emergency medicine, emergency service, health services needs and demands, hospital, observation unit, review



  1. Baugh, Christopher W.
  2. Venkatesh, Arjun K.
  3. Bohan, J. Stephen


Introduction: There are nearly 120 million visits to emergency departments each year, one for every three people in the United States. Fifty percent of all hospital admissions come from this group, a marked change from the mid-1990s when the emergency department was a source of only a third of admissions. As the population increases and ages, the growth rate for emergency department visits and the resulting admissions will exceed historical trends creating a surge in demand for inpatient beds.


Background: Current health care reform efforts are highlighting deficiencies in access, cost, and quality of care in the United States. The need for more inpatient capacity brings attention to short-stay admissions and whether they are necessary. Emergency department observation units provide a suitable alternate venue for many such patients at lower cost without adversely affecting access or quality.


Methods: This article serves as a literature synthesis in support of observation units, with special emphasis on the clinical and financial aspects of their use. The observation medicine literature was reviewed using PubMed, and selected sources were used to summarize the current state of practice. In addition, the authors introduce a novel conceptual framework around measures of observation unit efficiency.


Findings and Practice Implications: Observation units provide high-quality and efficient care to patients with common complaints seen in the emergency department. More frequent use of observation can increase patient safety and satisfaction while decreasing unnecessary inpatient admissions and improving fiscal performance for both emergency departments and the hospitals in which they operate. For institutions with the volume to justify the fixed costs of operating an observation unit, the dominant strategy for all stakeholders is to create one.


Article Content

Currently half of all inpatient admissions to hospitals come from the emergency department (ED). The most recent Centers for Disease Control survey data from 2007 reveal that there are nearly 120 million visits to EDs in the United States, a number that is increasing at a rate of approximately 1% per year while inpatient capacity is static or declining (Pitts, Niska, Xu, & Burt, 2008). Some of these inpatient stays are short, making them subject to payer audits and denials. However, many institutions are now managing these patients as outpatients in short-stay "observation" units, most often operated by the ED. Such patients require either further treatment or diagnostics before being safely discharged and usually stay less than 24 hours. Current estimates are that about a third of all EDs now have an observation unit (Graff, 2009). Despite this, the historical, the clinical, and the business basis for the creation and growth of the emergency department observation unit (EDOU) remains elusive to many who could potentially benefit from its use. As a result, this article is intended to clarify the rationale for and operating' characteristics of such units and provides support for their clinical, fiscal, and administrative benefits, including their contribution to patient safety for an audience of ED and hospital leadership.


Conceptual Framework

In the United States today, acute care hospitals are facing enormous pressures to increase patient access, safety, quality of care, and satisfaction without increasing costs. In this era of mounting scrutiny and transparency, few "win-win" initiatives exist that have the potential to lower costs while improving patient safety and satisfaction without adversely impacting access to care or the quality of care delivered. However, the increased use of the EDOU, for those hospitals with the volume of ED visits to justify one, has the potential to be one of these rare initiatives.


All stakeholders in the health care system benefit from EDOU use: patients are more accurately diagnosed before leaving the ED and are discharged home faster, payers avoid costly inpatient admission charges, hospitals keep scarce inpatient bed capacity open for more appropriate patients and avoid audits and denials, and providers deliver care in a setting that more appropriately matches patient needs to resources (Graff, 2009). Because every aspect of care delivered in this setting is at least equivalent, if not better, to the alternative of inpatient care, use of the observation unit can be considered a dominant strategy for managing eligible patients. A dominant strategy is one that does at least as well as every other strategy in all situations but does strictly better than every other strategy in at least one situation (Dixit & Nalebuff, 1993). As a result, emergency medicine and hospital leadership should be familiar with the concept of the EDOU and its importance not only to the ED but also to the entire hospital.



This article is not a systematic review of the observation unit literature but rather a literature synthesis to highlight important clinical and financial aspects of EDOU care. Using PubMed as a search platform, the keyword search term "observation medicine" was used to generate an initial list of articles from the English language scientific literature, which was reviewed for this article. Articles were then selectively chosen to support the explanatory concepts in this article. This article introduces common language and measures related to observation units in an effort to familiarize the reader with this topic.


