Financial Viability of Emergency Department Observation Unit Billing Models

Background Outpatients receive observation services to determine the need for inpatient admission. These services are usually provided without the use of condition‐specific protocols and in an unstructured manner, scattered throughout a hospital in areas typically designated for inpatient care. Emergency department observation units (EDOUs) use protocolized care to offer an efficient alternative with shorter lengths of stay, lower costs, and higher patient satisfaction. EDOU growth is limited by existing policy barriers that prevent a “two‐service” model of separate professional billing for both emergency and observation services. The majority of EDOUs use the “one‐service” model, where a single composite professional fee is billed for both emergency and observation services. The financial implications of these models are not well understood. Methods We created a Monte Carlo simulation by building a model that reflects current clinical practice in the United States and uses inputs gathered from the most recently available peer‐reviewed literature, national survey, and payer data. Using this simulation, we modeled annual staffing costs and payments for professional services under two common models of care in an EDOU. We also modeled cash flows over a continuous range of daily EDOU patient encounters to illustrate the dynamic relationship between costs and revenue over various staffing levels. Results We estimate the mean (±SD) annual net cash flow to be a net loss of $315,382 (±$89,635) in the one‐service model and a net profit of $37,569 (±$359,583) in the two‐service model. The two‐service model is financially sustainable at daily billable encounters above 20, while in the one‐service model, costs exceed revenue regardless of encounter count. Physician cost per hour and daily patient encounters had the most significant impact on model estimates. Conclusions In the one‐service model, EDOU staffing costs exceed payments at all levels of patient encounters, making a hospital subsidy necessary to create a financially sustainable practice. Professional groups seeking to staff and bill for both emergency and observation services are seldom able to do so due to EDOU size limitations and the regulatory hurdles that require setting up a separate professional group for each service. Policymakers and health care leaders should encourage universal adoption of EDOUs by removing restrictions and allowing the two‐service model to be the standard billing option. These findings may inform planning and policy regarding observation services.