How to Develop a Successful Observation Unit

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Dear Director: My hospital administration has asked me to open an observation unit. What advice do you have about getting one off the ground and operational?

In today’s dynamic healthcare environment, it’s not unusual for the hospital to ask the ED to take on new or different responsibilities. Whether you’re becoming a trauma center, opening a peds or a geriatric ED, or starting an obs unit, the one thing you can count on as a medical director is that you’ll be asked to do more if the hospital thinks it can help with patient satisfaction or flow, reduce costs, or improve revenue or publicly reported core measures.

Some Common Starting Points
The beginning of any development project will have some common themes. The first question you should address is “why.” Why an observation unit now and what are the goals of the unit. If the “why” makes sense and the goals are aligned with the ED and hospital, the next things to consider in any project like this will be space, cost of new equipment, and staffing. As you brainstorm ideas, or think you have the answers, then it’s time to get the key stakeholders together for a series of meetings to further develop the project.


We love a good road trip and it’s about the time you’re gathering your stakeholders meeting that you may benefit from visiting 1-2 different observation units. Call a friend or a colleague and find a successfully run obs unit that you can take your crew to see their set up and find out what works best and what they would do differently. I’ve always found that people are usually happy to show off their units (or EDs) to others. There’s also some great courses out there on how to do observation medicine and even some books that can increase your knowledge.

Unit Metrics
You’ll likely be developing your metrics as you build the business case for why the hospital wants an obs unit. There are published benchmarks in the literature and you and your team should likely base your metrics on what’s available from other experts. The size and staffing needs of the unit will be determined by how many patients you expect from the ED and how long their average length of stay will be. Consistent with published benchmarks, we expect 5-10% of ED patients to go to one of our obs units with an average LOS of 16-18 hours. You also need to track how many of these patients are upgraded from the obs unit to a regular hospital bed. Nationally, expect a 10-20% upgrade rate. It’s never too early to start developing your dashboard and you’re probably best to track these things on a daily and monthly rate in the beginning. The key metrics are volume, as new admissions per day, average LOS, and upgrade percentage. The goal is a high efficiency, high turnover unit with quality care.

Inclusion/Exclusion Criteria
One of our favorite expressions is that the obs unit is a “service, not a status.” Just because someone comes into the hospital under observation status, doesn’t automatically mean they should be placed in the observation unit. The obs unit is like any other part of the hospital— getting the right patient to the right place. You should develop your key principles around your unit metrics but some good starting points are: likely discharge within 24 hours; stable condition with low likelihood for clinical deterioration; no significant diagnostic uncertainty; no requirement for extensive work up or treatment. From these principles you can come up with your list of common appropriate diagnoses, your general exclusion criteria, and certain diagnoses that are specifically excluded.


For the unit to be successful, you’re going to have a lot of people who need to share the vision and mission of the unit. Like any good project, it will start with having an executive sponsor. In a case like this, it’s typically the CNO but don’t be surprised to get support from the CFO as well. Your key stakeholders will form your operations meeting to trouble shoot problems and review data. Nurses, techs, ED docs and hospitalists are obvious starting points for this committee; as is representation from the lab and radiology. Don’t forget to include your case management team, someone from the echo and vascular labs (for all your TIA patients) and key consultants (typically cardiology and neurology).

Location and Resources
You have likely seen observation done in a variety of ways. Many hospitals have “virtual observation.” Patients placed in observation status co-mingle with admitted patients throughout the hospital. This is obviously not a dedicated observation unit. These virtual obs patients usually have longer than necessary length of stays because there is not the commitment to make these patients a top priority in getting their work up completed. Therefore, an obs unit needs a dedicated space. Ideally, the space will be adjacent to the ED as there are staffing and communication benefits to this. However, unless you’re building a new ED and planning the space for the obs unit, most space next to existing EDs is already filled. We’ve each worked with obs units that were in different buildings than the ED or five or more floors away. While not ideal, it’s not necessarily a game stopper. Deciding on an open or closed unit is also a philosophical discussion. Will the ED own and control all of the beds (closed) or will some be reserved for other specialists? Just like my ICU docs want a closed ICU, we’re in favor of a closed obs unit as well. If you’re going to be accountable for all of the metrics, then you need to own the unit. In addition to dedicated space, you need to have dedicated resources. Additionally, some OBS units have closed units with consultants, in that only a specific cardiology group or neurology group for example, would be allowed to consult on obs patients to assure timely turn around times.

