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Who Benefits from “Observation” Status in Children’s Hospitals?

March 31, 2022

Anyone who practices hospital medicine in either pediatrics or internal medicine is familiar with placing patients in “observation” status for 1-2 days for conditions that require care in a hospital, yet these patients are not actually being “admitted” to the hospital. If you are confused by this statement, don’t worry, you aren’t alone. In this month’s Pediatrics, Synhorst et al (10.1542/peds.2021-052907) discuss the financial implications of observation status (OBS) in 15 children’s hospitals who are part of the Pediatric Health Information System (PHIS) dataset, a large national registry. To no surprise, the authors find that OBS status in pediatrics has become a “complicated, erratically applied billing policy which presents substantial challenges that reach beyond hospital financial status.” Their article demonstrates these challenges along with findings that the costs of providing OBS care are greater than the revenues paid for by insurers, especially public payers for this level of care. So the real question is – is OBS a bad thing?

Clearly, if you run a children’s hospital, OBS is likely considered “bad news”. It is hard to make ends meet and keep staffing and facilities running if every OBS case loses money. On the other hand, if you are the government and already spending almost 20% of the gross domestic product on healthcare costs, OBS payments make a lot of sense. The underlying problem is that there is too much variation as to which child gets placed in OBS, with the decisions appearing often as arbitrary and/or making zero sense clinically. Two children with the same condition and severity have a good chance of one being in OBS status and the other being admitted if they end up in different hospitals. Synhorst et al found OBS status varied from 8% of cases to 86% of the cases in different hospitals. Each admitting hospitalist relied on a team of care managers to help determine what the appropriate status should be for each child who was “admitted” – and often the assigned status can still be determined wrong after discharge by the child’s insurance company resulting in payment for the care provided denied.

So how do we fix this system? One option could be to eliminate OBS status completely. While this makes a lot of practical sense, it would likely increase costs to the overall health system. As Syndhorst et al note, in the 15 hospitals alone over a single year, the payment to hospitals would have increased by $167 million dollars. That seems unsustainable. Alternative payment structures, like value-based contracts, global costs of care, and other models offer incentives for the use of OBS care, as the cost to the system is lower, but those only work if the total cost of care is lowered. And that issue was not addressed in the current study. Can children’s hospitals become more efficient? Can they lower the cost of care? We are in a state of increasing consolidation and regionalization of inpatient pediatric care, and as community hospitals close inpatient units, the downstream impact may be either higher care costs or increasing losses for children’s hospitals. The bottom line is it would be very helpful to have a higher-level nationwide discussion and agreement about what constitutes an OBS case for pediatrics, how much should be paid for these cases, and what is the best location to deliver this care? Without this clarity we will continue to muddle along with this complicated, erratically applied system that does not appear to be in the best interest of our patients in its current state. Hopefully this study will help spur change to revisit OBS policies.

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