The discussion regarding observation finance, including the description of key operational measures in the EDOU, includes several novel concepts developed by the authors and published in a peer-reviewed publication for the first time.



Logistically, the EDOU is usually a discrete unit with 4 to 20 beds contained within or adjacent to the ED (Brillman & Tandberg, 1994). These units have the capacity to care for approximately 5% to 10% of the total ED volume, with an average EDOU stay of approximately 10 hours per patient (Graff, 2009). Patients are admitted to the EDOU from the ED if they require additional diagnostics or therapies beyond their initial ED stay but will likely be able to be discharged home within 24 hours. On average, approximately 80% of patients managed in the EDOU are able to be safely discharged home, whereas the remainder requires further inpatient hospitalization (Baugh & Bohan, 2008; Graff, 2009).


Historically, bed spaces in the ED specifically designated for patients requiring more time beyond the normal (4-6 hours) ED visit were called observation unit beds, as observing the patient over time was a tried and true test for various acute pathologies such as appendicitis. Since the initiation of these units in the 1960s, diagnostic technology has improved dramatically and in many cases can replace the tincture of time with, again in the care of appendicitis, a picture. Because of this evolving diagnostic role, these units have earned newer designations as clinical decision units or rapid diagnostic units (for the purposes of this article, we will use the term emergency department observation unit or EDOU). The clinical utility of EDOUs was first established around the care for patients with chest pain in whom clinicians feared a pending heart attack. Asthma, kidney stones, skin infections, and allergic reactions were also soon recognized to be suitable for EDOU care. Numerous research studies have been published over the past two decades showing safe and effective protocols in a wide range of conditions (Cooke, Higgins, & Kidd, 2003; Decker et al., 2008; Farkouh et al., 1998; Peacock, Young, Collins, Diercks, & Emerman, 2006).


Although placing a patient in observation has become more common in EDs nationwide, the historical and business case for the creation and growth of ED observation units remains unclear to many hospital administrators and even physicians. Although the origin of EDOUs dates back to the 1960s, more formal guidelines regarding their use were not established until many years later. The American College of Emergency Physicians (ACEP) began to formalize the scope of observation medicine by creating the first Observation Unit Guidelines in 1988 followed by the creation of the ACEP Section for Observation Medicine in 1991 (Graff, 2009).


The growth of EDOUs over the past four decades has been fueled by the acknowledgment that emergency physicians should no longer be forced into a dichotomous discharge to home or inpatient admission decision, especially as patients become more medically complex and require more diagnostic testing and therapeutic interventions than can be expected from an average ED visit. The recognition of the value conferred by observation coincided with national changes in the financing of health care. In 2003, in its first recognition of the EDOU as a distinct entity, the Center for Medicare and Medicaid Services offered payments for the three most common observation diagnoses: chest pain, congestive heart failure, and asthma. A national survey of EDs that year revealed that 18.8% of EDs already had an operational EDOU and another 11.6% of EDs were planning on opening an EDOU in the near future (Mace, Graff, Mikhail, & Ross, 2003). These EDOUs, however, were being used for many more clinical indications than the three Medicare designated diagnoses, and the most common uses identified in that survey were, not surprisingly, chest pain, abdominal pain, and asthma.



The Clinical Case for Observation Units

The clinical benefits of observation medicine have been well established across a variety of clinical conditions. In most cases, observation units provide a venue for the execution of efficient diagnostic and treatment algorithms when applied to appropriately selected patients who can be managed outside the inpatient setting. The scientific literature in support of EDOUs was largely first built on the concept of chest pain centers designed to effectively rule out acute coronary syndromes in low-risk patients and to provide subsequent risk stratification while avoiding costly hospital admission (Goodacre et al., 2004; Graff et al., 1995; Roberts et al., 1997; Zalenski et al., 1997).


On the basis of this early data, researchers directed further clinical investigation at widening the scope of clinical entities suitable for observation evaluation. At this time, studies in peer-reviewed journals point to more than 10 distinct clinical entities with demonstrated clinical diagnostic or therapeutic equivalence to inpatient admission. Specifically, EDOU care has demonstrated clinical efficacy in the management of cocaine associated chest pain (Cunningham et al., 2009), acute onset atrial fibrillation (Decker et al., 2008), transient ischemic attack (Ross et al., 2007), acute decompensated heart failure (Peacock et al., 2006), and numerous other diagnoses. These indications, the reported impact on hospital-level costs, and a direct comparison of length of stay versus inpatient admission are summarized in Table 1.

