To illustrate an example of how the formula derived in this article can be used, revenue and costs for both observation unit use and inpatient bed use were estimated for a select group of diagnoses. Specifically, the 10 most common conditions treated in observation units17 were investigated and contrasted against the 10 most common conditions seen in emergency department (ED) transfer patients18–20 (Tables 1 and 2, respectively).
Table 1. Most Common Observation Unit Diagnoses17
| 1. Chest pain/cardiac|
| 2. Gastrointestinal/abdominal|
| 3. Asthma/respiratory|
| 4. General ailments/medical|
| 5. Dehydration|
| 6. Psychiatric/social services|
| 7. Syncope/near syncope|
| 8. Congestive heart failure|
| 9. Head injuries|
|10. Kidney problems|
Table 2. Most Common Emergency Department Transfer Patient Diagnoses*18–20
| 1. Post–cardiopulmonary arrest|
| 2. Overdose|
| 3. Acute respiratory failure (pneumonia, COPD, asthma)|
| 4. Abdominal catastrophe (AAA, appendicitis, etc.)|
| 5. Seizures/epilepsy|
| 6. Gastrointestinal bleeding|
| 7. Aortic dissection|
| 8. Smoke inhalation|
| 9. Fractures (not major trauma)|
Those diagnoses that are usually accepted for transfer by tertiary care hospitals at peak capacity are also acknowledged and excluded in this analysis. These most often include ST-segment elevation myocardial infarction (STEMI), major trauma, burns, intracranial hemorrhage (ICH), and stroke (CVA). Because these patients may potentially be transferred regardless of ED or inpatient capacity, the presence of an observation unit will likely not affect their acceptance. In addition, these patients will quite often require an intensive care unit (ICU) bed, which is not the same destination as the patients under consideration for an observation unit admission. However, the next set of patients, those requiring a higher level of care than what their current medical setting can provide, but are also not among those most commonly accepted for transfer noted above, are at risk of being diverted away from the hospital due to ED or inpatient capacity constraints. These patients were factored into the “opportunity cost” analysis.
In this analysis, Medicare diagnosis-related group (DRG) payments were used for these diagnoses as a proxy for revenue. Medicare payments are an ideal proxy because they are accurate, available, and generalizable. After determining the most common conditions for both observation and transfer patients, these conditions were matched with the most likely resulting DRG codes. Using the 2005 Centers for Medicare and Medicaid Services (CMS) Medicare Provider Analysis and Review (MedPar) data, the average national DRG payment amounts were determined ($3,210; see Table 3). Another assumption made in this article was the link between category of complaint and final DRG. In reality, the DRG is paid after a claim is received, and this claim is created after the hospitalization. As a result, the patient’s final diagnosis is known when the DRG is assigned. The patients being transferred or admitted can be categorized by chief complaint, and although this will generally correlate with a DRG code, it is impossible to prospectively link the two together with complete accuracy.
Table 3. Inpatient Revenue and Cost Summary
|Condition||Diagnosis-related Group (DRG)||DRG Payment ($)||Hospital Cost ($)||Average LOS (Days)||Net Profit (Loss)||Net Profit (Loss) per Hospital-day|
| Chest pain/cardiac||140/143||2,410.64||3,553.30||2.25||(1,142.66)||(507.85)|
| General ailments/ medical||278/421||3,192.28||4,370.15||4.00||(1,177.87)||(294.47)|
| Psychiatric/social services||425/430/432||4,726.77||4,909.13||6.77||(182.36)||(26.95)|
| Syncope/near syncope||142||2,772.34||5,070.73||2.50||(2,298.39)||(919.36)|
| Congestive heart failure||127||5,376.35||6,740.41||5.10||(1,364.06)||(267.46)|
| Head injuries||29/32||3,035.09||4,798.48||2.85||(1,763.39)||(618.73)|
| Kidney problems||321/326/332||2,551.28||3,728.88||3.10||(1,177.60)||(379.87)|
| Average|| ||3,210.25*||4,487.55*||3.62*||(1,277.30)||(416.09)|
| Post–cardiopulmonary arrest||129/144||6,283.29||5,565.64||4.15||717.65||172.93|
| Acute respiratory failure||87/99/101/475||9,102.39||7,494.39||6.10||1,608.00||263.61|
| Abdominal catastrophe||154/164/165/170/478||14,889.20||12,047.34||8.44||2,841.86||336.71|
| GI bleeding||174||5,216.15||4,802.67||4.70||413.48||87.89|
| Aortic dissection||104/110/478||29,157.67||22,866.03||9.83||6,291.64||639.83|
| Smoke inhalation||449/450||3,168.60||3,136.22||2.85||32.38||11.36|
| Fractures (not major trauma)||211/219/224/22||4,531.12||4,620.58||3.05||(89.46)||(29.33)|
| Average|| ||8,878.72||7,583.53||5.34||1,295.20||166.97*|
In addition, the 2005 CMS MedPar data also report the national average hospital charges by DRG. To determine the average cost per DRG, these charges were multiplied by a cost-to-charge ratio (CCR). For this analysis, CCRs of 0.35 and 0.25 were estimated for observation and transfer patients, respectively. The CCR for observation unit patients was based on the assumption that on average, a congestive heart failure (CHF) admission results in a loss of $1,288.21 Given the Medicare DRG payment for CHF and this amount of loss, a CCR of 0.35 was calculated. This value was then generalized to apply to all of the observation unit diagnoses, resulting in an average cost of inpatient stay of $4,488 for these patients (see Table 3). For the transfer patients, a lower CCR, on average, was assumed to be more accurate, given that they are more likely to require services with lower CCR, such as operating room services and anesthesia (see Table 4).
