The Role of Observation Units in Accountable Care Organizations

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I recently consulted at a Virginia hospital that is planning on opening an Emergency Department Observation Unit (EDOU) in 2012. While on site, I was asked an interesting question by the hospital CEO. “What do you think will be the role of Observation Units within the structure of an Accountable Care Organization (ACO) and how can we design our future unit to meet that challenge?”

I recently consulted at a Virginia hospital that is planning on opening an Emergency Department Observation Unit (EDOU) in 2012. While on site, I was asked an interesting question by the hospital CEO. “What do you think will be the role of Observation Units within the structure of an Accountable Care Organization (ACO) and how can we design our future unit to meet that challenge?”


There is no simple answer to this question. Everyone agrees that our country’s current healthcare delivery model is in serious need of repair. Unlike previous health reform initiatives that have targeted insurers in an attempt to make them accountable for the quality and cost of care, ACOs would try to make providers and hospitals accountable for healthcare services. CMS hopes that one way ACOs will achieve cost savings is by reducing avoidable hospital admissions, preventing unscheduled readmissions, and reducing ED visits. This is an area where Observation Units can potentially be of great benefit.

Observing patients in a short stay unit as an alternative to hospitalization was first described way back in 1972.4 Observation Units (OUs) have gained popularity as a response to the challenges faced by hospitals trying to curtail healthcare costs, decrease ED overcrowding and improve quality of care. The most convenient location for OUs is adjacent to the emergency department, though some OUs may be located on a different floor of the hospital. OUs can be staffed by emergency physicians, hospitalists or dual-trained emergency medicine/internal medicine physicians.

Only recently has there accumulated enough data in the literature to support the role of such units, especially in the management of commonly encountered medical conditions like chest pain, syncope and transient ischemic attacks. Moreover, the DRG payment system has created a need to distinguish between “acute inpatients” and “observation status patients” since there is a large difference in hospital payments between the two groups. As evidenced by the RAC audits, erroneous billing of observation patients as acute inpatients can carry significant penalties for an organization. On the flip side, from 2003 to 2007, the percentage of Medicare patients admitted under observation status whose length of stay exceeded 48 hours increased from 3% to 7%. Most observation patients, if managed in a dedicated OU as opposed to an inpatient unit, will have a shorter length of stay. 6-10 In a 2003 national survey of OUs in the US by Sharon Mace, among academic centers with an EM residency program, 36% report having an EDOU, with another 45% planning a unit.5
The majority of observation units rely heavily on the help of nursing staff and mid-level providers, utilizing protocols for appropriate patient selection. The amount of physician oversight of OUs is highly variable and can range from a few hours a day to 24/7 coverage, depending upon the size and mission of the unit. In our experience, strict adherence to protocols tends to exclude patients who may still meet observation criteria but are deemed too complex for the observation unit. For instance, pneumonia and decompensated CHF comprise the largest category of patients who fail to do well and need to be readmitted soon after hospital discharge.


Some of these patients may qualify as complex observation patients. Rather than re-admit them to an inpatient service, it may make sense to admit them to a resource-intensive OU. Management of this cohort in an OU requires flexibility with nurse staffing and enhanced social worker, care coordination and physician support. Involvement of a hospitalist or dual EM/IM-trained physician is often required to manage such patients. At the Virginia Commonwealth University’s Clinical Decision Unit we have successfully managed complex observation patients over the last three years. An ACO that is trying to reduce readmissions would find it an attractive option to admit this cohort to an observation unit. Several other EDOUs like the University of Michigan are also adopting a similar setup and managing complex observation cases in their OU.

The ACO is a model for delivering health care services that offers financial incentives to hospitals and physicians to provide cost effective, quality care and reduce overutilization. Ever since the ACO was introduced in the current Senate’s health reform bill as one of Medicare’s pilot programs, it has generated a tremendous amount of interest. A recent National Public Radio segment compared ACOs to the elusive unicorn: everyone seems to know what it looks like, but no one has actually seen one.1 Although, the basic concept of an accountable care organization is not new, and there are a few health care systems across the country with modestly successful ACOs in existence. Robert Berenson and Kelly Devers list three essential characteristics of ACOs:2

(1) Ability to provide, and manage with patients, the continuum of care across different institutional settings, including at least ambulatory and inpatient hospital care and possibly post acute care;

(2) Capability of prospectively planning budgets and resource needs; and


(3) Sufficient size to support comprehensive, valid, and reliable performance measurement.
In order to encourage healthcare entities to form ACOs, they will be given an option during the first three years to choose a model that allows them to share cost savings with Medicare and not be at risk if they exceed the benchmark per capita spending on the enrolled patient population. The incentive payment will be contingent upon the ACO meeting quality and performance metrics developed by Medicare to evaluate ACOs.

In conclusion, observation units will play an important role within the structure of an ACO to help reduce the number of inpatient admissions, unscheduled readmissions and the attendant risks of nosocomial infections. At the same time, OUs will have to evolve and be able to manage complex observation patients if they are to have a significant impact on readmission rates. The two commonest reasons why OUs fail are a lack of strong leadership and lack of adequate resources. Hospitals planning on adding an observation unit should give serious thought to the resources they are willing to commit to project in terms of nursing staff, social work support and physician time, if they want to achieve the desired results.

4. Gururaj VJ, Allen JE, Russo RM. Short stay in an outpatient department. An alternative to hospitalization. Am J Dis Child 1972;123:128-32.
5. Mace SE, Graff L, Mikhail M, Ross M. A national survey of observation units in the United States. Am J Emerg Med 2003;21:529-33.
6. McDermott MF, Murphy DG, Zalenski RJ, et al. A comparison between emergency diagnostic and treatment unit and inpatient care in the management of acute asthma. Arch Intern Med 1997;157:2055-62.
7. Roberts RR, Zalenski RJ, Mensah EK, et al. Costs of an emergency department-based accelerated diagnostic protocol vs hospitalization in patients with chest pain: a randomized controlled trial. JAMA 1997;278:1670-6.
8. Hadden DS, Dearden CH, Rocke LG. Short stay observation patients: general wards are inappropriate. J Accid Emerg Med 1996;13:163-5.
9. Ross MA, Compton S, Medado P, Fitzgerald M, Kilanowski P, O’Neil B J. An Emergency Department Diagnostic Protocol for Patients With Tra
nsient Ischemic Attack: A Randomized Controlled Trial. Ann Emerg Med 2007.
10. Ross MA, Naylor S, Compton S, Gibb KA, Wilson AG. Maximizing use of the emergency department observation unit: a novel hybrid design. Ann Emerg Med 2001;37:267-74.


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