Table 1 - Click to enlarge in new windowTable 1 Cost and LOS comparisons for observation versus inpatient care

Two additional clinical advantages of observation care are increased patient satisfaction and safety, especially when directly compared with an alternative of inpatient admission. Several studies have demonstrated higher patient satisfaction with observation care versus routine inpatient care, specifically for asthma and chest pain (Rydman, Roberts, Albrecht, Zalenski, & McDermott, 1999; Rydman et al., 1997). In addition to providing care that patients prefer, this aspect of observation care may also have a broader impact. As the national focus on health care quality continues to shift toward more patient-centered metrics, patient satisfaction will likely play a prominent role in informing pay for performance payments and publically reported hospital quality data as evidenced by the effort of the Centers for Medicare & Medicaid Services to roll out the Hospital Consumer Assessment of Healthcare Providers and Systems program in conjunction with the Agency for Healthcare Research and Quality (Barr et al., 2006).


Furthermore, another way of conceptualizing the benefit of observation is that it increases both the specificity and the sensitivity of ED patient management. The additional time for diagnostics allows for more accurate diagnoses, and for the minority of patients who need additional care as an inpatient, they are more likely to be admitted to the correct service after an observation stay than after the initial emergency evaluation. For example, a patient with vertigo and headache but an unremarkable neurological examination may be sent to the observation unit for symptom control (i.e., pain and antinausea medications) and an MRI if there is sufficient clinical concern for a central cause of vertigo as the underlying diagnosis. Although discharge to home may be clinically indicated with normal imaging, the MRI may also reveal a brain mass, such as an acoustic neuroma, which may be better managed by a neurosurgeon than a neurologist. Without the benefit of the EDOU stay, such a specific diagnosis would be difficult to reach in a usual emergency evaluation, and the patient may have been initially admitted to an inpatient neurology service and would have required a transfer in service after the definitive diagnosis had been made. Such changes in service after a patient has been admitted create unnecessary administrative work and additional opportunities for errors in communication via additional patient handoffs. Handoffs have been identified by the Institute of Medicine and the Joint Commission as a critical patient safety issue, and the ED is the unique setting of many handoffs to inpatient services prone to numerous communication and care transition errors (Cheung et al., 2010).


In addition, higher sensitivity is achieved through the use of observation. The best example of increased sensitivity is in the diagnosis of myocardial infarction. Currently, it is very difficult to make a definitive diagnosis of acute myocardial infarction upon presentation to the ED without a characteristic electrocardiogram. Serum cardiac biomarkers have greatly enhanced the clinician's ability to determine if a patient's chest pain represents a true heart attack, but a significant limitation of these markers is the well-known delay of many hours between the cardiac event and a positive blood test (Jaffe, Babuin, & Apple, 2006). By keeping patients in the EDOU and by checking serial cardiac biomarkers (i.e., every 6 hours), fewer patients with an atypical presentation for acute myocardial infarction would be discharged home from the ED. Adding provocative cardiac stress testing to this observation protocol can further increase the sensitivity for detecting clinically significant coronary artery disease.


Finally, the impact of proper EDOU use on patient safety cannot be underestimated. In addition to achieving higher degrees of specificity and sensitivity of patient diagnosis as mentioned earlier, patients managed in observation and then discharged home as an alternative to inpatient hospitalization have much less exposure to the hospital. The efficiency achieved by using observation for up to 24 hours rather than a typical short-stay admission of perhaps 2 days or more also reduces the patient's exposure to the dangers of inpatient hospitalization. These dangers include exposure to multidrug-resistant bacteria, falls, medication errors, physical deconditioning, and many others that are well documented and harm thousands of patients every year (Baker et al., 2004). The best way to treat these complications of hospitalization is to avoid them altogether, and an observation stay that keeps a patient in the hospital for a fraction of the time of a routine inpatient hospitalization is an effective strategy to minimize exposure to these risks and improve patient safety.