Table 4. Centers for Medicare and Medicaid Services (CMS) Estimation of Cost-to-charge Ratios by Service
|Labor and delivery||0.46|
Finally, length of inpatient stay was factored into the final value of the opportunity cost. Mean inpatient hospital length of stay (LOS) was also listed by DRG in the 2005 MedPar data file. For each of the observation and transfer diagnoses in Tables 1 and 2, calculations of the average daily profit (or loss) were made using the CCRs assumed above and are listed in Table 3. Since transfer patients typically stay in the hospital longer than observation patients, the analysis needs to account for this extra resource utilization (i.e., you do not simply “trade” an observation patient for a transfer patient). This adjustment was made by calculating the profit (or loss) per inpatient day for transfer patients. This amount was then multiplied by the average inpatient LOS for an observation unit patient if they are assumed to have been admitted to an inpatient ward instead. As a result, this correction results in a more accurate determination of the true opportunity cost of admitting a patient to an inpatient ward instead of an observation unit. The average inpatient LOS for observation unit diagnoses was 3.62 days, and the average profit per day for transfer patients was $167. As a result, the opportunity cost avoided by utilizing the observation unit and keeping an inpatient bed open was estimated at $604.
To determine the costs and revenues of an observation unit stay, the available literature regarding this topic was surveyed. Recent and useful articles outlining the costs for such common observation diagnoses as chest pain, asthma, head injury, and transient ischemia attack were found8,9,22–25 (Table 5). The value of these costs were adjusted to 2005 dollars and averaged, using this mean as a proxy for average observation unit costs ($1,138). Finally, the revenue collected by the average observation patient was estimated by the average payment at Brigham and Women’s Hospital in 2005 dollars across all payers for all observation unit patients ($3,175).
Table 5. Costs Associated with Select Observation Diagnoses
|Transient ischemic attack||864.00||Ross25|
Using the formula derived in the main body of this article and inputs described above, the value of a patient treated in an observation unit was determined to be $2,908 (see Figure 4). This value is substantially higher (about 40%) than the basic subtraction of observation unit costs from payments, which equals $2,037. The contributions of the avoidance of losses on inpatient admissions and the opportunity costs saved by keeping inpatient beds open explain a great deal of this discrepancy and are illustrated in Figure 5. Additionally, this analysis can also be applied to smaller, non–tertiary care hospitals, but these opportunity costs would not be of benefit since patients are rarely transferred to these institutions. In these cases, the benefits of an observation unit may still be quite positive, as the more efficient care of patients eligible for a observation will likely yield cost savings.
This model was subjected to a sensitivity analysis wherein each of the previously stated assumptions was varied across a plausible range while others were held constant to determine the effect on the conclusions. The model did appear to be especially sensitive to the CCR assumed for both observation and transfer patients as well as the rate of discharge to home from the observation unit. Table 6 illustrates the range of values obtained for the final estimated observation admission value as the CCR was varied. This demonstrates that as the CCR rises for transfer patients, the open-bed value term becomes negative, reducing overall value (i.e., transfer patients become unprofitable). Also, as the CCR for observation unit patients decreases, the overall value also decreases, this time because the hospital is foregoing profits by not admitting these patients to an inpatient ward. As a result of this analysis, the most accurate calculation would require an institution-specific CCR for each of the most common diagnoses seen in observation units and in transfer patients declined transfer due to inpatient capacity constraints. In addition, the frequency of each of these diagnoses should be weighted in the calculation, rather than a simple average, which was used in this calculation.
Table 6. Sensitivity Analysis Estimated Observation Patient Value (or Loss) Varied by Cost-to-charge Ratios (CCR)
|Transfer Patients||Observation Unit Patients|
The rate of discharge to home from the observation unit was also varied, and the final value increased to $3,413 and decreased to $2,402 from the base case of $2,908 when the rate was changed from 80% to 90 and 70%, respectively. This suggests that a higher discharge rate is more profitable; however, industry experience shows that a rate much higher than 80% may be difficult to achieve.3 Finally, the transfer diagnosis of aortic dissection appeared to be an outlier in the calculated amount of profit per day. Removing this diagnosis reduces the open-bed value from $604 to $414.