 billion per year.

Based on their findings, the researchers concluded that, "The use of observation care in the setting of a dedicated unit should be included in health policy and delivery reform discussions, and payment systems should be evaluated to encourage changes to support it" (Baugh et al., Health Affairs, 9/26 [subscription required]).

Our take: Opportunity looms for hospitals

Brian Clement, Clinical Advisory Board

This new study is a useful addition to the growing body of literature supporting the clinical, operational, and financial case for observation units. The results also are consistent with The Advisory Board Company’s work in this area—we've found that well-run observation units can take stress off of the emergency department, generate inpatient capacity, and reduce unnecessary admissions and readmissions.

Our research also suggests that the savings estimated in the study are only part of the story; most of the financial gains for hospitals come from freeing up inpatient beds for profitable surgery cases.

Use of observation status utilization is definitely on the rise—the number of observation claims per Medicare beneficiary increased by 29% from 2006 to 2008, while the number of observation hours per Medicare beneficiary increased by 57% from 2006 to 2009—and we expect this trend to continue, fueled by the shifting case mix of an aging baby boomer population, pressure from recovery audit contractors, and value-based purchasing.

To learn more about how to develop and efficiently operate an observation unit, register for our upcoming webconference on October 2 or download a section from this year’s Clinical Advisory Board research, "Strategizing Observation Patient Management."

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