The Business Case for Observation Units

With ED and inpatient beds already in shortage, the EDOU needs to provide a compelling financial argument to senior hospital leadership to justify its expense of initiation and maintenance (Roberts & Graff, 2001). The creation or expansion of observation units is usually compared with alternative competing capital projects, such as expanding acute care ED beds or inpatient beds in most hospital settings. Observation units are distinct from these two care settings because they use algorithm-driven care, allowing for standardized, rapid treatment and evaluation within the 24-hour window required for observation stays. The ability for EDOUs to deliver care and provide additional risk stratification through efficient resource use and shorter hospital stay centers on a business model that has proven quite profitable to date.


An EDOU creates a third disposition option that more accurately matches health care resources to patient needs. Accordingly, the first and foremost goal of the EDOU is to augment the clinical capacity of the ED. In support of and not necessarily opposing this goal is the EDOU's ability to maximize ED efficiency and profitability. Understanding EDOU profitability is best understood by starting with the basic hospital profit equation in which profit equals revenue minus costs. Revenues generated by the EDOU may be distinct from or overlap with revenues generated by patients that would otherwise be discharged home (the majority, usually approximately 80%; Baugh & Bohan, 2008) or admitted to the hospital. For those who are discharged, insurance companies treat their initial ED stay and subsequent observation care as an outpatient visit. This is distinct from an inpatient bundled diagnosis-related group (DRG) payment, in that items such as laboratory tests, medications, and radiology studies are billed on a fee-for-service basis per the ambulatory payment classification system. An advantage of placing a patient in the EDOU is that once 8 hours in observation have passed, for most insurance companies, a second current procedural terminology billing code in addition to the ED visit code is established or a new single but higher-paying code combining the ED visit and ED observation visit is generated. Thus, additional payment is captured for these patients. Of note, a recent change by Medicare bundles the basic facility payments for the ED and observation visits together into a single increased payment for "room and board." Diagnostic and therapeutic interventions remain separately billable. Of note, as Medicare and private payers transition toward increased payment bundling and potential episode of care payment strategies to reduce total costs, this trend will likely spread across observation stay payments (Centers for Medicare & Medicaid Services, 2008a, 2008b).


Another financial benefit results from patients that are discharged home from an EDOU. This benefit is derived from the avoidance of an inpatient admission that would have otherwise potentially resulted in a loss for the hospital. For example, Medicare payments for several common diagnoses (i.e., congestive heart failure) are widely recognized to not fully cover average inpatient hospital costs (McHugh, Regenstein, & Siegel, 2008). Medicare justifies this practice because although payments for some diagnoses create a loss for the hospital, other payments match or even exceed costs, so on average, Medicare intends for payments across all diagnoses to result in a small profit for the entire hospital (Hackbarth, 2008). By managing patients who would have created a loss for the hospital as an inpatient, EDOUs create value. For every patient managed in observation and sent home who would have otherwise been admitted, an inpatient bed could be filled by a patient with a more profitable DRG payment. Chest pain is the most common EDOU diagnosis and provides the best example of this phenomenon (Graff, 2009; Sieck, 2005). The inpatient DRG and the outpatient observation payments are actually similar, but the cost to manage a patient in the outpatient setting is much less. Prior studies have shown that the higher fixed costs and longer length of stay associated with inpatient care, coupled with bundled payments, can create a loss for the hospital, whereas management of the same patient in an EDOU would have generated a profit (Sieck, 2005). Table 2 summarizes the most striking cost and payment differences between observation and inpatient care.

Table 2 - Click to enlarge in new windowTable 2 Cost and payment advantages of observation care versus inpatient care

In 2007, Medicare changed its payment policy regarding observation care from narrowly defined reimbursement for chest pain, asthma, and congestive heart failure to any diagnosis suitable for observation care. Fearing widespread increase in observation stay use, however, this increased clinical scope was combined with lower payment rates than before as part of a move toward bundled payments. As discussed previously, this reduced payment relates only to the bed charge and all other charges, such as supplies and diagnostic testing, which are still billed separately. We believe that this payment change will still result in substantial growth of EDOU evaluations as previously unprofitable hospital admissions will be moved to observation units where the same care can be efficiently delivered in 24 hours and generate a profit. Hospitals must be careful about shifting too much acute care into observation units, however, because any EDOU stay that results in inpatient admission (~20% of EDOU patients) are only paid by a single DRG that includes ED, EDOU, and inpatient care; thus, there is a risk of incurring additional costs without additional revenues by providing EDOU care to patients who are likely to require further inpatient hospitalization.