As you build your unit, you’ll want to develop committed team members. From a leadership point of view, there should be both a medical and a nursing director. A good staffing ratio is 1 nurse per 5 patients and 1 tech for each 1.5 nurses. Because many of these patients will have serial blood tests, techs should be good phlebotomists. A unit clerk will be instrumental in keeping the patients moving to tests and handling the paperwork. While there’s likely not enough business for a full time case manager, having a case manager who understands the unit’s flow and patient population will also be instrumental. Depending on the size of the unit, you will likely need 1 full time provider. Obs units can be staffed by a committed and knowledgeable advanced practice provider, typically with part time ED attending supervision (often rounding occurs before and after a day shift). Some facilities may choose to use a nurse practitioner to run the unit and keep the physician out of the process. That is certainly possible without a big hit to the billing (check with your billing company and expect at least a reduction among Medicare patients), but I would caution you to be consistent with the culture of your hospital. If the hospitalists or other units don’t have NPs practice without attending supervision, starting your program with a different model than what is typically used may end up being a bigger challenge for you. The nursing and tech resources for the obs unit are ideally dedicated to obs and not shared with other parts of the hospital. If you put the unit next to the ED, and the ED is short, be careful not to share resources from the obs unit to backfill the ED.

What makes ED people so effective in an obs unit is our drive towards efficiency and having clear end points. Part of reducing LOS in the obs unit is getting the rest of the hospital to prioritize the patients in the unit like they’re in the ED or the ICU—everything gets done STAT. Whether it’s an MRI, a HIDA, or a cards consult, the hospital departments and physicians must prioritize the obs patients to come right after the ED and ICU patients. Without this urgency, there will be too many patients waiting on tests in the obs unit. Because you’ve already established key diagnoses that the obs unit will take, most of these patients should also be on clinical protocols or pathways. Fortunately, some of the country’s best academic centers have already developed these and have made them available for you online. A quick Google search will give them to you.


Documentation and Coding
Most of us have mastered the documentation required to maximize reimbursement with our ED patients. Like coding an ED patient, obs patients are coded under their own set of E and M codes. The primary differentiator for obs patients is in documenting the complexity of the medical decision making. For top level billing, which requires “high complexity medical decision making,” an H and P done on the initial day still requires 4 HPI components, 10 ROS, 3 PSFH and 8 physical exam elements. Daily progress notes are required and are written in standard SOAP format. Billing really comes down to the documentation done on the initial day (E and M codes 99218-99220) and the note written on the discharge day, which should include a final physical exam, discharge instructions and the coordination of care involved. There are even codes for when the admission and discharge happen on the same day (E and M codes 99234-99236). Just like charts on ED patients, downcoding is a concern as 1 forgotten HPI element could result in a loss of >3 RVU’s. And yes, just like the ED, critical care billing is possible with rules similar to the ED. From a business point of view, patients who stay overnight generate more revenue than those who stay and get discharged on the same day. That being said, the unit will generate more RVU’s if you are able to discharge and admit two patients on the same day out of the same bed, instead of keeping the same patient in that bed overnight. Be sure to check with your billing company and business team to make sure everyone understands the relationships and potential bundling of charges between the ED E and M codes and the Obs E and M codes, as well as the implications for documentation when done by a PA, an NP and/or an emergency physician.

All of us have probably been asked by a Medicare patient to make sure they’re “admitted” and not in the hospital under “observation” because the patient doesn’t want the higher co-pay associated with observation. It’s true that a lot of the facility charge expense is shifted to the patient when the patient is placed in obs status. However, just having an obs unit shouldn’t change the conversation we’ve been having with patients since the same diagnoses were under obs status before the unit. The patient is now just receiving more efficient care. This payment shifting is currently only on the facility side and doesn’t impact our fee for service E and M codes.

Taking on a new project like an obs unit can have efficiency, revenue, and marketing benefits. But developing one from scratch also adds a level of leadership and operational complexity that most of us have never dealt with before. Taking the time to establish your mission and objectives, build your team, and get your stakeholders on board will make implementation easier. Your dashboard will allow the executive team to see your progress and help assist with roadblocks.


EXECUTIVE EDITOR Dr. Silverman is Chairman of Emergency Medicine at the Virginia Hospital Center. He also serves as the Director of the Alteon-Mid Atlantic Leadership Academy. Dr. Silverman’s practical wisdom is available in an easy-to-use reference guide, available on Amazon. Follow on Twitter @drmikesilverman

Puneet Chopra, MD is chairman of emergency medicine and director of the observation medicine at Doctors Community Hospital in Lanham, MD. He is a partner with Emergency Medicine Associates.

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  1. Margarita Khosh on

    This is a very informative article. How do you propose observational care will play out with the new CMS APC 8011?

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