Estimating Observation Unit Profitability with Options Modeling


Christopher Baugh, MD, MBA; e-mail:


Background:  Over the past two decades, the use of observation units to treat such common conditions as chest pain, asthma, and others has greatly increased. These units allow patients to be directed out of emergency department (ED) acute care beds while potentially avoiding inpatient admission. Many studies have demonstrated the clinical effectiveness of care delivered in such a setting compared to the ED or inpatient ward. However, there are limited data published about observation unit finance.

Methods:  Using the economic principles of stock options, opportunity costs, and net present value (NPV), a model that captures the value generated by admitting a patient to an observation unit was derived. In addition, an appendix is included showing how this model can be used to calculate the dollar value of an observation unit admission.

Results:  A model is presented that captures more complexity of observation finance than the simple difference between payments and costs. The calculated estimate in the Appendix suggests that the average value of a single observation unit admission was about $2,908, which is about 40% higher than expected.

Conclusion:  Subtraction of costs from payments may significantly underestimate the financial value of an observation unit admission. However, the positive value generated by an observation unit bed must be considered in the context of other projects available to hospital administrators.