Another important trend to consider is the use of recovery audit contractors by Medicare to recover inpatient DRG payments made for short inpatient admissions deemed inappropriate. By managing patients expected to have a short hospital stay in the EDOU instead of admitting to an inpatient service, hospitals can avoid audits resulting in loss of payment. To date, the recovery audit contractor audits have resulted in billions of dollars in recovered Medicare payments, which has only increased the federal government's interest in continuing this program (Bissey, 2008). Not only are payments being recovered for admissions deemed inappropriate, a significant number of inpatient admissions are denied at the outset by payers. This denial rate may vary by hospital but can represent a significant loss of direct clinical revenue and incur new indirect costs associated with the administrative work of managing the denial. On the other hand, denials for observation evaluations are quite rare, and efficient use of observation evaluations in place of short-stay Medicare admissions was proven to reduce denial rates and to improve overall efficiency during an Oklahoma demonstration project (Oklahoma Foundation for Medical Quality, 2008).


Perhaps more importantly than relatively fixed revenues, understanding the potential costs associated with an EDOU are essential to completing the profit equation. Several types of "cost" exist, including fixed, variable, and opportunity costs. Fixed costs include the start-up and maintenance costs of the unit. Many units are converted from existing, underused hospital space; in other cases, new construction may be required. The cost of this space, however, tends to be far less expensive than the cost of additional ED or inpatient space. The major fixed costs involved in maintaining an EDOU lie in the staffing. The number of EDOU patients that a single nurse can manage is higher than that in the acute care or inpatient areas of the hospital, usually around five patients per nurse, and physician staffing tends to be minimal to care for these patients (Graff, 2009). This ratio is safe because patients in observation have been selected because they represent a low acuity population amenable to simple care algorithms with a high likelihood of being discharged home.


Variable costs include the direct resources required to care for each patient in the EDOU. These are relatively insignificant, as examples include the costs of charting, housekeeping, and linens for bed turnaround and other resources consumed by each patient.


Opportunity costs are the opportunities for profit lost because of the resources diverted to the EDOU. For example, if an ED was to simply increase the number of acute care beds instead of creating an EDOU, that department would have the potential to care for a higher number of acute patients at once. In addition, an opportunity cost is created because of lost profits for the hospital by some patients with select diagnoses who were observed and discharged home rather than admitted for an inpatient stay. However, as aforementioned, the reality is just the opposite because most observation unit diagnoses involve patients for whom hospital costs would have exceeded payments. On the other hand, there is an opportunity cost for not using an EDOU. For hospitals that are at full capacity, filling an inpatient bed with a patient who could have been observed creates an opportunity cost because profitable patients (i.e., transfers, elective surgery patients, etc.) may be deferred as a result.


Measures of Observation Care

Emergency physicians have recognized that longer observation stays require structured diagnostic and treatment algorithms to efficiently facilitate patient disposition. As a result, many departments use structured observation medicine protocols for all patients designated as "observation status," including patients who, for lack of a bed, may not physically be in an EDOU but rather receive observation care in the acute care area of the ED. This "virtual" observation unit carries the advantage of not requiring the significant fixed costs of creating a distinct unit, particularly in hospitals with notable space or budget limitations. However, the highest potential for cost savings, patient comfort, and hospital bed use efficiency lies in dedicating a physical space to observation. The placement of the unit at a significant distance from the ED does not change the internal dynamic but results in a loss of efficiency in physician coverage, transport, and communication. As a result, understanding the financing of an EDOU is critical to justify its creation (Finarelli, 2003; Lenox & New, 1997).


Moving beyond the sources of payments and costs, an essential component of a profitable EDOU is operational efficiency. Maximum efficiency in the EDOU and subsequently profitability require optimizing three main operational variables: the occupancy rate, the duration of observation, and the discharge to home rate. Pushing more patient volume through the EDOU creates a more robust disposition option from the ED while also diverting patients away from inpatient services, thus mitigating both ED and inpatient crowding. In addition, maximizing the number of patients seen in the EDOU enables the ED to capture many additional observation payments, which in turn may help finance less profitable services (e.g., uncompensated care). Thus, efforts to optimize observation unit use not only help the department meet a diverse set of goals but also help hospitals deliver an appropriate level of care to all patients by better matching resources to patient needs. Of course, the underlying assumption of this premise is that patient care comes first and that an optimal observation unit is designed to prioritize serving patients and not management or finance concerns.


