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Rising use of observation care among the commercially insured may lead to total and out-of-pocket cost savings

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Original languageEnglish
JournalHealth Affairs
Issue number12
Early online date4 Dec 2017
StateE-pub ahead of print - 4 Dec 2017


Proponents of hospital-based observation care argue that it has the potential to reduce health care spending and length of stay as compared to short-stay inpatient hospitalization. However, critics have raised concerns around the out-of-pocket spending associated with observation care. Recent reports of high out-of-pocket spending among Medicare beneficiaries have received considerable media attention and have prompted direct policy changes. Despite the potential for these policies to indirectly affect non-Medicare patients, little is known about the utilization of, and spending associated with, observation care among commercially-insured populations. Using multi-payer commercial claims from 2009-2013, we evaluated utilization and spending among patients admitted for six conditions that are commonly managed with either observation care or short-stay hospitalizations. From 2009-2013, use of observation care increased relative to short-stay hospitalization. Total and out-of-pocket spending were substantially lower for observation care, though both grew rapidly over the study period, and at rates much higher than in inpatient settings. Despite this growth, spending on observation care is unlikely to exceed spending for short-stay hospitalizations. As observation care garners greater attention, policymakers should be aware that Medicare policies that disincentivize observation may have unintended financial impacts on non-Medicare populations where observation care may be cost-saving.

ID: 45740556