Occupancy Rate

Because it is impossible to exactly match patient arrivals to departures (i.e., time needed for bed turnover, daily variation, etc.), the maximum occupancy rate will always be less than 100%. However, an optimal occupancy rate approaching 100% is obviously beneficial for a dedicated EDOU with fixed resources (e.g., number of beds, nursing staff). As a result, the optimal achievable occupancy rate can be easily estimated using basic calculations.


Take for example a 10-bed EDOU with an average length of stay of 12 hours, assuming a bed turnover time of 30 minutes, several calculations can be made. The theoretical maximum daily patient bed time is 240 hours (24 hours x 10 beds). Next, not accounting for bed turnover or variability in arrivals, the theoretical occupancy rate is 100% (20 patients per day at 12 hours per patient, occupied 240 hours or 100%). Finally, accounting for bed turnover time but assuming perfect arrival times (which is unrealistic), a more accurate maximum occupancy rate can be calculated: 12.5 hours per patient (12-hour stay and 30-minute bed turn around) allows for 19.2 patients per day (24 hours / 12.5 hours per patient x 10 beds), or 1.92 patients per bed per day (19.2 patients per day / 10 beds). Thus, 19.2 patients x 12 hours per patient = 230.4 hours of patient bed time, or a 96% occupancy rate (230.5/240).


Thus, even if a new patient was always ready to take the spot of a patient leaving the EDOU, the maximum occupancy rate would be 96%. In reality, the variability of arrivals to the EDOU will push this maximum even lower. Contrast the approximately 1.9 patients per bed per day with the average inpatient length of stay for patients with similar complaints of several days and one can see the remarkable efficiency of such units.


Duration of Observation

The duration of observation should exceed 8 hours for every patient to justify the added expense of operating the EDOU because payers, including Medicare, generally do not pay clinical or facility fees for observation stays less than 8 hours. The maximum length of stay should also be less than 24 hours because stays longer than 1 day are an inefficient use of the EDOU. No additional payment is generated for keeping patients longer than the required 8 hours. The facility payment for observation is replaced by a single DRG payment for when patients are admitted to the inpatient service. Thus, to maximize EDOU volume, the maximum number of patients can be cared for in the EDOU if every patient stayed just more than 8 hours, but never less.


Discharge to Home Rate

Assuming a maximum occupancy rate near 90% and an optimal length of stay between 8 and 24 hours for all EDOU patients, the discharge to home rate remains the elusive variable to optimize. Clearly, the ideal rate would approach 100%, as long as the unintended consequence of increasing short-stay (<24h) inpatient admissions was avoided. In addition, inpatient admission after an observation stay represents inefficient use of resources. Even in ideal clinical trial settings, however, around 20% of patients evaluated in the EDOU require admission, and this may represent a more realistic outcome given the clinical uncertainty surrounding observation unit patients.


To determine the industry-wide benchmark for the discharge to home rate, several sources were investigated. For example, operational characteristics of large cohorts of observation unit patients have been analyzed in the pediatric population and reveal EDOU discharge rates between 80 and 85% (Alpern, Calello, Windreich, Osterhoudt, & Shaw, 2008; Zebrack, Kadish, & Nelson, 2005). Similar cohorts have not been reported in the adult emergency medicine literature; however, a survey of larger scale recent studies on EDOU use for diagnoses, such as chest pain, atrial fibrillation, transient ischemic attack, and cocaine-associated chest pain, reveals discharge rates between 80% and 100% (Cunningham et al., 2009; Decker et al., 2008; Madsen, Bledsoe, & Bossart, 2008; Ross et al., 2007). Notably, one study reports lower discharge rates for patients admitted to the EDOU for congestive heart failure exacerbations (73%; Burkhardt, Peacock, & Emerman, 2005). This literature should be taken with some caution when creating administrative benchmarks given the careful attention given to patient selection in such studies, which may not reflect the various social, psychiatric, and geriatric independency issues that often complicate disposition management in EDOU patients.


Consensus recommendations can also help estimate an appropriate discharge to home benchmark rate. There is no official ACEP policy on these EDOU benchmarks, nor have any organizations published benchmark rates to date. However, a policy article published in the Annals of Emergency Medicine by Brillman et al. (1995) suggests that units with a discharge to home rate less than 70% should question their guidelines for observation (Brillman et al., 1995). Several other articles refer to an industry standard near 80% (Ross & Graff, 2001).


Finally, self-reported rates provide additional support for benchmarks. The text Observation Medicine by Graff (2009) contains many self-reported discharge to home rates from different observation units throughout the country, all of which appear to cluster around 80%. The most recent version of this text, which is considered a cornerstone of the observation medicine literature, was updated in 2009 and is available at no cost on the ACEP Web site.


Practice Implications

This article makes both a clinical and a business case for the increased use of ED-based observation units. The implication for health care managers and administrators is that if sufficient patient volume exists in their institution to justify the expense of an EDOU, opening or enlarging one to maximize both clinical utility and profitability should be strongly considered. One can expect approximately 5% to 10% of ED volume to be managed in an observation unit (Graff, 2009). Given a ratio of five patients managed per nurse in an EDOU, the minimum efficient size of a dedicated EDOU should be five beds, which translates into a minimum ED volume of approximately 30,000 to 50,000 annual visits, assuming the average length of stay and the bed turnover calculations discussed previously.


Administrators working in hospitals with ED volumes greater than 30,000 annual visits who do not have a dedicated observation unit should work with the clinicians staffing the ED to determine if adding this additional resource makes sound clinical and financial sense for that particular institution. This article aims to provide the background necessary to perform the needed analysis to answer such questions. Of course, such an analysis should calculate the expected return on investment over several years and compare an EDOU project with competing alternatives, such as expanding acute care ED space or adding additional inpatient capacity.



The EDOU operational metrics of occupancy rate, length of stay, and discharge to home rate are intertwined, as illustrated in the triangle in the Figure 1. When one of these variables is significantly changed, the two others are also affected. Ultimately, the task of patient selection for observation is the critical task of the clinician, and proper patient selection will optimize these variables. Managers of observation units need to provide patient selection support in the form of well-constructed inclusion and exclusion criteria in addition to well-established diagnostic and treatment algorithms. In addition, research to identify the patient attributes that maximize the management variables outlined earlier should be encouraged. Finally, although profit and efficiency maximization are important considerations of EDOU management, one must always caution about letting payment parameters dictate clinical management. Payment rules will remain in constant flux, and at the end of the day, focus must be centered on providing the right care to all patients in the right place at the right time.

Figure 1 - Click to enlarge in new windowFigure 1 Key operational variables of observation unit care

The methodology of using a selected literature synthesis for this article creates several limitations. Most notably, selection bias in the form of publication bias and positive result bias may have influenced the inclusion of specific articles in this analysis. Looking forward, further research into the dynamic interplay between the ED, the observation units, and the inpatient ward needs to be conducted to better understand this complex relationship. Specifically, the impact of observation unit use on common ED metrics such as length of stay, time to physician, and left-without-being-seen rate is unclear. In addition, the effect of observation unit use on general metrics of hospital operations such as inpatient occupancy rate, short-stay hospitalization rate, denial rate, and other key measures is not well understood.


There are two compelling arguments for observation: improved clinical decision making and increased profitability. Observation units can convert previously unprofitable hospital admissions into profitable observation stays while still providing patients appropriate evaluation, treatment, and risk stratification. Furthermore, moving patients to an EDOU frees up costly and overcrowded ED resources, such as acute care treatment rooms, for undifferentiated patients in the waiting room who may be in need of urgent medical attention. The current literature basis for patient management in the observation setting is strongest in several specific conditions. However, future research will likely expand the scope of patients the can be safely managed in the EDOU, which will create more opportunities to divert patients out of the ED and also away from inpatient beds, thus acting as a mitigating force against both ED and hospital overcrowding. In this era of increasing pressure to practice high-quality medicine at lower cost without sacrificing key aspects of care such as patient access or satisfaction, the ED observation unit provides a valuable resource that helps clinicians and administrators meet these challenges.




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